[Federal Register Volume 62, Number 93 (Wednesday, May 14, 1997)]
[Proposed Rules]
[Pages 26449-26453]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-12574]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 566
[No. 97-44]
RIN 1550-AA77
Liquidity
AGENCY: Office of Thrift Supervision, Treasury.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Office of Thrift Supervision (OTS) is proposing to update,
simplify, and streamline its liquidity regulation. This proposal
follows a detailed review of the regulation to determine whether it is
necessary, imposes the least possible burden consistent with statutory
requirements and safety and soundness, and is written in a clear,
straightforward manner. Today's proposal is made pursuant to the
Regulatory Reinvention Initiative of the Vice President's National
Performance Review and section 303 of the Community Development and
Regulatory Improvement Act of 1994.
DATES: Comments on this proposed rule must be received on or before
July 14, 1997.
ADDRESSES: Send comments to Manager, Dissemination Branch, Records
Management and Information Policy, Office of Thrift Supervision, 1700 G
Street, NW, Washington, DC 20552, Attention Docket No. 97-44. These
submission may also be hand delivered to 1700 G Street, NW, from 9:00
a.m. to 5:00 p.m. on business days; they may be sent by facsimile
transmission to FAX number (202) 906-7755; or they may be sent by e-
mail: public.info@ots.treas.gov. Those commenting by e-mail should
include their name and telephone number. Comments will be available for
inspection at 1700 G Street, NW, from 9:00 A.M. until 4:00 P.M. on
business days.
FOR FURTHER INFORMATION CONTACT: Francis Raue, Program Analyst, (202)
906-5750, Robyn Dennis, Manager, Thrift Policy, (202) 906-5751,
Supervision Policy, or Susan Miles, Senior Attorney, (202) 906-6798,
Karen Osterloh, Assistant Chief Counsel, (202) 906-6639, Regulations
and Legislation Division, Chief Counsel's Office, Office of Thrift
Supervision, 1700 G Street, NW, Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
I. Background and Objectives of the Proposal
In a comprehensive review of the agency's regulations in the spring
of 1995, OTS identified numerous obsolete or redundant regulations that
could be quickly repealed. OTS also identified several key regulatory
areas for a more intensive, systematic regulatory burden review. The
first areas reviewed--lending and investment authority, subsidiaries
and equity investments, corporate governance, conflicts of interest,
corporate opportunity and hazard insurance--were selected because they
have a significant impact on thrift operations, and had not been
developed on an interagency basis or been comprehensively reviewed for
many years. OTS has issued comprehensive final regulations in all of
these areas.1
---------------------------------------------------------------------------
\1\ 61 FR 50951 (September 30, 1996) (Lending and Investment);
61 FR 66561 (December 18, 1996) (Subsidiaries and Equity
Investments); 61 FR 60173 (November 27, 1996) (Conflicts of
Interest, Corporate Opportunity and Hazard Insurance); 61 FR 64007
(December 3, 1996) (Corporate Governance).
---------------------------------------------------------------------------
Today's proposal is a part of the next phase of OTS's review of its
regulations. The proposed liquidity rule follows an intensive review of
the relevant statute and regulation, legal interpretations, and
requirements of other federal banking agencies. Like other OTS
reinvention efforts, this proposal was prepared in consultation with
those who use the regulation on a daily basis, including the agency's
regional examination staff.
Both the industry and OTS regulatory staff have consistently cited
the liquidity requirement and attendant calculations as an unnecessary
burden. Consequently, the review process has led to a consensus that
the statutory liquidity requirement no longer serves any useful purpose
and should be eliminated. The OTS has in the past recommended
legislative action to repeal this requirement.
In the interim, OTS has reviewed its current liquidity regulation
and has identified modifications that would reduce the burden of
compliance to the maximum extent possible, consistent with the
requirements of the statute and safety and soundness considerations.
Specifically, the burden of compliance with the liquidity regulation
would be decreased by: (1) reducing the liquidity base by excluding
withdrawable accounts payable in more than one year
[[Page 26450]]
from the definition of the term ``net withdrawable accounts''; (2)
streamlining the calculations used to measure compliance with the
liquidity requirement; (3) reducing the liquidity requirement from five
percent of net withdrawable accounts and short-term borrowings to four
percent; (4) removing the one percent short-term liquidity requirement;
and (5) expanding the categories of liquid assets that may count toward
satisfying a savings association's liquidity requirement. In addition,
a general requirement that thrifts maintain a safe and sound level of
liquidity would be added to the regulation. Each of these changes is
discussed in full below.
OTS believes that these proposed changes will significantly reduce
regulatory burden with respect to the statutory liquidity requirement.
While some thrifts may choose to modify their systems to take advantage
of the new rule, thrifts need not change any systems they have in place
to comply with the current rule.
II. Historical Overview of Current Liquidity Regulation
A. Statutory Requirement and Current Regulation
Section 6 of the Home Owners' Loan Act (HOLA) 2 requires
savings associations to meet a liquidity requirement by holding liquid
assets in an amount prescribed by the Director of OTS. The Director
may, by regulation, vary the amount of the liquidity requirement, but
only within pre-established statutory limits. The requirement must be
no less than 4 percent and no greater than 10 percent of ``the
obligation of the institution on withdrawable accounts and borrowings
payable on demand or with unexpired maturities of one year or less.''
3 The law identifies the assets that are suitable for
liquidity purposes. The Director, however, has express authority to
issue regulations defining the terms used in the statute and to
prescribe or limit the extent to which certain assets included on the
statutory liquidity list may be used to meet the liquidity requirement.
The Director also has express authority to prescribe the method for
calculating the liquidity requirement.
---------------------------------------------------------------------------
\2\ 12 U.S.C. 1465.
\3\ 12 U.S.C. 1465(b)(2).
---------------------------------------------------------------------------
Regulations implementing the Director's authority under section 6
of the HOLA appear at 12 CFR Part 566. Among other things, these rules
define liquid assets to include cash and certain securities with
maturity limitations and marketability requirements that are set out in
detail.4 The rules currently impose a liquidity requirement
of 5 percent of an institution's liquidity base and a separate,
``short-term'' liquidity requirement of 1 percent of the liquidity
base. The liquidity base is defined as net withdrawable accounts plus
short-term borrowings. Except for institutions with less than
$25,000,000 in assets, liquidity requirements are based on the
``average daily balance'' of the liquidity base during the preceding
month. Institutions with less than $25,000,000 in assets may calculate
their liquidity using month-end figures. These requirements are
discussed more fully in Section III below.
---------------------------------------------------------------------------
\4\ 12 CFR 566.1(g) (1996).
---------------------------------------------------------------------------
B. Reasons for Modifying the Current Rule
When first enacted in 1950, the liquidity statute provided a
mechanism for regulating the money supply available for housing. That
purpose was reflected in the statutory text, which provides:
The purpose of this section is to provide a means for creating
effective and flexible liquidity in savings association which can be
increased when mortgage money is plentiful, maintained in easily
liquidated instruments, and reduced to add to the flow of funds to
the mortgage market in periods of credit stringency. More flexible
liquidity will help support sound mortgage credit and a more stable
supply of such credit.5
\5\ 12 U.S.C. 1465(a).
---------------------------------------------------------------------------
Consistent with this purpose, for many years the OTS's predecessor,
the Federal Home Loan Bank Board, raised the liquidity requirement when
the supply of money for housing was abundant and lowered the
requirement when the supply was scarce.
Over the years, however, this mechanism for ensuring a stable flow
of housing credit has become obsolete. In recent decades, a vast
secondary market for home loans has developed. This market has become
the primary source of funding for home loans. Savings associations, as
well as other lenders, can now originate home loans without regard to
whether they themselves have the capacity to hold those loans in
portfolio.
Moreover, due largely to the development of the secondary market,
lenders other than thrifts have become major mortgage lenders. Although
savings associations are still an important source of housing credit,
they are no longer the predominant source. For example, in 1975,
thrifts were responsible for 55 percent of home mortgage originations,
with mortgage companies originating only 14 percent. Today, those
percentages are nearly reversed, with thrifts accounting for only 18
percent of home mortgage originations, while the mortgage companies'
share has increased to 56 percent. Mortgage companies, commercial banks
and other lenders, unlike savings associations, are not subject to a
statutory liquidity requirement.
Adjusting the amount that savings associations must invest in
liquid assets is no longer an effective means for regulating or
ensuring the stable supply of credit for housing. Thrifts, banks, and
mortgage bankers can obtain steady funding for home loans from the
secondary market. As a result, the statutory liquidity requirement for
savings associations no longer serves a useful purpose.
As indicated above, the statutory liquidity requirement was
designed as a mechanism for regulating housing credit, not safety and
soundness. Thus, although adequate liquidity is vital to the safety and
soundness of depository institutions, the OTS does not rely on the
statutory liquidity requirement to ascertain whether an institution has
adequate liquidity for purposes of safety and soundness. The statutory
requirement is far too rigid and imprecise to be an effective measure
of liquidity for safety and soundness purposes. Determining a safe
level of liquidity for any particular institution depends on the
overall asset/liability structure of the institution, the conditions of
the markets where the institution operates, the activities of the
institution's competitors and the requirements of the institution's own
deposit and loan customers. Through the examination process, the OTS
carefully reviews the process that an institution uses to allocate its
assets and structure its liabilities to ensure sufficient liquidity to
meet its needs and customer demands.
This is the same general approach that the other banking agencies
use to examine the institutions they regulate to determine the adequacy
of liquidity. For example, the Office of the Comptroller of the
Currency states,
A sound basis for evaluating funds management requires
understanding the bank, its customer mix, the nature of its assets
and liabilities, and its economic and competitive environment. The
adequacy of a bank's liquidity will vary from bank to bank. In the
same bank, at different times, similar liquidity positions may be
adequate or inadequate depending on anticipated need for funds. In
addition, a liquidity position which is adequate for one bank may be
insufficient for another bank. Determining the adequacy of a bank's
liquidity position depends upon an analysis of the bank's
[[Page 26451]]
present and anticipated asset quality, present and future earnings
capacity, historical funding requirements, current liquidity
position, anticipated future funding needs, options for reducing
funding needs or attracting additional funds, and sources of
funds.6
\6\ Comptroller's Handbook for National Bank Examiners, section
405.1, Funds Management-Introduction (March 1990). See, FDIC-DOS
Manual of Examination Policies, ``Liquidity and Funds Management,''
Section II (August 1995); and Commercial Bank Examination Manual,
section 4020.1 Asset/Liability Management (March 1994).
---------------------------------------------------------------------------
It is important to emphasize that the changes the OTS is proposing
today are not intended to suggest that the OTS believes that the HOLA's
prescribed percent ratio of liquid assets to liabilities is ordinarily
a sufficient level of liquidity. As indicated above, from a safety and
soundness perspective, the appropriate level of liquidity varies
significantly from institution to institution depending upon factors
unique to each institution. Thus, compliance with the statutory
liquidity requirement does not create a presumption that an institution
has adequate liquidity for safety and soundness purposes. As indicated
above, the statutory requirement was established as a means of
regulating the supply of funds for housing credit, not as a measure of
safety and soundness. A savings association's management is responsible
for ensuring that the institution has adequate procedures in place to
maintain a safe level of liquidity. The OTS will carefully monitor this
via examinations.
III. Description of Proposal
The OTS proposes the following amendments to 12 CFR Part 566:
A. Excluding Accounts With Unexpired Maturities Exceeding One Year From
the Definition of ``Net Withdrawable Accounts''
A savings association must maintain liquid assets of not less than
a stated percentage of the amount of its liquidity base. The regulation
defines the term ``liquidity base'' as net withdrawable accounts plus
short-term borrowings. 12 CFR 566.1(c). The term ``net withdrawable
accounts'' is defined to mean, with certain exclusions, all
withdrawable accounts less the unpaid balance of all loans secured by
such accounts. 12 CFR 566.1(d). Short term borrowings are generally
defined as borrowings where any portion of the principal is payable on
demand or in one year or less. 12 CFR 566.1(e).
The OTS proposes to change the regulation's definition of the term
``net withdrawable accounts'' to exclude accounts with unexpired
maturities exceeding one year, and to delete the word ``all'' from the
phrase ``all withdrawable accounts'' in the first part of the
definition.
The effect of changing the ``net withdrawable accounts'' definition
will be to reduce a savings association's liquidity base by the amount
of its outstanding savings accounts payable in more than one year, and
to reduce the association's liquid asset requirement accordingly. The
OTS believes that this proposed reduced liquid asset requirement is
warranted and appropriate to the purpose of the liquidity statute. This
change is consistent with the regulation's present exclusion from the
liquidity base of borrowings payable in more than one year.
B. Streamlining the Average Balance Calculations of Liquid Assets and
Liquidity Base
Under the current rule, for every calendar month, every savings
association (other than certain small institutions and mutual
institutions that are discussed below) must calculate its average daily
balance of its liquid assets and liquidity base. This requires the
calculation of the institution's liquid assets and liquidity base as of
the close of each business day, from which the daily average balance of
liquid assets and liquidity base for each month is computed. The OTS
proposes to amend the regulation to require that while institutions
must continually satisfy their liquidity requirements, the liquidity
base must be calculated only on the last day of the preceding calendar
quarter. This eliminates the necessity for savings associations to
determine average daily balances for each month.
This change is consistent with other OTS regulations, including the
loans-to-one-borrower rule and the capital rule, that use a quarter-end
calculation to measure compliance with an ongoing requirement.
The current rule permits a savings association with less than $25
million in total assets at the beginning of a fiscal year, by
resolution of its board of directors, to compute its liquid asset
requirement as a percentage of its liquidity base at the end of the
preceding calendar month (rather than as a percentage of the average
daily balance of its liquidity base during the preceding calendar
month). 12 CFR 566.2(b). Because the proposed rule would base the
liquidity requirement on the institution's liquidity base at the end of
the preceding quarter, the exception for small institutions would be
more burdensome than the proposal. Accordingly, the OTS proposes to
eliminate this provision.
The current rule also contains a provision that grants mutual
savings banks an alternative election for satisfying the liquidity
requirement. 12 CFR 566.2(e). Although in prior years the election
permitted such institutions to maintain a lower percentage of liquid
assets than other savings associations, the election is currently no
more lenient than the requirement for all savings associations, and
would be more burdensome than the proposal. Therefore this provision
would also be eliminated.
C. Reducing the Liquid Asset Requirement From Five to Four Percent and
Removing the One Percent Short-term Requirement
The OTS proposes to reduce the liquidity requirement from five
percent of an institution's liquidity base to four percent. The four
percent floor is the lowest the OTS may prescribe under section 6(b)(2)
of the HOLA.7 As noted above, this change would minimize the
regulatory burden associated with the statutory liquidity requirement,
and is not intended to suggest that OTS considers four percent
liquidity sufficient for most institutions. The OTS is aware that most
savings associations maintain more than four percent liquidity in order
to operate in a safe and sound manner. The OTS will continue to require
a savings association to maintain a level of liquidity that is prudent
given its particular circumstances. The OTS also encourages
institutions to diversify their investments in qualifying liquid
assets. Unsafe and unsound concentrations may occur in a securities
portfolio, as well as in a loan portfolio.
---------------------------------------------------------------------------
\7\ 12 U.S.C. 1465(b)(2).
---------------------------------------------------------------------------
Section 566.2(a) also requires a savings association, other than a
mutual savings bank, to maintain an average daily balance of short-term
liquid assets 8 of not less than one percent of the average
daily balance of its liquidity base during the preceding calendar
month. The original intent of this provision was to require savings
associations to have sufficient short-term, easily convertible assets
that may be used to meet a portion of the liquidity requirement. With
the expansion of the secondary mortgage
[[Page 26452]]
market and the resultant increase in the sources and amount of funds
available for mortgages, the one percent short-term liquid asset
requirement is no longer necessary. Accordingly, the OTS proposes to
eliminate the requirement.
---------------------------------------------------------------------------
\8\ This term is currently defined at Sec. 566.1(h)(1996). These
assets include cash and liquid assets with short maturities, such as
government obligations that will mature in 12 months or less, and
corporate debt obligations that will mature in six months or less.
The removal of the requirement will also eliminate the need for this
definition.
---------------------------------------------------------------------------
D. Expanding the Categories of Liquid Assets That Count Toward
Satisfaction of the Liquidity Requirement
Under sections 6(b)(1)(C)(vi) and (vii) of the HOLA,9 as
added in 1989 by the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA),10 certain mortgage-related
securities and mortgage loans now qualify as liquid assets to the
extent approved by the Director of the OTS. The first category consists
of mortgage-related securities that are defined in section 3(a)(41) of
the Securities Exchange Act of 1934. The second category consists of
mortgage loans on the security of a first lien on residential real
property, if the mortgage loans qualify as backing for mortgage-backed
securities issued by the Federal National Mortgage Association or the
Federal Home Loan Mortgage Corporation or are guaranteed by the
Government National Mortgage Association. The qualifying mortgage-
related securities and mortgage loans must have one year or less
remaining until maturity, or be subject to an agreement (including a
repurchase agreement, put option, right of redemption, or takeout
commitment) that requires another person to purchase the securities
within a period that does not exceed one year. In addition, the person
that agrees to purchase the securities must be an insured depository
institution (as defined in section 3 of the Federal Deposit Insurance
Act) that is in compliance with applicable capital standards, a primary
dealer in United States Government securities, or a broker or dealer
registered under the Securities Exchange Act of 1934.
---------------------------------------------------------------------------
\9\ 12 U.S.C. 1465(b)(1)(C)(vi), (vii).
\10\ Pub. L. 101-73, 103 Stat. 183, 313-314 (1989).
---------------------------------------------------------------------------
The OTS liquidity regulation has never been amended to reflect the
foregoing FIRREA provision. The OTS proposes to update the liquidity
regulation to reflect this statutory provision.
E. Adding a General Safety and Soundness Requirement
The OTS also proposes to add a general requirement that savings
associations must maintain a safe and sound level of liquidity at all
times. This is not a new position. The minimum level of liquidity
required by the statutory liquidity provision does not necessarily
constitute a safe level of liquidity. As explained above, savings
associations have always been required to maintain a safe level of
liquidity and the statutory liquidity provision has not been viewed as
indicative of what constitutes a safe level of liquidity.
The OTS views the statutory liquidity provision as a rigid and
imprecise measure of the sufficiency of an institution's liquidity. For
this reason, the OTS is seeking to reduce the burden imposed by the
rigid statutory formula, while making clear that the statutory
liquidity requirement and its implementing regulations do not
constitute a safe harbor for demonstrating a safe and sound level of
liquidity. As indicated above, safety and soundness determinations must
be made on a case-by-case basis in light of the particular
circumstances of each institution.
IV. Request for Comment
Comments are sought on all aspects of this proposed rulemaking.
V. Paperwork Reduction Act
The OTS invites comments on:
(1) Whether the proposed collection of information contained in
this notice of proposed rulemaking is necessary for the proper
performance of the agency's functions, including whether the
information has practical utility;
(2) The accuracy of the agency's estimate of the burden of the
proposed information collection;
(3) Ways to enhance the quality, utility, and clarity of the
information to be collected; and
(4) Ways to minimize the burden of the information collection
including the use of automated collection techniques or other forms of
information technology.
Recordkeepers are not required to respond to this collection of
information unless it displays a currently valid OMB control number.
The recordkeeping requirements contained in this notice of proposed
rulemaking have been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on all aspects of this information collection
should be sent to the Office of Management and Budget, Paperwork
Reduction Project (1550), Washington, D.C. 20503 with copies to the
OTS, 1700 G Street, NW., Washington, D.C. 20552.
The recordkeeping requirements contained in this notice of proposed
rulemaking are found at 12 CFR 566.4. The information is needed by the
OTS in order to ensure that associations comply with a statutory
liquidity requirement. The likely recordkeepers are OTS-regulated
savings associations.
Estimated number of recordkeepers: 1,372.
Estimated average annual burden hours per recordkeeper: 2.
Estimated total annual recordkeeping burden: 2,744.
Start-up costs to recordkeepers: None.
Records are to be maintained in accordance with basic business
practices, but not less than a period of three years.
VI. Executive Order 12866
The Director of the OTS has determined that this proposal does not
constitute a ``significant regulatory action'' for purposes of
Executive Order 12866.
VII. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (Pub.
L. 96-354, 5 U.S.C. 601), the OTS certifies that this regulation will
not have a significant economic impact on a substantial number of small
entities. It reduces the liquidity requirement from 5 percent to 4
percent, which should increase all savings associations' abilities to
manage their assets. Additionally, the proposed regulation should ease
the administrative burden of calculating compliance with liquidity
requirements for all savings associations, including small savings
associations.
VIII. Unfunded Mandates Act of 1995
Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.
104-4 (Unfunded Mandates Act), requires that an agency prepare a
budgetary impact statement before promulgating a rule that includes a
federal mandate that may result in expenditure by state, local, and
tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year. If a budgetary impact statement is
required, Section 205 of the Unfunded Mandates Act also requires an
agency to identify and consider a reasonable number of regulatory
alternatives before promulgating a rule. As discussed in the preamble,
this proposed rule reduces regulatory burden. OTS has determined that
the proposed rule will not result in expenditures by state, local, or
tribal governments or by the private sector of $100 million or more.
Accordingly, this rulemaking is not subject to Sec. 202 of the Unfunded
Mandates Act.
[[Page 26453]]
List of Subjects in 12 CFR Part 566
Liquidity, Reporting and recordkeeping requirements, Savings
associations.
Accordingly, the Office of Thrift Supervision hereby proposes to
amend part 566, chapter V, title 12, Code of Federal Regulations, as
set forth below:
PART 566--LIQUIDITY
1. The authority section for part 566 continues to read as follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1465, 1467a; 15
U.S.C. 1691, 1691a.
2. Section 566.1 is amended by revising paragraphs (d) and (g)(8),
by adding paragraphs (g)(12) and (g)(13), and by removing paragraph (h)
to read as follows:
Sec. 566.1 Definitions.
* * * * *
(d) Net withdrawable accounts. The term net withdrawable accounts
means withdrawable accounts having unexpired maturities not exceeding
one year, less the unpaid balance of all loans secured by such
accounts, but not including tax and loan accounts, note accounts,
accounts to the extent that security has been given upon them pursuant
to any applicable regulations, U.S. Treasury General Accounts, or U.S.
Time Deposit Open Accounts.
* * * * *
(g) * * *
(8) Shares or certificates in any open-end management investment
company registered with the Securities and Exchange Commission under
the Investment Company Act of 1940, while the portfolio of such company
is restricted by its investment policy, changeable only by vote of the
shareholders, to investments described in the other provisions of
paragraphs (g)(1) through (g)(7), (g)(9), (g)(12), and (g)(13) of this
section.
* * * * *
(12) Mortgage-related securities as described in 12 U.S.C.
1465(b)(1)(C)(vi).
(13) Mortgage loans on the security of a first lien on residential
real property as described in 12 U.S.C. 1465(b)(1)(C)(vii).
3. Section 566.2 is amended by removing paragraphs (b), (c), and
(e), by redesignating paragraph (a) as paragraph (b) and paragraph (d)
as paragraph (c), by adding a new paragraph (a), by revising newly
designated paragraph (b), and by removing the phrase ``paragraph (a)''
where it appears in newly designated paragraph (c) and adding in lieu
thereof the phrase ``paragraph (b)'' to read as follows:
Sec. 566.2 Requirements.
(a) Safety and soundness. Each savings association must maintain
sufficient liquidity to ensure its safe and sound operation.
(b) Liquidity. Except as otherwise provided in paragraph (c) of
this section, each savings association shall maintain liquid assets of
not less than 4 percent of the amount of its liquidity base at the end
of the preceding calendar quarter.
* * * * *
Dated: May 7, 1997.
By the Office of Thrift Supervision.
Nicolas P. Retsinas,
Director.
[FR Doc. 97-12574 Filed 5-13-97; 8:45 am]
BILLING CODE 6720-01-P
