Commercial Bank Examination Manual · Section 6000.1, “Commercial Bank Report of Examination,”...

Commercial Bank Examination ManualSupplement 51—April 2020

Summary of Changes

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 May 2019 supplement.

Table of Contents

The Table of Contents was updated to reflect thechanges described below. In addition, the 6000series major section heading was updated toremove the commercial bank report of exami-nation template and instructions, which are insection 1001.1 of the manual. Going forward,the 6000 series major section heading willcontain sections on key regulations that pertainto safety and soundness examinations of statemember banks. These sections summarize andexplain the rules, as amended, but are notsubstitutes for the rules themselves.

Section 1000.1

This section, “Examination Strategy and Risk-Focused Examinations,” was updated to notethat examiners should convey, if evident, boththe root cause of a supervisory finding and thepotential effect of a finding on the organization.The section also describes key factors examinersshould consider in determining whether to rec-ommend additional formal or informal investi-gation or enforcement action for an organiza-tion. Lastly, the section also includes a referenceto SR-18-5/CA-18-7, “Interagency StatementClarifying the Role of Supervisory Guidance,”which examiners should also consider whencommunicating supervisory findings.

Section 1001.1

Minor updates were made to section 1001.1,“Community Bank Supervision Process.” Thissection includes references to SR-20-8, “JointStatement on Adjustment to the Calculation forCredit Concentration Ratios Used in the Super-visory Approach,” and SR-19-9, “Bank Exams

Tailored to Risk (BETR).” Minor typographicalerrors were corrected.

Sections 1020.1, 1020.2, and 1020.3

Section 1020.1, “Federal Reserve System BankSurveillance Program,” was updated to includeinformation on the Federal Reserve’s use ofoutlier metrics to assist examiners and othersupervisory staff in determining the scope ofsafety-and-soundness examinations. The role ofoutlier metrics is particularly important in pre-examination planning at community and re-gional state member banks. Combined withexaminer judgment, outlier metrics are used toclassify the levels of risk at a state member bankwithin individual risk dimensions, such as credit,liquidity, and operational risk. Federal Reserveexaminers then tailor the bank examination toreflect the levels of risk present. See SR-19-9,“Bank Exams Tailored to Risk (BETR),” formore information. The examination objectives(section 1020.2) and examination procedures(section 1020.3) also were revised.

Section 2040.1

This section, “Loan Portfolio Management,”was updated to remove the discussion related toRegulation O, which is now covered in sec-tion 6050.1 of the manual.

Sections 2110.1, 2110.2, 2110.3, and

2110.4

This section, “Floor Plan Loans,” was revised toimprove its clarity and to add additional guid-ance references. For instance, material in thesection was revised to consolidate supervisoryconsiderations in the review of a bank’s floorplan loans into one part of the section. Theexamination procedures in section 2120.3 werealso revised to align with the interagency exami-nation documentation (ED) modules. Sec-tion 2120.2, “Floor Plan Loans: ExaminationObjectives” and section 2120.4, “Floor PlanLoans: Internal Control Questionnaire,” wereremoved from the manual.

Commercial Bank Examination Manual April 2020

Sections 2120.1, 2120.2, 2120.3, and

2120.4

Section 2120.1, “Direct Financing Leases,” wasrevised to provide updated accounting refer-ences for lease accounting. The section statesthat leases should be accounted for in accor-dance with accounting standards issued by theFinancial Accounting Standards Board (FASB).The lease accounting standard currently appliedby public business entities, “Leases (Topic 842),”was issued by FASB in February 2016, andsupersede ASC Topic 840, Leases, by 2021. Theexamination procedures in section 2120.3 wererevised to align with the interagency ED mod-ules. Section 2120.2, “Direct Financing Leases:Examination Objectives” and section 2120.4,“Direct Financing Leases: Internal Control Ques-tionnaire,” were removed from the manual.

Sections 3025.1 and 3025.3

This new section, “Dividends,” was previouslysection 4070.1. In addition to moving the sec-tion closer to the other sections in the manualrelated to capital, this section was revised toinclude references to guidance on capital plan-ning processes, including the issuance of divi-dends, for bank subsidiaries of large holdingcompanies. The section also includes a newdiscussion on the capital conservation buffer,which limits capital distributions and discretion-ary bonus payments for banking organizationsthat do not hold a specified amount of commonequity tier 1 capital in addition to the amount ofregulatory capital necessary to meet the mini-mum risk-based capital requirements. (See12 CFR 217.) The examination procedures insection 3025.3 were also revised.

Sections 4050.1, 4050.2, 4050.3,

and 4050.4

The contents of “Transactions Between MemberBanks and Their Affiliates” (sections 4050.1,4050.2, and 4050.3), were moved to sec-tion 6070 and renamed “Regulation W: Trans-actions Between Member Banks and Their Af-filiates.” Section 4050.4 was removed from themanual.

Sections 4052.1, 4052.2, 4052.3,

and 4052.4

The contents of “Bank-Related Organizations”(sections 4052.1, 4052.2, and 4052.3), weremoved to section 6072 and renamed “Regula-tion W: Bank-Related Organizations.” Sec-tion 4052.4 was removed from the manual.

Sections 4070.1, 4070.2, 4070.3,

and 4070.4

The contents of sections 4070.1, “Dividends,”and 4070.3, “Dividends: Examination Proce-dures,” were updated and moved to sec-tions 3025.1 and 3025.3 of the manual, respec-tively. Section 4070.2, “Dividends: ExaminationObjectives,” and section 4070.4, “Dividends:Internal Control Questionnaire,” were removedfrom the manual.

Section 5000.1

This section, “Duties and Responsibilities ofDirectors,” was updated to remove contentsrelated to the Depository Institution Manage-ment Interlocks Act as implemented by Regula-tion L. The relevant content on Regulation Lwas moved to section 6040.1, “Regulation L:Depository Institution Management InterlocksAct.”

Section 5020.1

This section, “Overall Conclusions RegardingCondition of the Bank,” was updated to removethe contents related to the review of BankSecrecy Act (BSA) and anti-money-laundering(AML) compliance at state member banks. Sec-tion 6010.1, “Regulation H: Bank Secrecy Actand Anti-Money-Laundering,” was developedto provide a brief description of supervisoryactivities related to the review of BSA and AMLcompliance programs at state member banks.

Section 6000.1

Section 6000.1, “Commercial Bank Report ofExamination,” was removed from the manual.The primary report of examination template islocated in section 1001.1, “Community Bank

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April 2020 Commercial Bank Examination Manual

Supervision Process.” The 6000 series majorsection heading will contain sections on keyregulations that pertain to safety-and-soundnessexaminations of state member banks.

Section 6010.1

This new section, “Regulation H: Bank SecrecyAct and Anti-Money-Laundering,” was devel-oped to provide a brief introduction of the BSAand AML compliance program and suspiciousactivity reporting requirements for banks underRegulation H. The section notes that additionaldetails on the BSA/AML program, suspiciousactivity reporting requirements, and all otherlaws, regulations, and examination procedurespertaining to the BSA, are described in theFederal Financial Institutions Examination

Council (FFIEC) BSA/AML Examination

Manual.

Section 6040.1

This new section, “Regulation L: DepositoryInstitution Management Interlocks Act,” pro-vides an overview of the Depository InstitutionManagement Interlocks Act, as implemented byRegulation L (12 CFR 212) and subpart J ofRegulation LL (12 CFR 238.91-.99). Theseregulations prohibit a management official of adepository institution or depository institutionholding company from serving simultaneouslyas a management official of another depositoryorganization if the organizations are not affili-ated and both either are very large or are locatedin the same local area.


This new section, “Regulation O: Loans toExecutive Officers, Directors, And PrincipalShareholders of Member Banks,” provides anoverview of the Federal Reserve Board’s Regu-lation O (12 CFR 215), which implements manyof the laws pertaining to extensions of credit bybanks to their insiders. Regulation O is designedto mitigate the potential for conflicts of interestand self-dealing by individuals who may be in aposition to influence a bank’s lending decisions.The section outlines Board staff legal opinionson Regulation O and supervisory considerationsfor assessing compliance with Regulation O.The content in section 2040.1 related to Regu-lation O was removed from the manual. Exami-nation procedures (refer to section 6050.3) weredeveloped.

Sections 6070.1, 6070.2, and 6070.3

This new section, “Regulation W: TransactionsBetween Member Banks and Their Affiliates,”contains the content that was previously insection 4050. No substantive edits were made tothis content. As a result, section 4050 wasremoved from the manual.

Sections 6072.1, 6072.2, and 6072.3

This new section, “Regulation W: Bank-RelatedOrganizations,” contains the content that waspreviously in section 4052. No substantive editswere made to this content. As a result, sec-tion 4052 was removed from the manual.


Commercial Bank Examination Manual April 2020

Commercial Bank Examination ManualSupplement 50—May 2019

Summary of Changes

Section 1000.1

Section 1000.1, “Examination Strategy and Risk-Focused Examinations,” was significantly re-vised and reorganized. This section addresseskey aspects of the Federal Reserve’s supervisoryprocess for safety and soundness examinationsfor state member banks. Some of the mostsignificant topics covered in this section includeexamination authority, compliance with lawsand the role of guidance, applications underRegulation H (12 CFR part 208), state memberbank examination frequency, coordinating super-visory activities, and communicating supervi-sory findings. Subsequent sections in the manualfurther describe the examination and supervi-sory practices that apply to particular supervi-sory portfolios of state member banks.

Section 1001.1

This new section, “Community Bank Supervi-sion Process,” discusses some of the most sig-nificant aspects in the preparation and executionof an examination of a state member bank with$10 billion or less in total assets. The sectionexplains the risk-focused process for examiningcommunity banks and describes the writtenproducts that facilitate this process. In addition,the section provides an updated description ofthe community bank report of examination and arevised illustrative template of the communitybank report of examination. Relevant report ofexamination content that was previously in sec-tions 6003.1 and 6005.1 has been incorporatedinto section 1001.1.

Section 1007.1

This section, “Other Types of Examinations,”was previously Section 6010.1. In addition tothe reorganization of the material in this newsection, section 1007.1 addresses the Board’sfinal rules that expanded the examination cyclefor certain small state member banks and U.S.branches and agencies of foreign banks. The

final rules (83 Fed. Reg. 67,033 (December 28,2018)) adopted the interim final rules (83 Fed.Reg. 43,961 (August 29, 2018)) without change.The final rules amended Regulation H (12 CFRpart 208) and Regulation K (12 CFR part 211),which raised the total asset threshold (from lessthan $1 billion to less than $3 billion in assets)for certain qualifying state member banks andU.S. branches and agencies of foreign banks tobe eligible for an 18-month examination cycle.See SR-18-7, “Updates to the Expanded Exami-nation Cycle for Certain State Member Banksand U.S. Branches and Agencies of ForeignBanking Organizations,” for more information.

Section 1011.1

The contents of this new section, “SupervisoryGuidance for Assessing Risk Management atSupervised Institutions with Total ConsolidatedAssets Less than $50 Billion,” were previouslypart of section 1000.1, “Examination Strategyand Risk-Focused Examinations.” A new sec-tion was developed to improve the organizationand presentation of manual content. The newsection also provides more information on theapplicability of the guidance to supervised insti-tutions as well as updates for several references.

Section 1012.1

The contents of this new section, “Risk Man-agement Processes and Internal Controls ofFirms Having $50 Billion or More in TotalAssets,” were previously part of section 1000.1,“Examination Strategy and Risk-Focused Ex-aminations.” A new section was developed toimprove the organization and presentation ofmanual content. In addition to the content beingmoved, the section provides more informationon the applicability of the guidance to super-vised institutions and contains minor editorialedits.

Section 2190.1

Section 2190.1, “Bank Premises and Equip-ment,” was revised to provide updated account-

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ing standards about leases. In February 2016,the Financial Accounting Standards Board(FASB) issued a new accounting standard onleases, Accounting Standards UpdateNo. 2016-02, Leases (Topic 842), which revisesthe accounting for lease transactions. The sec-tion also was revised to provide guidance on thetreatment of operating leases as an investment inbank premises under Regulation H upon theimplementation of the new lease accountingstandard. See SR-19-7, “Statement on the Im-plications of the New Lease Accounting Stan-dard on Regulation H,” for more information.

Section 3050.1

Section 3050.1, “Dodd-Frank Act Company-Run Stress Testing for Banking Organizationswith Total Consolidated Assets $10–50 Billion,”has been removed from the Commercial BankExamination Manual. Eighteen months after theEconomic Growth, Regulatory Relief, and Con-sumer Protection Act’s (EGRRCPA) enactment(May 24, 2018), financial companies with totalconsolidated assets of less than $250 billion thatare not bank holding companies (BHCs) will nolonger be subject to the company-run stresstesting requirements in section 165(i)(2) of theDodd-Frank Act. On EGRRCPA’s date of enact-ment, BHCs under $100 billion in total consoli-dated assets were no longer subject to section165(i)(2). The agencies’ regulations implement-ing company-run stress testing provide that theagencies may extend any deadline relating tocompany-run stress testing. In order to avoidunnecessary burden for depository institutions(including state member banks) and to maintainconsistency between BHCs and depository in-stitutions, the agencies are extending the dead-lines for all regulatory requirements related tocompany-run stress testing for depository insti-tutions with average total consolidated assets ofless than $100 billion until November 25, 2019(at which time both statutory exemptions will bein effect). For more information, see the inter-agency statement regarding the impact of theEconomic Growth, Regulatory Relief, and Con-sumer Protection Act issued on July 6, 2018.

Sections 4140.1, 4140.2, 4140.3, and4140.4

Section 4140.1, “Real Estate Appraisals andEvaluations,” has been revised significantly. Thissection provides a brief summary of the Board’sappraisal regulations and directs readers to thekey pieces of guidance that the Board and otherbanking agencies have issued relating to realestate appraisals and evaluations. Previously,section 4140.1 contained the entire contents ofthe December 2010 “Interagency Appraisal andEvaluation Guidelines.” The revised manualsection includes a brief summary of the Decem-ber 2010 Interagency Appraisal and EvaluationGuidelines, as well as a hyperlink to the guide-lines. (See SR-10-16.) The examination objec-tives (section 4040.2), examination procedures(section 4140.3), and internal control question-naire (section 4140.4) also were revised.

Section 6000.1

This section, “Commercial Bank Report of Ex-amination,” has been revised to remove much ofthe content related to the communication ofsupervisory findings. This content on the com-munication of supervisory findings has beenincorporated into the revised section 1000.1,“Examination Strategy and Risk-Focused Ex-aminations,” to improve manual content organi-zation.


The relevant content from section 6003.1, “Com-munity Bank Examination Report,” and contentof 6005.1, “Community State Member Banksand Holding Companies Rated Composite “4”or “5” (Examination and Inspection Report For-mat),” have been incorporated into section1001.1, “Community Bank Supervision Pro-cess.” As a result, sections 6003.1 and 6005.1were removed from the Commercial Bank Ex-amination Manual.

Section 6010.1

The relevant content in this section, “OtherTypes of Examinations,” was moved to section1007.1 of this manual to consolidate high-levelsupervisory process information into the 1000

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sections of the manual. Accordingly, section6010.1 was removed from the Commercial BankExamination Manual.

Section A.2000.1

This section, “Cash Accounts: Financial Record-keeping and Reporting Regulations-ExaminationProcedures,” was removed from the Commer-cial Bank Examination Manual. This sectionwas a placeholder and did not contain back-ground information or examination procedures.For more information and examination proce-dures on monetary instrument recordkeepingrequirements under the Bank Secrecy Act, seethe Federal Financial Institutions ExaminationCouncil Bank Secrecy Act/Anti-Money Launder-ing Examination Manual.

Section A.4140.1

Real Estate Appraisals and Evaluations: Appen-dixes A-D was removed from the CommercialBank Examination Manual. The appendix pro-vided a commentary on the 12 exemptions fromthe agencies’ appraisal regulations and explana-tion of the agencies’ statutory authority to pro-vide for appraisal regulatory exemptions and theapplication of these exemptions. This informa-tion is provided in the 2010 Interagency Ap-praisal and Evaluation Guidelines. (See SR-10-16). Section 4140.1 was revised to includehyperlinks to these appendixes and include briefsummaries of the appendixes. As a result of therevisions to section 4140.1, the information insection A.4140.1 was determined to be duplica-tive and, therefore, was removed from themanual.

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Commercial Bank Examination ManualSupplement 49—October 2018

Summary of Changes

Sections 3020.1, 3020.2, 3020.3, 3020.4

The section, “Assessment of Capital Adequacy,”has been completely revised to reflect theBoard’s issuance of several final rules related tocapital over the past five years. Primarily, thesection was revised to reflect a 2013 final rule(78 Fed. Reg. 62018 (October 11, 2013)), whichreplaced the general risk-based capital rules,advanced approaches rule, market risk rule, andleverage rules in accordance with certain transi-tion provisions. See also the Board’s Regula-tion Q (12 CFR 217). Regulation Q implementsinternational regulatory capital standards ad-opted by the Basel Committee on BankingSupervision and certain requirements of theDodd-Frank Wall Street Reform and ConsumerProtection Act of 2010, including the removal ofcredit ratings from capital rules. The sectionprovides updated examination guidance on theassessment of the “capital adequacy” compo-nent of the Uniform Financial Institution Rat-ings System (CAMELS rating system). Theexamination objectives (section 3020.2) andexamination procedures (section 3020.3) werealso revised. The internal control questionnairesection (section 3020.4) was removed from themanual.

Sections 3030.1, 3030.2, 3030.3, 3030.4

Section 3030.1 has been significantly revised.The section was renamed from “Assessing Risk-Based Capital—Direct-Credit SubstitutesExtended to ABCP Programs” to “Overview ofAsset-Backed Commercial Paper Programs.”Much of the section was eliminated from themanual as the material did not reflect the currentcapital rules. The previous capital rules permit-ted banking organizations with qualifying inter-nal risk-rating systems to use those systems toapply the internal-ratings approach to their un-rated direct-credit substitutes extended to ABCPprograms that they sponsored by mapping inter-nal risk ratings to external rating equivalents.The revised capital rules (78 Fed. Reg. 62018(October 11, 2013)) replaced references to creditratings with new measures of creditworthiness.

The section now conveys a summary of thetypical structures, types, and roles of ABCPprograms. The examination objectives (section3030.2), examination procedures (section3030.3), and internal control questionnaire(3030.4) were removed from the manual.

Section 4010.1, 4010.2, 4010.3

The section, “Earnings—Analytical Review ofIncome and Expense,” has been revised. Thesection was renamed from “Analytical Reviewand Income and Expense,” to highlight that thesection provides examination guidance on theassessment of the “earnings” component of theCAMELS rating system. The section includesan updated discussion on how examiners gener-ally utilize the Uniform Bank Performance Re-port in assessing the adequacy of a bank’searnings. The examination objectives (section4010.2) and examination procedures (section4010.3) were also revised.

Section 4052.1; 4052.3, 4052.4

This section, “Bank-Related Organizations,” wasrevised to remove specific references to nation-ally recognized statistical rating organizationsfrom the section. Descriptions of certain bank-related organizations were updated to reflect thedefinitions of those organizations in the Board’sregulations, such as Regulation H and Regula-tion K. The section now contains a brief descrip-tion on the role of savings and loan holdingcompanies as a related organization. The sub-section on “Intercompany Transactions” wasalso updated to use terminology for referencinginsured depository institutions, which moreclosely aligns with the language in the Board’sRegulation W (12 CFR 223). In addition, thesection was updated to reference a 2014 updateto the interagency policy statement on tax allo-cation in a holding company structure. See SRletter 14-6, “Addendum to the Interagency Pol-icy Statement on Income Tax Allocation in aHolding Company Structure,” for more informa-tion. The examination procedures (section4052.3) and internal control questionnaire (sec-tion 4052.4) were also revised.

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Section 4100.1, 4100.2, 4100.3

The section, “Litigation and Other Legal Mat-ters, and Examination-Related SubsequentEvents,” was revised to highlight that appropri-ate examination staff should notify the enforce-ment section of the Board’s Legal Division ofany investigations or other legal actions beingconducted by governmental regulators or crimi-nal prosecutors against a bank when such infor-mation is ascertained during the examinationprocess. The description of legal risk in thesection was also updated to align with theFederal Reserve’s supervisory guidance for as-sessing risk management at supervised institu-tions. See SR letter 16-11, “Supervisory Guid-ance for Assessing Risk Management atSupervised Institutions with Total ConsolidatedAssets Less than $50 Billion” and SR letter95-51, “Rating the Adequacy of Risk Manage-ment Processes and Internal Controls at StateMember Banks and Bank Holding Companies,”for more information. The examination objec-tives (section 4100.2) and examination proce-dures (section 4100.3) were also revised.

Section 4180.1, 4180.2, 4180.3, 4180.4

The section, “Investment-Funds Support,” wasrevised to clarify that a state member bank’smanagement should notify and consult with theFederal Reserve prior to the bank providingmaterial financial support to its advised funds.The section was also revised to remove a refer-ence to the abolished Office of Thrift Supervi-sion and to update an accounting standards

reference. The examination objectives (section4180.2), examination procedures (section4180.3), and internal control questionnaire(4180.4) were also revised.

Section 6010.1

The section, “Other Types of Examinations,”was revised to reference an August 2018 interimfinal rule (83 Fed. Reg. 43961 (August 29,2018)) that amended Regulation H (12 CFR208) and Regulation K (12 CFR 211), whichraised the total asset threshold (from less than$1 billion to less than $3 billion in assets) forcertain qualifying insured depository institutionto be eligible for an 18-month examinationcycle. See SR-18-7, “Updates to the ExpandedExamination Cycle for Certain State MemberBanks and U.S. Branches and Agencies of For-eign Banking Organizations,” for more informa-tion.

Subject Index

The Subject Index was removed from the Com-mercial Bank Examination Manual. EffectiveDecember 31, 2017, the Board no longer offersprint versions or subscriptions for the Commer-cial Bank Examination Manual. The eliminationof the print version of the Commercial BankExamination Manual has rendered the SubjectIndex obsolete. Manual readers can use thesearch function within the online version of themanual to find material.

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Commercial Bank Examination ManualSupplement 48—January 2018

Summary of Changes

Section 2150.1

This section, “Energy Lending—Reserve-BasedLoans,” has been significantly revised to pro-vide updated guidance on prudent risk manage-ment of energy lending activity to examinersreviewing reserve-based lending. Section 2150.1contains an overview of the oil and gas industry,and reserve-based lending. A new discussion onrepayment analysis and analyzing the financialstatements of exploration and production bor-rowers has been added to the section. Thesection includes an updated sample repaymentanalysis for determining the borrower’s abilityto repay total secured debt within a reasonabletime. The section also conveys guidance de-scribed in SR letter 16-17, “Supervisory Expec-tations for Risk Management of Reserve-BasedEnergy Lending Risk.” Topics covered in SR let-ter 16-17 that are discussed in the sectioninclude market issues and risk ramifications forbanks engaging in reserve-based lending as wellas supervisory expectations for credit risk man-agement and underwriting practices.

Section 2200.1

This section, “Other Real Estate Owned,” wasrevised to provide updated accounting and re-porting standards with regards to other realestate owned (OREO). The section notes thatuntil the effective date of Accounting StandardsUpdate (ASU) 2014-09, “Revenue from Con-tracts with Customers,” which includes amend-ments to Accounting Standards Codification(ASC) Subtopic 610-20, “Other Income—Gainsand Losses from the Derecognition of Nonfinan-cial Assets,” the primary accounting guidancefor sales of foreclosed real estate is ASC Sub-topic 360-20, “Property, Plant, and Equipment—Real Estate Sales.” ASU 2014-09 is effective forfiscal years beginning after December 15, 2017,including interim reporting periods within thosefiscal years, for institutions that are public busi-ness entities. For institutions that are not publicbusiness entities (i.e., that are private compa-nies), ASU 2014-09 is effective for fiscal years

beginning after December 15, 2018. When theamendments to ASC Subtopic 610-20 take effect,ASC Subtopic 360-20 is superseded for realestate sales not accompanied by a leaseback andbecomes the primary accounting guidance forsales of foreclosed real estate. Descriptions ofthe superseded accounting methods for gainrecognition of OREO were removed from thesection, as were several outdated references.

Section 3050.1

This section, “Dodd-Frank Act Company-RunStress Testing for Banking Organizations withTotal Consolidated Assets $10−50 Billion,” wasupdated to address changes to the agencies’rules implementing Dodd-Frank Wall Street Re-form and Consumer Protection Act (Dodd-Frank Act) company-run stress testing disclo-sure requirements since the issuance of SRletter 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 Board’s stress testing rules, see80 Fed. Reg. 75419 (December 2, 2015).

Section 4133.1, 4133.2, 4133.3

This section, “Prompt Corrective Action,” wasrevised to update the capital ratios used totrigger specific actions that are designed torestore a bank to financial health through theprompt corrective action (PCA) framework. In2013, the Federal Reserve Board implementedhigher minimum capital requirements and ad-justed ratios in four of the five capital categoriesof the PCA framework. The final rule estab-lished a common equity tier 1 capital require-ment, and specified criteria that instrumentsmust meet in order to be considered commonequity tier 1 capital, additional tier 1 capital, ortier 2 capital. The Federal Reserve has main-tained the general structure of the existing PCAframework while incorporating increased mini-mum capital requirements. The examinationobjectives, section 4133.2, and the examinationprocedures, section 4133.3, were also revised.

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Section A.4150.1

This new appendix has been added to themanual to provide a listing of key FinancialAccounting Standards Board (FASB) Account-ing Standards Codification (ASC)® References.The table can also be used as a reference for

manual users looking to find the appropriateASC reference for precodification FASB refer-ences, that is, references that were establishedbefore June 2009, that are found throughoutmanual. More information regarding the FASBASC® Codification can be accessed at http://asc.fasb.org/.

FILING INSTRUCTIONS

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Summary of Changes

Foreword

Minor revisions were made to the Foreword toprovide updated information on how to order theCommercial Bank Examination Manual and howto access it on the Federal Reserve Board’swebsite at https://www.federalreserve.gov/publications/supmanual.htm.

Preface

The Preface was removed from the manual.Previously, the Preface contained chronologicalinformation regarding the changing legislativeand regulatory environment of the banking indus-try. This section was removed because theinformation was duplicative and readers canlocate more comprehensive discussions on de-velopments in the banking industry in the spe-cific manual sections.

Section 1000.1

This section, “Examination Strategy and Risk-Focused Examinations,” was revised to reflectreferences to an interim final rule that amendedRegulation H to raise the total asset thresholdfor which an insured depository institution canbe eligible for an 18-month examination cyclerather than a 12-month examination cycle fromless than $500 million to less than $1 billion.The interim final rule was made effective Feb-ruary 29, 2016, with the Board approving thefinal rule in December 2016. The final ruleadopted the interim final rule without change.See SR-17-2, “Updates to the Expanded Exami-nation Cycle for Certain State Member Banksand U.S. Branches and Agencies of ForeignBanking Organizations.” Modifications weremade to the alternate year examination programto reflect the guidance transmitted in SR-17-2.In addition, minor grammatical edits were madeto several pages in this section.

Section 1015.1

This section, “Conflict-of-Interest Rules for Ex-aminers,” was revised to include changes result-ing from the issuance of SR-16-16 / CA-16-7,“Special Post-Employment Restriction for SeniorExaminers.” The letter was issued to announcean amendment to the Board’s rule on Post-Employment Restrictions for Senior Examiners(12 CFR 264a), which expands the definition of“senior examiner.” This amendment was devel-oped to promote consistency in post employ-ment ethics rules across the Federal ReserveSystem and to address the risk associated withindividuals leaving the Federal Reserve for em-ployment with a regulated entity.

Section 2080.1

This section, “Commercial and Industrial Loans,”was revised to remove a subsection titled “LoanSampling and Coverage Requirements” becausethe guidance was outdated and no longer re-flected the supervisory approach to loan reviewat large state member banks. Subsequent sec-tions in the manual describe loan sampling andcoverage expectations for state member bankswith less than $50 billion in total assets.

Section 6010.1

This section, “Other Types of Examinations,”was revised to provide updated terminology andhigh-level guidance on the Federal Reserve’ssupervisory responsibilities of information tech-nology, trust activities, transfer agent activities,securities dealer activities, and consumer com-pliance at state member banks. The section wasalso updated to include a reference to the Decem-ber 2016 final rule that amended Regulation Hand Regulation K, which raised the total assetthreshold for an insured depository institution tobe eligible for an 18-month examination cycle.See SR-17-2 for more information. This sectionnow includes a reference table with a partial listof key guidance and resources that apply to thesupervision of the entities and activities describedin this section.

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https://www.federalreserve.gov/publications/supmanual.htm

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Summary of Changes

Section 1000.1

This section, “Examination Strategy and Risk-Focused Examinations,” was amended to includechanges resulting from the June 8, 2016, issu-ance of SR-16-11, “Supervisory Guidance forAssessing Risk Management at Supervised In-stitutions with Total Consolidated Assets Lessthan $50 Billion.” The supervisory guidanceapplies to assessing risk-management practicesat state member banks, bank holding companies,and savings and loan holding companies (includ-ing insurance and commercial savings and loanholding companies) with less than $50 billion intotal consolidated assets and foreign bankingorganizations with combined U.S. assets of lessthan $50 billion. When SR-16-11 was issued,SR-95-51, “Rating the Adequacy of Risk Man-agement Processes and Internal Controls at StateMember Banks and Bank Holding Companies,”became applicable only to state member banksand bank holding companies with $50 billion ormore in total assets. Both SR-95-51 and SR-16-11 are included in this manual section. (Referto SR-16-11 and its attachment.)

Section 4020.1

This section, “Liquidity Risk,” is revised toinclude “Interagency Guidance on Funds Trans-fer Pricing Related to Funding and ContingentLiquidity Risks,” issued March 1, 2016. Theguidance (refer to appendix 3 of this section)was issued to address weaknesses observed insome large financial institutions’ funds transferpricing (FTP) practices related to funding risk(including interest rate and liquidity compo-nents) and contingent liquidity risk. (Refer toSR-16-3 and also to the March 1, 2016, attach-ment to the interagency guidance, “IllustrativeFunds Transfer Pricing Methodologies.”) FTP isan important tool for managing a firm’s balancesheet structure and measuring risk-adjusted prof-itability. By allocating funding and contingentliquidity risks to business lines, products, andactivities within a firm, FTP influences thevolume and terms of new business and ongoingportfolio composition. If done effectively, FTPpromotes more resilient, sustainable businessmodels. (Refer to SR-16-3 and its attachments.)

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4020.1, pages 1–2, 47–48 4020.1, pages 1–2, 2.1, 47–53

4060.1, pages 8.1–8.2 4060.1, pages 8.1–8.2

4090.1, pages 1–2 4090.1, pages 1–2

4200.1, pages 3–4, 7–8 4200.1, pages 3–4, 7–8

5020.1, pages 1–4 5020.1, pages 1–4

6003.1, pages 3–4 6003.1, pages 3–4

A.5020.1, pages 1–4, 9–10 A.5020.1, pages 1–4, 9–10

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Summary of Changes

Section 1000.1

This section, “Examination Strategy and Risk-Focused Examinations,” is revised to include adiscussion of a rule that amended Regulation Hto raise the statutory maximum total asset thresh-old for a state member bank (SMB) to beeligible for the expanded 18-month examinationcycle (as opposed to 12 months) from less than$500 million to less than $1 billion in totalassets. A SMB with less than $1 billion in totalassets may be eligible for the 18-month exami-nation cycle if it satisfies certain qualifyingcriteria. (Refer to SR-16-6 and its attachment.)

Sections 1020.1, 1020.2, 1020.3

Section 1020.1 on the “Federal Reserve SystemBank Surveillance Program” discusses “En-hancements to the Federal Reserve System’sSurveillance Program.” (Refer to SR-15-16, andits attachment.) The Surveillance Program usesalgorithms that are incorporated into regularmonitoring systems to identify aspects of statemember banks’ financial condition and perfor-mance that may warrant possible supervisoryattention. In addition to the Watch List and itsuse of the Supervision and Regulation StatisticalAssessment of Bank Risk (SR-SABR) earlywarning model, the algorithms’ main compo-nents are the Outlier List, the State MemberBank Monitoring Screen, and the IntercompanyTransactions Exception List. The algorithms usedata gathered on the Call report, other financialregulatory reports, as well as examination datato identify institutions exhibiting financial dete-rioration, weaknesses, an increased or changingrisk profile, or deviations from supervisory ex-pectations. Also, the monitoring systems mayidentify complex operations, can be used todetect novelties or departures from expectedperformance or risk patterns, and they identifythe institutions that fail the key screening crite-ria. The surveillance results can be used inpre-examination planning to schedule and deter-mine the type of risk-focused examination to beperformed, to assess significant risk exposures,outlooks, and possible non-compliance con-

cerns, and to calibrate supervisory and exami-nation resources to risk. The Surveillance Pro-gram’s objectives, phases, structure, andmaintenance are discussed in the section alongwith additional information on the metrics, pro-cedures, and write-up requirements. The exami-nation objectives, section 1020.2, and the ex-amination procedures, section 1020.3, are revised.

Section 2088.1

This new section, “Off-site Review of LoanFiles,” announces to state member banks (SMBs)with less than $50 billion in total assets, thatthey have the option to have Federal Reserveexaminers review loan files off site during full-scope or target examinations. Federal Reserveexaminers may conduct an off-site loan reviewprovided the SMB has communicated its will-ingness to participate in the program and is ableto appropriately image and send its legible andsufficiently comprehensive loan information tothe Federal Reserve Bank in a secure manner.(Refer to SR-16-8.)

Section 4128.1

This section, “Private Banking,” is revised toprovide supplemental information about cus-tomer identification program (CIP) requirementsfound in section 326 of the USA PATRIOT Act(referred to as the “CIP” rule). The CIP rulerequires a bank to obtain sufficient informationto form a reasonable belief regarding the iden-tity of each “customer.” The definition of an“account” is provided, and also information fordetermining if an “account” has been created.Under the CIP rule, a person that opens a newaccount is deemed to be a “customer.” (Refer toSR-16-7 and its interagency attachment.)

Section 6010.1

This section is revised under the subheading,“U. S. Activities of Foreign Banking Organiza-tions,” to include amendments made to section10(d) of the Federal Deposit Insurance Act (FDIAct) that permit a longer cycle to conductexaminations of insured depository institutions


based on certain qualifying criteria – at leastonce every 18 months instead of 12 months. TheBoard approved on February 29, 2016, a rulethat amended Regulation K, which resultedfrom the FDI Act amendments. Regulation Kgoverns the on-site examination cycle for Boardsupervised U.S. branches and agencies of for-eign banks. A U. S. branch or agency of a

foreign bank with less than $1 billion in totalassets may be eligible for an 18-month, insteadof a 12-month, on-site examination cycle if itreceived, at its most recent examination, a com-posite condition rating of “1” or “2” under thesupervisory rating system and if it satisfies otherqualifying criteria. (Refer to SR-16-6 and itsattachment.)

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Summary of Changes

Section 1000.1

This section, “Examination Strategy and Risk-Focused Examinations,” includes revised guid-ance within its subsection on “Examinations ofInsured Depository Institutions Prior to Mem-bership or Merger into a State Member Bank.”The guidance further explains the FederalReserve’s criteria for waiving or conductingpre-membership safety-and-soundness and con-sumer compliance examinations of insureddepository institutions that are either (1) seekingto become state member banks; or (2) mergingwith another institution where a state memberbank would be the surviving entity. Further, theguidance clarifies the eligibility criteria for whenthe Federal Reserve may waive a pre-membership or pre-merger examination. (Referto SR-15-11/CA-15-9.)

Section 2080.1

This section, “Commercial and Industrial Loans,”has been revised within the subsection, “LoanSampling and Coverage Requirements.” Refer-ences have been changed from SR-02-19 to themanual’s section 2082.1, and SR-14-7 to section2086.1. Also, the limitation for using statisticalloan sampling at banks was revised from lessthan $1 billion to $10 billion or less. (Seesection 2082.1.)

Section 2082.1

This section, “Loan-Sampling Program for Com-munity Banks,” includes revised procedures gov-erning the use of statistical sampling in thereview of commercial and industrial loans andcommercial real estate loans during safety andsoundness examinations of community bankingorganizations (CBOs). The “Core” bucket andits sub-buckets have been amended to providegreater flexibility to risk focus the loan reviewprocess. Instead of the loan review “Core”bucket requirements of the ten largest, ten large

problem, five insider, and five new borrowerexposures, the revised procedures require thatthe “Core” bucket loan review consist of up to atotal of 25 borrowers. The “Core” bucket is toconsist of appropriate representation of the larg-est, largest new, largest problem, and largestinsider credits, respectfully, to be determinedbased on the examiner’s judgment of where theexamination should be appropriately risk-focused. The limitation for using statistical loansampling at banks was revised from less than$1 billion to $10 billion or less.

Section 2084.1

This section, “Loan Sampling Requirements forState Member Bank and Credit-Extending Non-bank Subsidiaries of Banking Organizations with$10−$50 Billion in Total Consolidated Assets,”is revised to supplement footnote 1 pertaining tothe calculation of a concentration of credit in aloan portfolio or portfolio segment—total risk-based capital refers to tier 1 capital plus theallowance for loan and lease losses. Also, areference to banking organizations does notinclude savings and loan holding companies.

Section 2086.1

This section, “Loan Coverage Examination Re-quirements for Community State Member Bankswith $10 Billion or Less in Total ConsolidatedAssets,” is revised to reference section 2082.1instead of SR-02-19, and to remove a referenceto SR-14-7.

Section 5020.1

This section, “Overall Conclusions Regardingthe Condition of the Bank,” is revised to giverecognition to the Federal Reserve’s assignmentof a risk-management rating during an exami-nation of a state member bank. (See SR-95-51,“Rating the Adequacy of Risk ManagementProcesses and Internal Controls at State MemberBanks and Bank Holding Companies.)


Section A.5020.1

This appendix section, “Overall ConclusionsRegarding Condition of the Bank: UniformFinancial Institutions Rating System and theFederal Reserve’s Risk Management Rating,” is

revised to give recognition to the Federal Reserv-e’s assignment of a risk-management ratingduring an examination of a state member bank.(See SR-95-51.) See the subsection on “Risk-Management Rating,” which follows the subsec-tion on “Sensitivity to Market Risk.”

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2080.1, pages 1–8, 8.1 2080.1, pages 1–8, 8.1

2082.1, pages 1–5 2082.1, pages 1–5

2084.1, pages 1–3 2084.1, pages 1–3

2086.1, pages 1–3 2086.1, pages 1–3

5020.1, pages 1–9 5020.1, pages 1–9

A.5020.1, pages 1–8 A.5020.1, pages 1–10

Subject Index, pages 19−20 Subject Index, pages 19−20

Supplement 44—October 2015


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Summary of Changes

Section 2040.1

This section, “Loan Portfolio Management,” hasbeen revised to include interagency “Guidanceon Private Student Loans with Graduated Re-payment Terms at Origination.” The guidanceprovides principles that financial institutionsshould consider in their policies and proceduresfor originating these loans. Financial institutionsshould prudently underwrite their private stu-dent loans in a manner that is consistent withsafe and sound lending practices. Financial in-stitutions should also comply with all applicablefederal and state consumer laws and regulations,including the providing of disclosures that clearlycommunicate the timing and the amount ofpayments to facilitate borrower understandingof loan terms and features. Refer to SR-15-2/CA-15-1 and its interagency guidance attach-ment.

Section 3050.1

This new section, “Dodd-Frank Act Company-Run Stress Testing for Banking Organizations

with Total Consolidated Assets $10–50 Billion”has been added to the manual. It providesguidance on the supervisory expectations for theDodd-Frank Wall Street Reform and ConsumerProtection Act stress test practices for theserespective companies. The section 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 TotalConsolidated Assets of More Than $10 Billionbut Less than $50 Billion.” (See 79 FederalRegister 14153, March 13, 2014).

Sections 2000.4, 2080.3, 2130.3, 4052.1,

4060.1, 4060.4, 4063.4, 4128.1, 4128.3,

4140.1, 5020.1, 6000.1, 7030.3, 7050.3,

and 8000.1

These sections have been revised to updateFinancial Crimes Enforcement Network rulereferences (e.g., 31 CFR 1010 and 31 CFR 1020and certain other subsections) pertaining to theBank Secrecy Act. See also, SR-14-10, “Releaseof the 2014 Federal Financial Institutions Ex-amination Council’s Bank Secrecy Act/Anti–Money Laundering Examination Manual.”

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2060.1, pages 9–10 2060.1, pages 9–10

2080.3, pages 5–6 2080.3, pages 5–6

2130.3, pages 5–6; 11–12 2130.3, pages 5–6; 11–12

3050.1, pages 1–4

4052.1, pages 9–10 4052.1, pages 9–10


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4128.1, pages 9–10; 13–14 4128.1, pages 9–10; 13–14

4128.3, pages 1–2 4128.3, pages 1–2

4140.1, pages 15–16 4140.1, pages 15–16

4170.1, pages 7–8 4170.1, pages 7–8

5020.1, pages 7–8 5020.1, pages 7–8

6000.1, pages 15–16 6000.1, pages 15–16

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Summary of Changes

Section 1020.1

This section, “Federal Reserve System BankWatch List and Surveillance Programs,” hasbeen revised to reflect June 5, 2014, enhance-ments to SR-06-2, February 2, 2006, “Enhance-ments to the System’s Off-Site Bank Surveil-lance Program.” The 2014 enhancements indicatethat surveillance write-ups for the System’sState Member Bank Watch List banks are notrequired (in most cases) for institutions with aCAMELS composite rating of 4 or 5 or certaininstitutions with a CAMELS composite ratingof 3. (See the revised discussion under “SystemBank Watch List Program” and footnote num-ber 3.)

Section 2080.1

This section, “Commercial and Industrial Loans,”was modified to incorporate the guidance foundin SR-14-4, “Examiner Loan Sampling Require-ments for State Member Bank and Credit Ex-tending Nonbank Subsidiaries of Banking Orga-nizations with $10−$50 Billion in TotalConsolidated Assets,” and SR-14-7, “Loan Cov-erage Requirements for Safety and SoundnessExaminations of Community State MemberBanks.” The examiner guidance in SR-14-7 maybe used for statistical loan sampling for exami-nations of state member banks having totalconsolidated assets of $10 billion or less, pro-vided other qualifying criteria are met. This

provision also applies to the guidance found insection 2082.1.

Section 2082.1

This section, “Loan-Sampling Program for Cer-tain Community Banks,” was revised to incor-porate the changes resulting from the issuancesof SR-14-7 and SR-14-4.

Section 2086.1

This new section, “Loan Coverage ExaminationRequirements for Community State MemberBanks with $10 Billion or Less in Total Con-solidated Assets,” sets forth the loan samplingexpectations for Federal Reserve led examina-tions of community state member banks. Itclarifies when statistical sampling is expected tobe used and establishes minimum coverageexpectations for judgmental samples for full-scope and asset-quality target examinations. Ex-aminers are expected to select for review asample of loans that is of sufficient size andscope to enable them to reach sound and well-supported conclusions about the quality of, andrisk management over, a community state mem-ber bank’s lending portfolio. (Refer to SR-14-7,which was subsequently revised on July 29,2014, to clarify that when calculating a concen-tration of credit in a loan portfolio or portfoliosegment, as described under “Retail ConsumerLending,” a concentration would be more than25 percent of tier 1 capital plus the allowancefor loan and lease losses.)

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2082.1, pages 1−5 2082.1, pages 1−5

2086.1, pages 1−3

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Summary of Changes

Section 1005.1

This section, ‘‘Consolidated Supervision Frame-work for Large Financial Institutions,’’ is revisedto include Appendix A—‘‘Risk Transfer Con-siderations When Assessing Capital Adequacy.’’Refer to SR-13-23, which is additional supple-mental guidance to SR-12-17/CA-12-14. It cen-ters on how certain risk transfer transactionsaffect assessments of capital adequacy at largefinancial institutions. SR-13-23 provides clarifi-cation on supervisory expectations when assess-ing a firm’s capital adequacy in certain circum-stances when the risk-based capital frameworkmay not fully capture the residual risks of atransaction.

This section is also revised to include Appen-dix B—‘‘Managing Foreign Exchange Settle-ment Risks for Physically Settled Securities.’’See SR-13-24. 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 system’s ability to withstand severe marketdisruptions. Institutions covered by SR-13-24should apply the seven guidelines to their for-eign exchange activities with the stated clarifi-cations regarding application of the guidance inthe United States.

Sections 1010.2, 1010.3, and 1010.4

These sections on ‘‘Internal Control and AuditFunction, Oversight, and Outsourcing’’ havebeen further revised. The sections consist of the2003 interagency guidance, ‘‘Policy Statementon the Internal Audit Function and Its Outsourc-ing.’’ The sections include revised examinationobjectives, examination procedures, and an in-ternal control questionnaire for both the 2003guidance and the January 23, 2013, FederalReserve policy statement that supplements the2003 interagency guidance. Refer to SR-03-5and SR-13-1/CA-13-1.

Section 2084.1

This new section, ‘‘Examiner Loan SamplingRequirements for State Member Bank andCredit-Extending Nonbank Subsidiaries of Bank-ing Organizations with $10–$50 Billion in TotalConsolidated Assets,’’ sets forth the loan sam-pling expectations in SR-14-4 that apply to theFederal Reserve’s examination of these statemember bank (SMB) and credit-extending non-bank subsidiaries. Examiners will also have theflexibility, depending upon the structure and sizeof subsidiary SMBs, to utilize the guidanceapplicable to smaller SMBs when the SMBsubsidiary’s total assets are below $10 billion.This guidance supersedes the examiner loansampling expectations described in SR-94-13,‘‘Loan Review Requirements for On-site Exami-nations’’ (see this manual’s section 2080.1). Itclarifies expectations for the assessment of mate-rial1 retail credit portfolios for these institutions.

Section 2090.1

This section on ‘‘Real Estate Loans’’ was revisedto include a brief discussion of the December13, 2013, ‘‘Interagency Statement on Supervi-sory Approach for Qualified and Non-QualifiedMortgage Loans’’ that was issued to clarify thesafety-and-soundness expectations and Commu-nity Reinvestment Act considerations for regu-lated institutions engaged in residential mort-gage lending. The Consumer Financial ProtectionBureau’s Ability-to-Repay and Qualified Mort-gage Standards Rule2 was issued on January 10,2013 (effective on January 10, 2014). Institu-tions may issue qualified mortgages or non-qualified mortgages, based on their business

1. A loan portfolio or portfolio segment is consideredmaterial when the portfolio or segment exceeds 25 percent oftotal risk-based capital or contributes 25 percent or more toannual revenues.

2. See the Ability-to-Repay and Qualified Mortgage Stan-dards Rule (the Ability-to-Repay Rule) under the Truth inLending Act (Regulation Z), 78 Fed. Reg. 6408 (January 30,2013), as amended. The Ability-to-Repay Rule requires insti-tutions to make reasonable, good faith determinations thatconsumers have the ability to repay mortgage loans beforeextending such loans. In accordance with the rule, a ‘‘qualifiedmortgage’’ may not have certain features, such as negativeamortization, interest-only payments, or certain balloon struc-tures, and must meet limits on points and fees and otherunderwriting requirements.


strategies and risk appetites. Institutions are tounderwrite residential mortgage loans in a pru-dent fashion and are to address key risk areas intheir residential mortgage lending, includingloan terms, borrower qualification standards,loan-to-value limits, documentation require-ments, and appropriate portfolio and risk-management practices. Refer to SR-13-20/CA-13-23 and its attachment.

Sections 2115.2, 2115.3, and 2115.4

These sections on ‘‘Leveraged Lending’’ havebeen revised to supplement the March 23, 2013,‘‘Interagency Guidance on Leveraged Lending’’with revised examination objectives, examina-tion procedures, and an internal control ques-tionnaire for leveraged lending. The sectionprovides guidance about the risk-managementexpectations for leveraged loans and examinerguidance for the review of such loans. Refer toSR-13-3 and its attachment.

Section 4050.1

This section, ‘‘Transactions Between MemberBanks and Their Affiliates,’’ was revised toreflect the statutory amendments to sections 23Aand 23B of the Federal Reserve Act resultingfrom the enactment of the Dodd-Frank Act. Oneamendment modifies the definition of an ‘‘affili-ate’’ to include an investment fund with respectto which an insured depository institution (IDI)or one of its affiliates is an investment adviser.Also, the definition of ‘‘covered transactions’’was revised to include securities borrowing,

securities lending, or a derivatives transactionbetween an IDI and an affiliate to the extent thatthe transaction causes an IDI or a subsidiary tohave a credit exposure with the affiliate. Inaddition, the Dodd-Frank Act removed theexemption from the 10 percent limit for coveredtransactions between a bank and any individualfinancial subsidiary. The retained earnings of afinancial subsidiary are to be included as part ofthe IDI’s investment in the financial subsidiary.The amendments were effective July 21, 2012.(See sections 608 and 609 of the Dodd-FrankAct.)

Section 4062.1

This new section, ‘‘Managing OutsourcingRisk,’’ consists of the December 5, 2013, Fed-eral Reserve ‘‘Guidance on Managing Outsourc-ing Risk’’ that was issued to assist financialinstitutions3 in understanding and managing therisks associated with outsourcing a bank activityto a service provider to perform that activity.The guidance addresses the characteristics, gov-ernance, and operational effectiveness of a finan-cial institution’s service provider risk- manage-ment program for outsourced activities beyondtraditional 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.

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3. For purposes of this guidance, ‘‘financial institutions’’refers to state member banks, bank and savings and loanholding companies (including their nonbank subsidiaries), andU.S. operations of foreign banking organizations.



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2082.1, pages 1–5 2082.1, pages 1–5

2084.1, pages 1–3

2090.1, pages 1–2, 5–6 2090.1, pages 1–2, 2.1, 5–6

2115.2, page 1 2115.2, pages 1–2

2115.3, page 1 2115.3, pages 1–4

2115.4, pages 1–5

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4062.1, pages 1–8

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Summary of Changes

Section 1000.1

This section, ‘‘Examination Strategy and Risk-Focused Examinations,’’ is revised to clarify the60-calendar-days from the close date comple-tion standard and the documentation require-ments for examination and inspection reports forcommunity banking organizations with $10 bil-lion or less in total consolidated assets. Further-more, for institutions rated composite ‘‘3,’’ ‘‘4,’’or ‘‘5,’’ Reserve Banks are encouraged to adoptan internal target of 45 calendar days from theclose date for sending the reports. The sectionexplains the meaning of ‘‘close date’’ for exami-nations or inspections. (See SR-13-14.)

Sections 2020.1, 2020.3, and 2020.4

The section, ‘‘Investment Securities and End-User Activities,’’ has been further revised. Thesection incorporates the provisions of section939A of the Dodd-Frank Wall Street Reformand Consumer Protection Act of 2010. Thisstatute requires each federal agency to removereferences to, and requirements of reliance on,ratings from nationally recognized statisticalrating organizations (external credit ratings) inany regulation issued by the agency. In 2012, theOCC revised its investment security regulations(12 CFR 1) to remove references to the solereliance on external credit ratings.

Investments in securities and stock by statemember banks are required under the FederalReserve Act (12 USC 335) and Regulation H(12 CFR 208.21) to comply with the OCCinvestment security regulations. State memberbanks are to assess a security’s creditworthinessto determine whether the security is investmentgrade and that the security is not predominantlyspeculative. (See SR-12-15 and its attachedOCC guidance.)

The section also is revised to include the 2013Uniform Agreement on the Classification andAppraisal of Securities Held by DepositoryInstitutions (2013 Securities Classification Guid-ance). This guidance outlines principles relatedto the proper classification of securities withoutrelying on ratings issued by external creditrating organizations and applies to state member

banks and in principle to other institutionssupervised by the Federal Reserve. The OCCinvestment security regulations require an insti-tution to monitor investment credit qualitythrough an analytical review of the obligorrather than solely through external credit rat-ings. Credit quality monitoring provides anopportunity for management to determinewhether a security continues to be investmentgrade or if it has deteriorated and if it requiresclassification. The 2013 Securities ClassificationGuidance clarifies the classification standardsfor securities held by an institution and providesexamples that demonstrate when a security isinvestment grade and when it is not investmentgrade. (See SR-13-18 and its attachment.)

Also, the section is revised to update or deletestatutory and regulatory references and to deletethe content of SR letters that have been deter-mined to be inactive. The section’s examinationprocedures and internal control questionnairehave been revised accordingly.

Section 2103.1

This section, ‘‘Concentrations in CommercialReal Estate Lending, Sound Risk-ManagementPractices,’’ is revised to clarify procedures forcalculating the total commercial real estate(CRE) loan ratio included in the 2006 Guidanceon Concentrations in Commercial Real EstateLending, Sound Risk-Management Practices(2006 CRE Guidance). In March 2008, theConsolidated Reports of Condition and Income(Call Report) were revised, which changed howCRE loan ratios are calculated using the 2006CRE Guidance. The revised Call Report excludesowner-occupied CRE loans when calculating abank’s total CRE loan concentration ratio. Thesection also emphasizes that the supervisoryscreening criteria for CRE lending activity arenot intended to represent hard limits on thebank’s activity, but rather to encourage a dia-logue between bank management and supervi-sors regarding the bank’s level and nature ofCRE concentration risk.

Section 6000.1

The section, ‘‘Commercial Bank Report of


Examination,’’ clarifies the manner in whichFederal Reserve examiners communicate super-visory findings to banking organizations andinstitutions supervised by the Federal Reserve.The guidance discusses the Federal Reserve’suse of standard language for examination/inspection findings with regard to MattersRequiring Immediate Attention (MRIAs) and

Matters Requiring Attention (MRAs), reaffirm-ing their definitions, including their use bysafety-and-soundness and consumer complianceexaminers when communicating supervisoryfindings to banking organizations. The use ofthe term, ‘‘Observations’’ is discontinued. (Referto SR-13-13/CA-13-10 and its attachment.)

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2103.1, pages 1–5 2103.1, pages 1–5

6000.1, pages 1–4 6000.1, pages 1–4, 4.1–4.2




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Summary of Changes

Section 1005.1

This new section, ‘‘Consolidated SupervisionFramework for Large Financial Institutions,’’represents the Federal Reserve’s December 17,2012, new framework for the consolidated su-pervision of large financial institutions.1 Thenew guidance supersedes the guidance previ-ously found in SR-99-15, ‘‘Risk-Focused Super-vision of Large Complex Banking Organiza-tions.’’ The framework strengthens traditionalmicroprudential supervision and regulation toenhance the safety and soundness of individualfirms. In addition, it incorporates macropruden-tial considerations to reduce potential threats tothe stability of the financial system and toprovide insights into financial market trends.The consolidated supervision framework hastwo 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 theconsolidated organization (or the combinedU.S. operations in the case of foreign bankingorganizations) and its core business lines cansurvive under a broad range of internal orexternal stresses. This requires financial resil-ience by providing sufficient capital and li-quidity, and operational resilience to maintaineffective corporate governance, risk manage-ment, and recovery planning.

• Reducing the impact on the financial systemand the broader economy in the event of afirm’s failure or material weakness.

Each firm is expected to ensure the sustain-ability of its critical operations and bankingoffices2 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 firm’s operations.

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

Section 1010.1

This section, ‘‘Internal Control and Audit Func-tion, Oversight, and Outsourcing,’’ is revised toremind state member banks with $500 million ormore in total assets of the key longstandingFederal Deposit Insurance Corporation (FDIC)reporting and filing requirements for insureddepository institutions entitled ‘‘Annual Indepen-dent Audit and Reporting Requirements,’’ asamended in 2009.3 The section further explainswhen an insured depository institution subsidi-ary may file its audited financial statements atthe holding company level.4 See SR-13-11.

The section includes the March 17, 2003,‘‘Interagency Policy Statement on the InternalAudit Function and Its Outsourcing.’’ The sec-tion has been revised to include the January 23,2013, ‘‘Federal Reserve Supplemental PolicyStatement on the Internal Audit Function and ItsOutsourcing,’’ which supplements the 2003 in-teragency guidance. (See SR-13-1/CA-13-1.)

Section 2020.1

This revised section, ‘‘Investment Securities andEnd-User Activities,’’ provides that state mem-ber banks are to assess a security’s creditwor-thiness to determine whether the security isinvestment grade. Depository institutions can nolonger rely solely on reports from external creditreporting agencies when making a determina-tion as to the quality and permissibility of aninvestment in accordance with the Office of theComptroller of the Currency’s (OCC’s) rule (12CFR 1). Securities may qualify for investmentby national banks (and thus, state memberbanks) only if they are determined by the bankto be ‘‘investment grade’’ and are not predomi-nantly speculative in nature. A security meetsthe ‘‘investment grade’’ test only if the issuerhas an adequate capacity to meet its financial

1. The framework applies to large financial institutionswith consolidated assets of $50 billion or more.

2. ‘‘Banking offices’’ are defined as U.S. depository insti-tution subsidiaries, as well as the U.S. branches and agenciesof foreign banking organizations.

3. See 12 CFR part 363.4. For this guidance, the term ‘‘holding company’’ refers

to a bank holding company or a savings and loan holdingcompany, as applicable.


commitments under the security for the pro-jected life of the asset or exposure. Based on thisdefinition of ‘‘investment grade,’’ the issuer hasan adequate capacity to meet financial commit-ments if (1) the risk of default by the obligor islow and (2) the full and timely repayment ofprincipal and interest is expected.

While the bank may continue to take intoaccount external credit ratings and assessmentsas a valuable source of information, it is expectedto supplement these ratings with a degree of duediligence processes and additional analysesappropriate for the bank’s risk profile and for thesize and complexity of the instrument. There isa detailed discussion of this rule as to whatinvestments can be considered ‘‘investmentgrade’’ and the investment limitations. (SeeSR-12-15, November 15, 2012, and the attachedOCC guidance.)

Section 2022.1

This new section, ‘‘Investing in Securities with-out Reliance on Ratings of Nationally Recog-nized Statistical Rating Organizations(NRSROs),’’ sets forth guidance that informsstate member banks, effective January 1, 2013,that 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. See the OCC-issued supple-mental guidance (77 Fed Reg. 35259 (June 13,2012)), under the OCC’s rule (12 CFR 1), thatstates that securities may qualify for investmentby national banks only if they are determined bythe bank to be ‘‘investment grade’’ and notpredominantly speculative in nature.5 (See SR-12-15 and its attachment, ‘‘OCC Guidance onDue Diligence Requirements in DeterminingWhether Securities Are Eligible for Invest-ment.’’) Institutions may perform due diligenceby maintaining and updating internal credit-

rating reports and assessments, which can besupplemented by reports from external credit-rating services.

Section 2040.1

This revised section, ‘‘Loan Portfolio Manage-ment,’’ includes amendments to the FederalReserve Act (FRA) regarding insider lending.The definition of ‘‘extension of credit’’ wasrevised to include an insured depository institu-tion’s (IDI’s) credit exposure to a person arisingfrom a derivatives transaction, repurchase agree-ment, reverse repurchase agreement, securitieslending transaction, or securities borrowingtransaction. See the FRA, section 22(h)(9)(D)(i),as amended by the Dodd-Frank Act, section614(a), 12 USC 375 b(9).

The Federal Deposit Insurance (FDI) Act alsowas amended to prohibit the purchase or sale ofassets between an IDI and an executive officer,director, or principal shareholder of the IDI andany related interest of such person unless thetransaction is on market terms. In addition, if theasset purchase or sale represents more than10 percent of the IDI’s capital stock and surplus,the transaction must be approved by the major-ity of the board of directors of the IDI who donot have an interest in the transaction. See theDodd-Frank Act, section 615(1), codified at12 USC 1818(2).

Section 2115.1

The ‘‘Leveraged Lending’’ section includes the2013 updated leveraged lending guidance, whichreplaced the 2001 ‘‘Interagency Guidance onLeveraged Financing.’’ This guidance describesexpectations for the sound risk management ofleveraged lending activities, including why in-stitutions need to develop

• transactions structured to reflect a sound busi-ness premise, an appropriate capital structure,and reasonable cash flow and balance sheetleverage. Combined with supportable perfor-mance projections, these elements of a safe-and-sound loan structure should clearly sup-port a borrower’s capacity to repay and tode-lever to a sustainable level over a reason-able period, whether underwritten to hold ordistribute;

5. Under the Federal Reserve Act (FRA) (12 USC 335)and the Board’s Regulation H (12 CFR 208.21), state memberbanks are subject to the same limitations and conditions withrespect to the purchasing, selling, underwriting, and holdingof investment securities and stock as national banks under theNational Banking Act (12 USC 24 (Seventh)). When investingin securities, state member banks must comply with theprovisions of the National Banking Act and the OCC regula-tions in 12 CFR 1. In addition to this federal requirement, astate member bank may purchase, sell, underwrite, or holdsecurities and stock only to the extent permitted underapplicable state law.


April 2013 Commercial Bank Examination ManualPage 2

• 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 institution’s 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 expecteddistributions and approved hold levels; and

• guidelines for conducting periodic portfolioand pipeline stress tests to quantify the poten-tial impact of economic and market conditionson the institution’s asset quality, earnings,liquidity, and capital.

This guidance should be consistent with thesize and risk profile of an institution’s leveragedactivities relative to its assets, earnings, liquid-ity, and capital. Institutions that originate orsponsor leveraged transactions should considerthe entire guidance. (See SR-13-3 and itsattachment.)

Section 5000.1

This revised section, ‘‘Duties and Responsibili-ties of Directors,’’ updates the content within thesubsection on ‘‘Compliance with Formal andInformal Supervisory Actions.’’ The section in-structs examiners to comment on how the bankaccomplished compliance or the problems thathave prevented compliance. The guidance notesthat it is appropriate for examiners to make allsalient negative comments regarding enforce-ment actions on the Other Matters report page(regular examination report) or the Compliancewith Enforcement Actions report page (commu-nity bank examination report) to notify bankdirectors of any remaining enforcement actiondeficiencies that need correction.

Section 5040.1

This section, ‘‘Formal and Informal SupervisoryActions,’’ was revised to discuss further indem-nification agreements and payments accordingto the provisions of section 18(k) of the FDI Actand the FDIC’s regulation on indemnificationagreements and payments found at 12 CFR part359. The FDIC’s regulations provide that a bankmay make or agree to make a reasonable indem-nification payment if all of the following condi-tions are met: (1) the institution’s board ofdirectors determines in writing that the institution-affiliated party acted in good faith and in the bestinterests of the institution; (2) the board ofdirectors determines that the payment will notmaterially affect the institution’s safety andsoundness; (3) the payment does not fall withinthe definition of a prohibited indemnificationpayment; and (4) the institution-affiliated partyagrees in writing to reimburse the institution, tothe extent not covered by permissible insurance,for payments made in the event that theinstitution-affiliated party does not prevail.

The section notes that it is important forexaminers to provide adequate support for allrecommendations for both formal and informalactions in the examination report and associatedworkpapers.

Section 6003.1

This section, ‘‘Community Bank ExaminationReport,’’ was revised to reference the use of aletter-format examination report for communitybanking organizations composite-rated ‘‘4’’ or‘‘5,’’ based on certain conditions. (See section6005.1 and SR-13-10.)

Section 6005.1

This new section, ‘‘Community State MemberBanks and Holding Companies Rated Compos-ite ‘4’ or ‘5,’’’ discusses the Federal Reserve’sadoption of a flexible, letter-format report in lieuof the standard, longer-form report. The reportcommunicates the findings of on-site safety-and-soundness examinations and inspections of com-munity banking organizations6 that result in

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



composite supervisory ratings of ‘‘4’’ or ‘‘5.’’Examiners may use the letter-format report pro-vided that all mandatory and any applicable

optional information is included in the report.(See SR-13-10.)

FILING INSTRUCTIONS

Remove Insert


1000.1, pages 17–18 1000.1, pages 17–18

1005.1, pages 1–7

1010.1, pages 1–6, 6.1pages 15–16

1010.1, pages 1–6, 6.1–6.2pages 15–16, 16.1–16.10

2020.1, pages 1–6, 6.1 2020.1, pages 1–6, 6.1–6.4

2022.1, pages 1–7

2040.1, pages 1–2, 5–6pages 22.1–22.4

2040.1, pages 1–2, 5–6, 6.1pages 22.1–22.5

2115.1, pages 1–6 2115.1, pages 1–10

4200.1, pages 1–2 4200.1, pages 1–2

5000.1, pages 1–6 5000.1, pages 1–6

5040.1, pages 1–8 5040.1, pages 1–8

6003.1, pages 1–2, 7–8 6003.1, pages 1–2, 7–8

6005.1, pages 1–2



April 2013 Commercial Bank Examination ManualPage 4

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