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From Banking and Finance Law Daily, March 14, 2016

Fed describes small bank eligibility for reduced exam frequency

By Richard A. Roth, J.D.

The Federal Reserve Board has outlined the factors it will use to decide which smaller state member banks and U.S. branches and agencies of foreign banks will be eligible for an 18-month examination cycle, rather than the standard 12-month cycle (SR 16-6). The Fixing America’s Surface Transportation Act (Pub, L. 114-94) amended the Federal Deposit Insurance Act to raise the size limit for the longer exam cycle to $1 billion, and the change has been implemented by interim amendments to Reg. H—Membership of State Banking Institutions in the Federal Reserve System (12 CFR Part 208) and Reg. K—International Banking Operations (21 CFR Part 211). The Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency have made comparable changes to their regulations, the Fed said (see Banking and Finance Law Daily, Jan. 21, 2016).

The expanded examination schedule rules are to take effect immediately.

State member banks. For a state member bank to be eligible for the longer exam cycle, it must meet four criteria:

  1. The bank must be well capitalized.
  2. After its most recent examination, the bank must have received a CAMELS composite rating, and a management component rating, of either “1” or “2.”
  3. The bank may not currently be subject to a formal enforcement proceeding or order by either the Fed or the FDIC.
  4. There have been no changes in control of the bank during the preceding 12-month period during which an examination ordinarily would have been required.

U.S. branches and agencies. U.S. branches and agencies of foreign banks are subject to the same enforcement order and change in control conditions that apply to state member banks. Also, a branch or agency must have received a composite rating of either “1” or “2” after its most recent examination. However, a different criterion for financial stability applies.

To be eligible for the 18-month exam cycle, either:

  1. On a consolidated basis, the foreign bank’s most recently reported tier 1 capital ratio must be at least 6 percent, and its total risk-based capital ratio must be at least 10 percent; or
  2. The branch or agency has, over the last three quarters, maintained on a daily basis eligible assets of at least 108 percent of the prior quarter’s average third-party liabilities, and has sufficient liquidity to meet all obligations to third parties.

The Fed also is reserving the authority to consider other factors. These include whether:

  • the branch or agency received a rating of “3” or lower for any component after its most recent examination;
  • off-site surveillance indicates a deterioration in the branch or agency’s condition;
  • an annual exam is called for due to the branch or agency’s size or its role in or importance to the foreign bank’s U.S. operations; or
  • an annual exam is called for due to the foreign bank’s condition.

Other examinations. The 18-month exam cycle also will apply to Bank Secrecy Act/anti-money laundering compliance programs exams, the Fed says.

MainStory: TopStory BankingOperations BankSecrecyAct FederalReserveSystem

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