EXAMINATIONS AND INSPECTIONS—Of State Member Banks and Bank Holding Companies; Policy Statement

This policy calls for a general increase in the frequency of examinations of state member banks and inspections of bank holding companies. The objectives sought are (a) to help prevent the development of problems at banking institutions and (b) to make more effective the Federal Reserve’s ability to identify and resolve problems that develop nonetheless.

The policy requires that, in general, banking organizations for which the Federal Reserve is primary supervisor are to be examined/inspected at least annually, with the largest of such organizations and those with significant problems to be examined/inspected semiannually. As an exception to the general rule, small “shell” holding companies with no known problems and low levels of debt relative to the book value of their subsidiary bank’s stock may be inspected on a much more limited basis. Tables presenting these frequency and scope requirements follow this policy statement.

Federal Reserve Banks are to intensify their involvement in the examination/inspection of large organizations and those with significant problems. Greater reliance is to be placed on state examinations/inspections in the case of smaller organizations. If a state lacks the resources to conduct examinations/inspections in accordance with the specifications of this policy or is unwilling to do so, or, in the case of holding companies, lacks authority, the Federal Reserve Banks will conduct the examinations/inspections to the extent needed to meet the specifications.¹ In addition, if a state member bank or bank holding company indicates its wish to be examined/inspected by its Federal Reserve Bank, that wish should be honored.

No identified problems or special characteristics. Multinational state member banks and all others with assets greater than $10 billion will be subject to a full-scope examination annually. In addition, a targeted examination² should be scheduled annually for each of these banks. If, however, a bank’s financial condition is judged to be clearly satisfactory—based on its last full-scope examination, the findings of the Federal Reserve’s surveillance system³ and other sources of information—the Reserve Bank may waive the targeted examination. Each of the required examinations should be conducted by the Federal Reserve Bank independently or jointly with the state; these banks should no longer be examined under an Alternate-Year Examination Program (AEP).

Banks requiring special supervisory attention. Banks receiving a CAMEL⁴ composite rating of 4 or 5 on an examination must be examined on a twice-a-year basis thereafter until the problem is resolved; at least one of these two must be a full-scope examination. If a bank has total assets in excess of $500 million, both examinations must be conducted by its Federal Reserve Bank, independently or jointly with the state.

All banks rated a CAMEL composite 3 on their last examination are to have an annual full-scope examination conducted by the Federal Reserve, independently or jointly with the state. In addition, a limited-scope or targeted examination of composite 3-rated banks with total assets greater than $500 million must be conducted during the year by the Federal Reserve, independently or jointly with the state.

Banks with special characteristics. State-chartered banks applying for membership in the Federal Reserve System are to receive a full-scope examination by the Federal Reserve before membership is granted. Particular attention is to be given in these examinations to the quality of assets and the adequacy of capital.

Similarly, a full-scope examination by the Federal Reserve, independently or jointly with the state, will be required within 12 months following (1) the formation of a de novo state member bank or (2) the change in control of a state member bank.

Banks which in the judgment of the Reserve Bank fail the surveillance screen or which the Reserve Bank, on the basis of other information, has reason to believe may have significant problems, are to receive an in-depth, off-site review to determine whether an on-site examination should be conducted by the Federal Reserve, independently or jointly with the state.

Bank holding companies with no identified problems or special characteristics. Multinational bank holding companies and all others with consolidated assets over $10 billion are to receive a full-scope inspection annually to be coordinated with the examination of the lead bank to the extent possible. Although the inspection of the holding company and the examination of the lead bank need not be commenced simultaneously, they should overlap and rely on financial statements as of the same date, if possible, in order to facilitate the analysis and the presentation of findings to management and directors. A limited-scope or targeted inspection of these companies is also to be conducted between the annual full-scope inspections, the precise timing to be determined by off-site surveillance reports and by opportunities to coordinate with the examination of the lead bank. The requirement for a limited-scope or targeted inspection may be waived by the Reserve Bank if, on the basis of the findings of the last full-scope inspection and of the surveillance system, the institution is judged to be in satisfactory condition.

Complex bank holding companies (defined as companies with nonbank subsidiaries that extend a material amount of credit or companies whose parent has a material amount of debt outstanding to the general public) with consolidated assets between $500 million and $10 billion receive a full-scope inspection annually. Noncomplex “shell” organizations in this size group are to receive a limited-scope inspection every two years. These inspections should be conducted, to the extent possible, in coordination with the examination of the lead bank. All bank holding companies in this size group should be subject to additional limited-scope or targeted inspections when the Reserve Bank has information that suggests the institution may be developing significant problems.

Complex bank holding companies with consolidated assets between $150 million and $500 million are to receive an annual full-scope inspection. Noncomplex shell bank holding companies in this size group are to receive a limited-scope inspection on a once-in-three-years basis.

Inspection frequency for bank holding companies with consolidated assets of less than $150 million is to be determined by their structural characteristics and their debt levels. Complex bank holding companies are to receive a full-scope inspection every other year. Noncomplex shell companies with parent debt exceeding the book value of the stock of the company’s bank (or banks) should be inspected every other year. These inspections may be either full scope, limited scope, or targeted as deemed appropriate.

Noncomplex shell companies (with consolidated assets less than $150 million) with a ratio of parent debt to the book value of the stock of the company’s bank (or banks) of less than 100 percent will be inspected on a sample basis: a 20 percent sample will be drawn of companies with a ratio between 75 and 100 percent for inspection each year; a 10 percent sample will be drawn of companies with a ratio below 75 percent for inspection each year. These inspections may be either full scope, limited scope, or targeted as deemed necessary. (NOTE: Companies that received a BOPEC⁵ composite rating of 3, 4, or 5 or failed a surveillance screen will not be included in the population from which samples are to be drawn and should be inspected in accordance with the frequency requirements set forth below.)

In addition to the above inspection requirements, in the case of companies with less than $150 million in consolidated assets, primary federal and state bank supervisors are to be asked to review, during their examination of a bank, any significant dealings between the bank and the holding company and to report such findings along with any other relevant information on the health of the organization to the Federal Reserve. (A short form will be provided to make such reports to the Federal Reserve.) The Federal Reserve Banks will review this and other information to determine whether an inspection of the holding company should be conducted. Further, the Federal Reserve will be prepared to inspect any of these small bank holding companies—as well as any larger holding company—at the request of the bank’s primary supervisor.

Bank holding companies requiring special supervisory attention. Inspection frequency of bank holding companies requiring special supervisory attention is to be determined by both the size and complexity of the organization. The most intensive frequency requirements are directed at bank holding companies rated BOPEC composite 4 or 5, or whose lead bank subsidiary has been rated CAMEL composite 4 or 5. All bank holding companies so rated with consolidated assets over $500 million are to receive an annual full-scope inspection and a limited-scope or targeted inspection during the interval between full-scope inspections. The same requirements apply to complex bank holding companies with assets between $150 million and $500 million. To the extent possible, inspections of these 4- and 5-rated bank holding companies are to be coordinated with the examination of the lead bank subsidiary. Noncomplex bank holding companies with assets of $500 million or less are to receive an annual inspection whose scope may be determined by the Reserve Bank based upon the nature of the companies’ problems.⁶ Complex holding companies with assets under $150 million are to receive a full-scope inspection annually.

Bank holding companies rated composite 3 with consolidated assets over $500 million are subject to the same requirements as those rated 4 or 5. Bank holding companies with consolidated assets between $150 million and $500 million with complex structures are to receive an annual full-scope inspection; those with noncomplex structures are to receive an annual inspection, the scope of which is to be determined by the Reserve Bank. Complex bank holding companies with assets under $150 million should receive a full-scope inspection annually; noncomplex bank holding companies with assets less than $150 million are to be inspected every other year. The type of inspection for these small noncomplex companies may be determined by the Reserve Bank.⁶

Bank holding companies with special characteristics. Bank holding companies formed to acquire an existing bank are to be inspected to determine their compliance with Federal Reserve regulation and the extent to which they have fulfilled commitments the Board of Governors required of the organization in approving its application. Such inspections should be conducted between the 6th and 18th month after the acquisition; their scope is to be determined by the Reserve Bank. If information available to the Reserve Bank—the most recent examination of the bank, the most recent FR Y-6 and FR Y-9 reports from the holding company and other pertinent information— indicate that (a) the condition of the bank and bank holding company is satisfactory, (b) the bank holding company is fulfilling its commitments to the Board of Governors, and (c) the ratio of the parent’s debt to the book value of the subsidiary bank (or banks) is less than 75 percent, then, at the Reserve Bank’s discretion the inspection may be delayed as long as 36 months after the formation. Moreover, the requirement for an inspection may be waived in the case of a bank holding company whose bank subsidiary has less than $50 million in total assets if, in the Reserve Bank’s judgment, (a) the holding company’s financial condition is satisfactory and its commitments to the Board of Governors are being fulfilled and (b) the ratio of the holding company’s debt to the book value of the subsidiary bank (or banks) is less than 75 percent.

Bank holding companies that have undergone a change in control and de novo bank holding companies organized to acquire de novo banks, are to receive a full-scope inspection within 12 months following the change in control or formation. A limited-scope or targeted inspection may be conducted in lieu of the full-scope inspection if, in the judgment of the Reserve Bank, the financial condition of the holding company appears satisfactory.

In those cases where bank holding companies fail the surveillance screen or where other information suggests the company has experienced an adverse development, an in-depth off-site review will be made to determine the need for a limited-scope or targeted inspection. S-2493, attachment A; Oct. 7, 1985; revised by S-2563 of May 20, 1994.

Tables 1 and 2 follow.