Table of Contents - Holding Companies Handbook 

Office of Thrift Supervision March 2009 Table of Contents i 

Section 100 – Supervisory Approach

This section outlines OTS’s supervisory approach to holding companies. It provides a historic perspective 

on holding company regulation, and outlines our authority. 

Section 200 – Administration 

This section sets forth the more procedural aspects of scoping and performing an examination. The 

classification of holding companies into risk category is covered, as well as rating, examination and report 

requirements. 

• Appendix 200A – Holding Company PERK 

• Appendix 200B – Continuous Supervision 

• Appendix 200C – HC Report of Examination 

Section 300 – Capital 

This section outlines the factors, including debt, relevant to capital that examiners will review in determining 

its adequacy. 

• Appendix 300A – Hybrid Instruments 

Section 400 – Organizational Structure 

This section provides guidance in identifying and assessing the risk of non-thrift activities and investments of 

the holding company enterprise. Issues regarding ownership of the thrift are also addressed within this 

section. 

 

• Appendix 400A – Joint Agency Statement on Parallel-Owned Banking Organization Structure 

• Appendix 400B – List of Permissible Savings and Loan Holding Company Activities 

• Appendix 400C - Interagency Policy Statement on Income Tax Allocation in a Holding Company 

Structure 

Section 500 – Risk Management 

This section places an emphasis on the ability of the directors and senior management to identify, measure, 

monitor, and control risk. It also describes the four risk management elements to be reviewed in the 

examination process. 
Table of Contents – Holding Companies Handbook 

ii Table of Contents March 2009 Office of Thrift Supervision 

Section 600 – Earnings 

This section addresses the earnings and profitability, liquidity, and cash flow aspects of the financial analysis 

of a holding company. 

Section 700 – Holding Company Programs 

• Section 710 – Holding Company Administrative Program 

• Section 720 – Abbreviated Holding Company Examination Program 

• Section 730 – CORE Holding Company Examination Program 

Section 800 – Off-site Monitoring 

Section 900 – Specialized Holding Company Populations 

• Section 910 – HOLA 10(l)s 

• Section 920 – Mutual Holding Companies 

• Section 930 – Insurance Holding Companies 

⎯ Appendix 930A – Industry Background 

⎯ Appendix 930B – State Regulation 

⎯ Appendix 930C – A. M. Best 

• Section 940 – Large and Complex Enterprises (Conglomerates)

⎯ Appendix 940A – Financial Activities in the European Union

⎯ Appendix 940B – Methods to Assess Capital Adequacy

⎯ Appendix 940C – Prudential Treatment of Minority and Majority Interests in Subsidiaries
Supervisory Approach Section 100 

Office of Thrift Supervision March 2009 Holding Companies Handbook 100.1 

Introduction 

Holding company1 regulation is a significant element of OTS’s supervisory program. Savings and loan 

holding company enterprises2 are diverse, ranging from noncomplex companies with limited activities 

to complex, multinational corporations. Types of companies that own thrifts include: 

• Securities brokers or dealers 

• Insurance underwriters and agents 

• Manufacturing firms 

• Retail companies 

• Financial conglomerates 

Thrift ownership by commercial firms,3 insurance companies, or financial conglomerates was minimal 

prior to the 1990’s. Those that owned thrifts often operated them independently from the other parts 

of the organization. Many used the thrift investment to diversify their operations, but did not consider 

it a critical business component. During the mid 1990s, however, many financial firms, especially insurance companies and securities firms, began offering customers an array of proprietary financial 

products – insurance policies, savings accounts, mortgage loans, credit cards, and trust services – within 

the same corporate structure. As a result, ownership and reliance on the thrift charter to provide these 

services expanded substantially. 

This Handbook outlines OTS’s risk-focused approach to holding company supervision. It provides 

guidance to assess the risks of the holding company enterprise. It considers the combined risk profile, 

financial health, and stability of the enterprise, as well as the interdependence of entities within the 

structure. The approach is flexible and applies to all holding company structures. You should apply 

these concepts and standards in each holding company examination; however, you should ensure that 

you tailor your examination to the complexity and risk level of the holding company. This approach allows you to recognize the unique issues presented by any holding company enterprise. 

 

1 In this Handbook, the term “holding company” is synonymous with “savings and loan holding company.” Similarly, the term “thrift” is 

synonymous with “savings association.” 

2 The term “enterprise” refers to the entire holding company corporate structure or family, including all subsidiaries and affiliates. 

3 The passage of the Gramm-Leach-Bliley Act in 1999 restricted commercial firms from owning thrifts; however, the law grandfathered 

existing organizations. For more details on the different types of holding companies and activities restrictions, refer to Organizational 

Structure Section 400. 
Section 100 Supervisory Approach 

100.2 Holding Companies Handbook March 2009 Office of Thrift Supervision 

SUPERVISORY STRATEGY

The Application Process 

Prior to organizing or acquiring a thrift, the holding company must file an application with OTS. During the application review, OTS scrutinizes the company’s proposed business plan for the insured thrift. 

The agency analyzes the capital structure, managerial expertise, and overall integrity of the company. 

The objective is to ensure that the applicant has the financial and managerial resources to operate the 

thrift in a safe and sound manner without jeopardizing the deposit insurance fund.4

During the application, OTS identifies concerns or weaknesses with the proposed structure. Common 

issues that OTS reviews include: 

• Separation of corporate identity – If OTS determines the thrift does not have a separate corporate identity or may have difficulty operating as a stand-alone entity, the agency may require the 

thrift to hire qualified individuals in key positions. OTS may also require the thrift to perform 

core business functions independently. There must be a balance between leveraging the synergies of the enterprise and maintaining sufficient independence. 

• Third party reliance – If the applicant plans to rely on a network of agents or brokers for referral business, OTS ensures that proper controls are in place and that these representatives will 

receive comprehensive training. 

• Conflicts of interest – If there is a risk that key decision makers working at both the thrift and 

the holding company could encounter conflicts of interest, the agency may require the thrift to 

appoint independent directors. 

• Liquidity – If the thrift is heavily reliant on affiliates for funding, OTS may require the holding 

company to establish a segregated, earmarked deposit with the thrift, or that the thrift diversify 

its funding sources. 

• Risk level – If the proposal involves an elevated degree of risk, such as subprime lending, OTS 

may require the thrift to diversify operations or to hold more capital than the minimum regulatory requirement. 

Categorizing Holding Company Enterprises 

When OTS approves the application and the holding company forms or acquires the thrift, the resulting holding company enterprise is subject to OTS’s supervision and examination. OTS assigns the 

holding company enterprise to one of the following three categories: 

 

4 Section 500 of the Applications Processing Handbook provides detailed holding company acquisition guidelines. The Applications 

Processing Handbook is available on the OTS website at www.ots.treas.gov. 
Supervisory Approach Section 100 

Office of Thrift Supervision March 2009 Holding Companies Handbook 100.3 

CATEGORY I Noncomplex and low risk 

holding company enterprises. 

CATEGORY II

 

Complex or higher risk holding 

company enterprises. 

CATEGORY III Conglomerates 

 

Categorizing the holding company population results in more efficient allocation of examination resources and it facilitates examination scheduling and planning. In most cases, Category II holding 

company enterprises will require more resources than Category I holding companies. OTS defines 

Category III or “Conglomerates” as corporate enterprises comprising multiple companies or legal entities that operate in different fields. OTS has developed a continuous supervision program for 

Conglomerates and certain higher risk holding company enterprises. The approach tailors the examination and supervision to address the complex and unique characteristics of this type of enterprise. 

Section 940 of the Holding Companies Handbook outlines specific examination procedures for Conglomerates. 

OTS determines the complexity and level of risk by considering: 

• The level of interdependence among the corporate entities in the enterprise, including the 

thrift’s dependence on the holding company and other affiliates to perform core functions; 

• Reliance on intercompany borrowings and the method by which the thrift or significant affiliates are funded; 

• Type and character of intercompany transactions; 

• The risk profile and risk concentrations of the enterprise, including a review of the nature and 

type of business activities in which the entities in the enterprise engage; 

• Financial strength and stability of the holding company enterprise; 

• Review of functional supervisors’ findings at regulated entities in the holding company enterprise; and 

• Review of foreign supervisors’ findings at foreign regulated entities in the holding company enterprise. 

Holding Companies Handbook Section 710, Holding Company Administrative Program, contains a detailed checklist to determine the appropriate category for a holding company enterprise. The checklist is 

useful at the conclusion of the application analysis as well as in preexamination analysis. Handbook Section 200, Administration, explains how examiners should use the checklist to assess the enterprise. The 

category designation directs you to the appropriate holding company examination program. 
Section 100 Supervisory Approach 

100.4 Holding Companies Handbook March 2009 Office of Thrift Supervision 

The Off-site Monitoring Process 

OTS conducts off-site holding company enterprise monitoring including reviews of reports filed by 

holding companies. The off-site monitoring occurs between examinations for noncomplex and low- to 

moderate-risk holding companies. For certain high-risk, complex, and conglomerate holding companies, OTS conducts continuous supervision and examination. 

OTS uses private sector information to 

supplement its analysis, including 

stock analysts’ reports and ratings, 

securities filings, and reports that 

track the volume and prices of various 

holding company securities on the 

public markets. 

Holding companies file quarterly H-(b)11 reports. The H-(b)11 reports require the holding company to 

submit SEC filings, audited annual financial statements, quarterly financial statements, descriptions of 

material events, and documentation related to the holding company’s charter, bylaws, or material 

agreements. The subsidiary thrift also files quarterly 

electronic holding company financial data as part of 

its Thrift Financial Report5. For most holding company enterprises, OTS designates one holding 

company for which the thrift must provide financial 

information. In some cases, where more than one 

distinct ownership path exists, or other supervisory 

needs exist, there may be more than one designated 

filer. 

During off-site monitoring, OTS uses private sector information to supplement its analysis, including 

stock analysts’ reports and ratings, securities filings, and reports that track the volume and prices of 

various holding company securities on the public markets. Such information helps identify issues to 

discuss with management. In addition, in enterprises that have functionally regulated or foreignregulated affiliates, OTS will leverage their information and resources. 

Reviewing public reports and key financial data is effective for identifying and mitigating potential 

problems without disrupting the day-to-day operations of the holding company enterprise. Communication with management between examinations enhances supervisory efforts, and keeps the agency 

informed of any changes in strategic direction or significant transactions. Section 800, Off-site Monitoring, provides an overview of the information OTS collects. It suggests specific ratios for monitoring 

financial trends. Examiners can use this information to identify outliers and shifts in trends that will often prompt an informal inquiry. 

The On-site Examination 

OTS conducts full-scope, on-site holding company examinations of Category I and most Category II 

holding company enterprises concurrently with the lead insured thrift on a 12 or 18-month cycle, depending on the size and rating of the thrift. OTS may also conduct limited or targeted reviews to 

address specific issues or to follow-up on prior corrective action. In addition, OTS may conduct compliance, information technology or other specialty examinations of the thrift holding company 

 

5 The line items reported on Schedule HC of the Thrift Financial Report and detailed instructions are contained in the Thrift Financial 

Report Instruction Manual. This manual is available on the OTS website at www.ots.treas.gov. 
Supervisory Approach Section 100 

Office of Thrift Supervision March 2009 Holding Companies Handbook 100.5 

enterprise if the operations warrant. OTS assesses holding companies to cover the cost of ongoing supervision and examination.6 

The holding company examination focuses on the entire holding company 

enterprise as opposed to individual 

registered holding companies. 

The holding company examination focuses on the entire holding company enterprise as opposed to individual registered holding companies. This is the case even if you devote most of your review to one 

company within the structure. You must consider 

the organizational structure of the holding company 

enterprise to determine where the risks lie and 

where you will devote examination resources. This 

approach does not imply that you will conduct an 

in-depth review of every company within the 

structure. Instead, you will determine the scope 

based on the risk and complexity of each holding company enterprise. 

In most cases, you will perform one holding company examination, even if multiple tiers of indirect 

ownership exist. For ease of reference, OTS stores this examination electronically under one docket 

number usually the holding company that is responsible for paying the assessment. You may need to 

conduct separate examinations when multiple holding companies with distinct ownership paths control 

the thrift. 

You will document the examination in a report and assign a composite rating for each full scope examination. In addition, you will assign specific component ratings for complex or higher risk holding 

company enterprises (Category II) and Conglomerates (Category III). Section 200, Administration, contains more specific instructions on these aspects of the holding company examination. 

Continuous Supervision 

Dynamic and complex holding company enterprises require continuous monitoring and examinations 

from a dedicated and focused examination staff. Continuous supervision combines on-site examination 

work, routine communications, and off-site planning, monitoring, and analysis into one ongoing supervisory process. OTS uses the continuous supervision program for the most complex thrifts and holding 

company enterprises. Category III Conglomerates and certain Category II complex enterprises are subject to the continuous supervision program. The continuous supervision program includes developing 

planning documents; performing targeted reviews; annually aggregating findings, recommendations, 

and corrective actions into a roll-up report of examination; and assigning examination ratings. See 

Appendix 200B for a summary of the key elements of continuous supervision. 

 

6 12 CFR Part 502 outlines how holding company assessments are calculated and the fees OTS charges.
Section 100 Supervisory Approach 

100.6 Holding Companies Handbook March 2009 Office of Thrift Supervision 

RISK-FOCUSED APPROACH 

Determining Scope 

Holding company examinations are risk-focused. The primary objective is to examine the holding company enterprise in the areas that present the greatest degree of risk to the condition of the overall 

enterprise or to any material subsidiary, including the thrift. 

The initial examination scope should target the areas that have higher than normal risk characteristics. 

A risk-focused philosophy implies that: 

• Circumstances will determine the scope of the examination on a case-by-case basis; 

• Minimum scope will consist of procedures that are sufficient to assess the significant risks; and 

• Examination procedures will not incorporate every possible aspect of a full-scope examination. 

You should use judgment to 

determine the level of review, 

testing, and analysis necessary. 

You must carefully focus and tailor each examination to evaluate activities or operations with a high 

risk profile, including risks that have a direct impact on the thrift relationship or indirectly pose higher 

than normal risk to any material subsidiary, including the thrift. This risk-focused approach results in 

efficient management of available time and resources. 

You are not required to perform every procedure in the 

holding company examination program. Instead, you 

should use judgment to determine the level of review, 

testing, and analysis necessary. 

There is no predetermined limit on the examination scope. You may expand the scope if additional information indicates a greater degree of risk. Events that may lead to an expansion in examination scope 

include: 

• Inadequate, inaccurate, or misleading information in regulatory filings or frequent revisions to 

those filings; 

• Numerous intercompany or insider transactions between the thrift and its affiliates or insiders, 

or between the holding company and other affiliates or insiders; 

• Substantial changes in holding company management, corporate structure, or ownership; 

• Substantial changes in operations and financial condition; 

• Poor financial condition, inadequate cash flow, or high leverage; 

• The companies within the holding company are highly integrated; 
Supervisory Approach Section 100 

Office of Thrift Supervision March 2009 Holding Companies Handbook 100.7 

• The funds allocation processes within the holding company enterprise are cause for concern or 

adversely affect the thrift’s financial resources through management fees, cash dividends, excessive tax payments, or affiliated transactions; 

• The prior holding company examination, thrift subsidiary examination, or examinations of 

other regulated financial activities in the enterprise, revealed significant concerns; 

• A national credit rating service downgrades the credit rating of debt issued by corporate entities 

in the holding company enterprise, especially if the downgrade is to a noninvestment grade; or 

• The stock price of a publicly traded company in the holding company enterprise declines relative to a general stock market index. 

EXAMINATION COMPONENTS 

This Handbook contains detailed guidance and examination procedures for each of the primary areas of 

review in a holding company examination. There are three holding company examination programs, 

these are: 

• Administrative Program, Section 710; 

• Abbreviated Holding Company Examination Program, Section 720; and 

• CORE Holding Company Examination Program, Section 730. 

For all holding company enterprises, you start with the Administrative Program Section 710. This program contains procedures for determining the scope of the examination and the Risk Classification 

Checklist. You should use the Abbreviated Holding Company Examination Program, Section 720, for 

noncomplex and low risk holding company enterprises (Category I), recognizing that you may need to 

consult the CORE Holding Company Examination Program Section 730 to address specific areas of 

risk. You should use the CORE Holding Company Examination Program, Section 730, for all higher 

risk or complex holding company enterprises (Category II). In addition, there may be specific issues 

that relate to certain holding company populations, including Conglomerates (Category III), contained 

in Section 900. 

The remaining sections of this Handbook parallel the primary areas of review in a holding company examination. These areas of review also parallel the component rating factors. Examiners should assign 

component rating factors for all Category II and III holding company enterprises. You may assign 

component ratings to Category I holding company enterprises at your discretion. The “CORE” component factors are: 
Section 100 Supervisory Approach 

100.8 Holding Companies Handbook March 2009 Office of Thrift Supervision 

C Capital 

O Organizational Structure 

R Risk Management 

E Earnings 

Capital 

The first component of a holding company examination is an evaluation of Capital. OTS does not apply a standardized capital requirement for savings and loan holding companies. The population of thrift 

holding companies is too diverse to develop a single, meaningful capital requirement. Instead, the 

agency considers the overall risk profile of the consolidated entity on a case-by-case basis. This involves 

assessing traditional analytical measures, including the overall leverage, the level of short-term debt and 

liquidity, cash flow and reliance on thrift and other subsidiary earnings, interest coverage, quality of 

earnings, and level of consolidated tangible and equity capital. The objective is to ensure that the holding company enterprise maintains adequate capital to support its risk profile and to meet the minimum 

capital standards of any regulated financial sector (banking, securities, or insurance) in which it operates. 

Another objective is to ensure that an appropriate equity buffer exists to shield the thrift from unexpected problems within the enterprise. OTS can require holding company enterprises to meet 

individualized capital requirements when capital adequacy is a concern. 

Organizational Structure 

The Organizational Structure section gives an overview of the various types of holding companies. 

This component of the holding company examination requires you to identify the organizational structure and ownership and assess any changes. Additionally, in this aspect of the holding company 

examination, you will review the activities of the holding company and other affiliates in the structure 

to determine not only regulatory permissibility, but also the inherent risks associated with those activities as well as strategic importance to the enterprise. During the Organizational Structure section of the 

examination, you will reach conclusions about the: 

• Lines of business/activities and the inherent risks they pose; 

• Concentrations of risk; and 

• The nature and volume of intra-group transactions and significant intercompany relationships. 

Risk Management 

In the Risk Management component, you will assess the board and executive management’s ability to 

identify, measure, monitor, and control risk within the holding company enterprise. Managing risk is 

fundamental to the success of any business venture. OTS expects holding companies to have adequate 

risk management practices, including strong corporate governance and a system of internal controls. 

Such risk management practices should be commensurate with the size and complexity of the holding 

company enterprise. In assessing risk management, you will reach conclusions about: 
Supervisory Approach Section 100 

Office of Thrift Supervision March 2009 Holding Companies Handbook 100.9 

• Whether the board of directors provides adequate oversight for the affairs of the holding company and its subsidiaries; 

• How actively the holding company is involved in the management of the thrift institution and 

other regulated financial institutions; and 

• Whether the board has implemented effective policies and procedures to ensure that appropriate holding company affiliates maintain separate corporate identities and avoid conflicts of 

interest. 

Earnings 

In the Earnings component, you will assess the holding company’s operations, financial condition, and 

the current and prospective effect on subsidiaries, including the thrift. You will pay close attention to 

the holding company’s earnings trends and capacity as well as cash flow. You will also evaluate the relative contributions and dividend payout ratios of significant subsidiaries and the overall financial 

performance of the holding company enterprise. 

SUMMARY

Examination and supervision of holding companies is an important part of OTS’s supervisory program. 

Your examination work should assess the condition of the holding company enterprise and ensure that 

the operations of the holding company do not harm the thrift subsidiary. OTS categorizes the thrift 

holding company population based on risk and complexity. This approach ensures better resource allocation for the examinations of complex or higher risk holding company enterprises. 

The following section, Administration Section 200, outlines procedures for implementing this approach 

along with other examination elements. Other sections of this Handbook provide guidance to help you 

assess the CORE holding company examination areas. The Sections in the 900 series highlight additional considerations for specialized holding company populations. 

REFERENCES 

United States Code (12 USC) 

§ 1467a Home Owners’ Loan Act 

§ 1817(j) Change in Bank Control Act 

Code of Federal Regulations (12 CFR) 

Part 502 Assessments and Fees 
Section 100 Supervisory Approach 

100.10 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Part 574 Acquisition of Control of Savings Associations 

Part 583 Definitions 

Part 584 Regulated Activities 

Other References 

Applications Processing Handbook 

Thrift Financial Report Instruction Manual 
Administration Section 200 

Introduction 

The holding company examination process entails examination planning, on-site examination, off-site 

monitoring, and post examination coordination. Examination planning is important in categorizing risk, 

developing examination plans, and allocating resources. Off-site monitoring is essential for prioritizing 

examination scheduling and staying informed on key changes or trends. The on-site examination work 

must be attentive to ongoing findings and reactive so that examiners can adjust the scope accordingly. 

The examination culminates in presenting findings to holding company management and the directorate, completing a report of examination, integrating the findings with the examination of the thrift, and 

assigning a rating. Each of these examination phases is integral to the overall process. The combination 

of off-site monitoring and on-site examinations allows OTS staff to accurately assess the condition of 

the holding company enterprise. 

EXAMINATION AUTHORITY

The holding company examination assesses the overall condition of the entire holding company enterprise, including the effect that the holding company enterprise has on the subsidiary thrift and other 

regulated financial subsidiaries. OTS has authority by statute (12 USC 

1467a(b)(4)) and by regulation (12 CFR 584.1) to conduct examinations of savings and loan holding companies, their affiliates, and their subsidiaries. OTS’s 

examination authority does not cover holding companies that own both a bank 

and a thrift. The Federal Reserve Board regulates those holding companies. 

L INKS

 Appendix A 

 Appendix B 

 Appendix C 

The Gramm-Leach-Bliley Act established provisions regarding functional supervision of holding company subsidiaries. When a subsidiary of a thrift or a thrift holding company has a functional regulator, 

OTS relies on the examination and conclusions of the functional regulator. The provisions regarding 

functional supervision limit regulatory duplication and outline procedures for requesting information 

and conducting examinations of certain types of entities. OTS applies a similar methodology to foreignregulated subsidiaries. The agency has established multiple information sharing agreements to facilitate 

communication with both functional and foreign supervisors. 

REGULATORY COORDINATION AND COMMUNICATION

Regional Responsibility 

OTS normally determines regional examination responsibility for the holding company enterprise by 

the geographic location of the thrift. In many cases, regional authority is clear (i.e. unitary holding comOffice of Thrift Supervision March 2009 Holding Companies Handbook 200.1 
Section 200 Administration 

200.2 Holding Companies Handbook March 2009 Office of Thrift Supervision 

panies or multiple holding companies whose thrifts are within the same region). In other situations, the 

authority is less clear (i.e. multiple holding companies that own thrifts in several regions). 

Regional offices should coordinate with OTS headquarters to determine responsibility for complicated 

ownership structures. For example, a multiple holding company typically owns a “lead” institution. Often, the region with the lead institution should assume responsibility for the enterprise. In the few cases 

where OTS cannot easily identify a lead thrift, the regions concerned must determine examination responsibility. In many cases, it is more efficient for regions to share responsibility for the on-site work 

due to the geographic location of files and records. As a result, communication between regional offices 

and OTS headquarters is essential to ensure that there are no conflicts, duplications of effort, or omissions. 

Coordination with Other Regulators 

Communication with other regulators is essential. You should make every effort to coordinate examination and supervisory efforts with all other interested regulators. This includes federal and state banking 

regulatory agencies, functional regulators of other financial 

activities (for example, the Securities and Exchange Commission (SEC), state insurance supervisors, the Financial 

Industry Regulatory Authority (FINRA)), and foreign regulators who supervise subsidiaries and affiliates of OTSsupervised holding companies and thrifts. 

You should make every effort to 

coordinate examination and supervisory efforts with all other 

interested regulators. 

Functional Regulation 

The Gramm-Leach-Bliley Act modified OTS’s holding company examination authority to recognize the 

involvement of multiple regulators in supervising an enterprise that offers a variety of financial products. As part of examination scoping, you need to determine whether any entity within the holding 

company enterprise is “functionally regulated.” Functionally regulated entities include: 

• Registered broker-dealers. The SEC and the FINRA regulate broker-dealers. 

• Registered investment advisers with respect to investment advisory and incidental activities. Either the SEC or states regulate investment advisers. 

• Registered investment companies. The SEC regulates registered investment companies. 

• Insurance companies (including agencies) with respect to their insurance and incidental activities. Individual state insurance regulatory agencies regulate insurance companies. 

• Entities regulated by the Commodity Futures Trading Commission, with respect to their commodities and incidental activities. 

If you identify a subsidiary of the holding company or the thrift that is a functionally regulated entity, 

follow the procedures outlined below. There is no restriction within the legislation on examining the 
Administration Section 200 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200.3 

holding company itself. Therefore, even if a holding company is a functionally regulated entity, you may 

examine it under OTS’s regulatory authority. Nonetheless, you should be sensitive to the role of other 

regulators and strive to coordinate regulatory efforts where practicable. 

General Steps in the Examination Process

Step 1 – Using Available Information 

You can gain information about the affiliate by obtaining and reviewing: 

• Reports it submits to its primary regulator; 

• Information that it reports publicly; and 

• Externally audited financial statements. 

You may obtain this information from the affiliate or from other sources. Since the subsidiary is an investment of the holding company, there is significant information at the parent itself that you may 

review. The parent should have information to monitor its investment and should be able to provide 

you with items such as financial statements, budgets and operating plans, risk management reports, and 

internal audit reports. Additionally, the parent may have copies of board minutes or reports prepared 

for the affiliate’s board of directors. 

Step 2 – Requesting Information through the Primary Regulator 

If you need further information, OTS can request it from the functional regulator. You should coordinate these requests through your regional functional regulation contact. Many of the functional 

regulators have designated points of contact to facilitate these requests. In addition, OTS has entered 

into regulatory cooperation and information sharing agreements with many of the functional regulators. 

These agreements should facilitate communication and the exchange of information between regulators, including the exchange of each agency’s respective examination reports. Your functional regulation 

contact can also help expedite information requests and coordinate examinations. 

Step 3 – Requesting Information from the Functionally Regulated Entity 

If the functional regulator either does not have the information or fails to provide it, OTS may request 

the information directly from the functionally regulated affiliate. You should coordinate and consult 

with your functional regulation contact before making a request. Your functional regulation contact has 

day-to-day experience in working with the designated functional regulators. You may only request information that is necessary to assess: 

• A material risk to a thrift or holding company; 

• Compliance with a federal law that OTS has specific authority to enforce against the functionally regulated entity; or 
Section 200 Administration 

200.4 Holding Companies Handbook March 2009 Office of Thrift Supervision 

• The systems for monitoring and controlling the financial and operational risks that may threaten 

the safety and soundness of a thrift. 

Rely, to the fullest extent possible, on the examination reports and other data the entity’s functional 

regulator supplies. The only way to achieve the legislative goal of reducing duplication is by sharing information and working closely with other state and federal regulators. 

Step 4 – When to Pursue an Examination 

If you cannot address your concerns with the information made available in the preceding steps, and 

you have relied on the examination reports of the primary regulator to the fullest extent possible, then 

you can examine the entity.1 If you have concerns after reviewing all the information you have acquired, you must meet one or more of the following criteria required by statute to examine a 

functionally regulated affiliate: 

• You have reasonable cause to believe that the company engages in activities that pose a material 

risk to the insured thrift; 

• After reviewing relevant reports, you reasonably determine that an examination is necessary to 

inform OTS of the company’s systems to monitor and control financial and operational risks 

that may pose a risk to the safety and soundness of the thrift; or 

• Based on reports and other available information, you reasonably believe both of the following 

circumstances exist: 

⎯ The affiliate is not in compliance with a federal law that OTS has specific jurisdiction to enforce, including laws that cover transactions with affiliates; and 

⎯ OTS cannot make the determination by examining the thrift or its holding company. 

Step 5 – Examination 

You should only conduct an on-site examination of a functionally regulated entity for the following 

purposes: 

• To obtain information about the: 

⎯ Nature of operations and financial condition of the holding company and the functionally 

regulated entity; 

⎯ Financial and operational risks within the structure that may threaten the safety and soundness of a thrift; or 

⎯ Systems for monitoring and controlling financial and operational risk. 
Administration Section 200 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200.5 

OR 

• To monitor compliance with any Federal law that: 

⎯ OTS has specific jurisdiction to enforce against the functionally regulated entity; or 

⎯ Governs transactions and relationships between a thrift and its functionally regulated subsidiaries. 

Whenever possible, you should: 

• Coordinate the examination schedule with other agencies; 

• Invite interested regulators to examination closing meetings or meetings with the board of directors; and 

• Actively participate in meetings with functionally regulated affiliates conducted by other regulatory agencies. 

Interagency cooperation and exchange of information will facilitate OTS’s role of ensuring the viability 

of the holding company enterprise, including the safe and sound operation of the thrift. 

Foreign Coordination 

Because some OTS-regulated entities, particularly complex holding companies, have foreign operations, 

you should evaluate the supervisory findings of foreign supervisors. The Joint Forum and the Basel 

Committee on Banking Supervision have produced several policy papers regarding cross-border supervisory cooperation.2 OTS uses these standards as a guide for its interaction with foreign supervisors. 

Using the nomenclature of “home” and “host” supervisor, the Joint Forum/Basel principles obligate 

the host supervisor (the supervisor of a foreign-owned subsidiary or branch) to supply to the home supervisor (the consolidated supervisor of a cross-border group) information about the operations of the 

subsidiaries within its jurisdiction. When OTS is the host supervisor, it will supply relevant information 

on its holding company or thrift, including exam reports, to the consolidated home supervisor of the 

parent company. 

The home supervisor is expected to provide the host supervisor with any information about developments that may materially affect regulated subsidiaries in the host jurisdiction. The home supervisor is 

also encouraged to provide general information that would assist a host supervisor in understanding the 

foreign operations it supervises. When OTS is the home supervisor, it relies extensively on the examination work of foreign supervisors to identify and resolve material concerns. As home supervisor, OTS 

will provide relevant information in response to a host supervisor’s request or to avoid a significant 

 

1 OTS may not, however, examine a registered investment company. 

2 www.bis.org/publ/joint02.pdf and www.bis.org/list/bcbs/tid_24/index.htm
Section 200 Administration 

200.6 Holding Companies Handbook March 2009 Office of Thrift Supervision 

adverse consequence. However, OTS generally does not provide holding company examination reports 

to host supervisors, instead summarizing information to provide relevant facts to the host supervisor. 

General Steps in the Examination of Foreign Subsidiaries and Affiliates

Dealing with a foreign regulator has many similarities to dealing with a functional regulator, but there 

are some significant differences. Legal, regulatory, accounting, linguistic, and other differences between 

the U.S. and foreign jurisdictions complicate communications. In addition, the circumstances under 

which it is appropriate to make requests of a foreign regulator are less restrictive than for a functional 

regulator. 

Step 1 – Using Available Information 

You should gain information about the foreign affiliate by obtaining and reviewing publicly available information, such as externally audited financial statements, as well as internal documentation available 

from the OTS-supervised parent. The parent should have information to monitor its foreign investment and should be able to provide you with items such as financial statements, budgets and operating 

plans, risk management reports, and internal audit reports. Additionally, the parent may have copies of 

board minutes or reports prepared for the affiliate’s board of directors. 

Step 2 – Requesting Information from a foreign supervisor 

To supplement the information received in Step 1, it is desirable to confer directly with a foreign supervisor. OTS may request exam reports, submit specific written questions, or hold conference calls to 

gather information from foreign regulators about affiliates in their jurisdictions. 

Examiners should be aware that there are variances in rules, regulations, accounting practices, currency 

values, communication protocols, and business customs in foreign jurisdictions. OTS’s international affairs office contact can provide information regarding these differences for the jurisdictions you are 

reviewing. 

OTS has entered into regulatory cooperation and information sharing agreements with many foreign 

regulators. These agreements facilitate communication and the exchange of information between regulators, including the exchange of each agency’s respective examination reports. In certain cases, OTS 

hosts supervisory meetings in which several foreign regulators participate at once to discuss group wide 

supervisory issues. 

Step 3 – Conducting a review of a foreign entity 

In the course of developing supervisory plans for your firm, you may find it necessary to examine a foreign entity in order to adequately review an activity or risk exposure on a firm-wide basis. For example, 

you may need to meet with the management of a foreign subsidiary to evaluate the degree to which the 

parent company disseminates its policies throughout the organization. If a foreign subsidiary generates 

a significant portion of the revenue or profit of a business line, it may be valuable to examine how that 

subsidiary manages the risks inherent in that business. 
Administration Section 200 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200.7 

Because the ability to examine a foreign firm falls outside of U.S. law, OTS authority to supervise the 

foreign entity is not as clear as its authority for functionally regulated entities. As a result, OTS will need 

to coordinate with the foreign supervisor of the affiliate. 

Foreign-Based Holding Companies 

Foreign-based holding companies present OTS with additional challenges. The geographic location of 

foreign-based holding companies and their supervision by home supervisors make it more difficult to 

perform holding company examinations. Examiners should rely on information that home supervisors 

provide. However, a foreign firm that charters a thrift must sign the Foreign Acquirer Agreement, in which 

it agrees to submit to OTS supervision of the top-tier holding company. If an examination is necessary, 

OTS must coordinate it with the home country supervisor. OTS senior management must approve the 

decision to conduct an examination of a foreign holding company. 

EXAMINATION PLANNING

Before initiating the on-site examination, OTS must identify and categorize risk and allocate resources. 

During examination planning, OTS requests information from the holding company and other regulators to ensure that it is available when the formal examination begins. To complete examination 

scoping, you must understand the holding company enterprise and the industries in which it operates. 

In many situations, the individual responsible for ongoing monitoring may not be the same person who 

conducts the examination. Similarly, the person who conducts the examination may not be familiar with 

the history and operations of the holding company enterprise. 

The Administrative Program, Section 710, identifies several procedures that you should perform during 

examination planning to gain requisite knowledge. These procedures include reviewing sources of information on the holding company enterprise including: 

• Reports generated by the OTS databases; 

• Reports submitted to OTS; 

• Reports submitted to other regulators such as the SEC; and 

• Prior examination reports, work papers, and supervisory correspondence. 

Once you achieve the requisite understanding of the holding company enterprise, you should prepare 

and send the preexamination response kit (PERK). (Appendix 200A contains a sample PERK. Determinant questions are used to eliminate questions that are not relevant, for example, if the holding 

company is noncomplex, has no significant activities other than control of the thrift, and has no significant debt, many of the questions will automatically be deleted by the system and the PERK that you 

download is a simplified version.) 
Section 200 Administration 

200.8 Holding Companies Handbook March 2009 Office of Thrift Supervision 

One of the most important steps in examination planning is determining the appropriate risk category 

for the holding company enterprise. Although most holding company enterprises will already have an 

assigned category, you need to reassess it based on current information. In the case of a new holding 

company enterprise, your assessment is important to confirm that the application process resulted in 

the correct risk category. Your review will contribute to the risk-focused scope and allocation of examination resources. 

Holding Company Risk/Complexity Classifications 

The Administrative Program contains a Risk/Complexity Classification Checklist that you should use 

to determine the enterprise’s complexity. The initial questions determine if the enterprise is a low risk, 

noncomplex holding company. If the result is that the holding company is low risk and noncomplex, 

then the checklist concludes. Noncomplex entities require minimal examination, and you will use the 

Abbreviated Holding Company Examination Program contained in Section 720 of this Handbook. If 

the initial review indicates that the enterprise is higher risk or complex, you should continue the checklist to assess the nature and degree of the risks. The questions in the program will help assess the level 

of risk. The checklist also directs you to sections of the CORE Holding Company Examination Program, Section 730, to evaluate the potential risks that you identify. 

Once you complete the checklist, you should designate the appropriate risk category. You may modify 

your preliminary assignment during the examination based on your findings. At the close of the examination, you should update the appropriate risk/complexity category classification in the Holding 

Company Examination Data System. You must document a change in the risk/complexity category in a 

Holding Company examination. Regional management should review and approve all examination ratings and risk/complexity classification changes before notifying the holding company or changing the 

classification on the system. 

Category I holding company enterprises are noncomplex and low risk. An examination of this type of 

entity requires limited resources. You should use the Abbreviated Program (Section 720). You may 

supplement the abbreviated procedures with sections of the CORE Holding Company Examination 

Program (Section 730) when you note higher risk activities. At a minimum, you should conduct the 

procedures that relate to the “yes” responses on the Risk Classification Checklist. 

Category II or III holding company enterprises are complex and exhibit elements that are higher risk. 

The examination may require greater resources to review the current and prospective risks of the enterprise. You should review all procedures of the full CORE Holding Company Examination Program. 

Use judgment to determine which procedures you actually perform. You should also review and follow 

the procedures in Section 940 for a Category III enterprise. 

The following chart summarizes the appropriate program to use: 
Administration Section 200 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200.9 

HC Category Appropriate Program Use 

Judgment

Category I – 

Low Risk or Noncomplex 

Holding Company 

Enterprise 

Abbreviated HC Exam 

Program, Section 720 

To determine relevant procedures from full CORE 

Program, Section 730 

Category II – 

Complex or High Risk Holding Company Enterprise 

Full CORE HC Exam 

Program, 

Section 730 

To determine if all CORE procedures are required 

Category III – 

Conglomerate 

CORE HC exam Program 

Section 730 in conjunction 

with Section 940. Risk Matrix 

and Supervisory Plan outline 

of priorities. 

To develop and amend the risk assessment and supervisory plan under OTS’s continuous supervision 

program for conglomerates. 

ON-SITE EXAMINATION

In most cases, the on-site holding company examination will coincide with the examination of the insured thrift subsidiary. In cases where management of both entities overlaps, you can coordinate 

entrance and exit meetings with the thrift examination. However, you must ensure that you complete 

your examination work for the holding company examination interacting with these managers in their 

capacities as holding company representatives. 

In those instances in which management is distinct or there is no concurrent thrift examination, the 

holding company examination will proceed independently. For the most part, you should use the protocols and techniques of a thrift examination for the holding company as well. These include protocols 

of professional behavior and communication techniques such as introductory and closing meetings. 

You are also required to maintain adequate documentation and support for findings in examination 

work papers similar to the standards for thrift examination reports. 

However, holding company examinations may require additional procedures that are not applicable to a 

thrift examination. For example, a complex holding company structure may have one or more tiers of 

companies between the thrift and the top tier holding company. Further, there may be large noninsured 

or unregulated subsidiaries of the holding company 

that are significant businesses. 

Holding companies and their noninsured or unregulated subsidiaries may not be as familiar with regulatory 

examination practices as their thrift counterparts. Because of this, a cooperative attitude, prompt response to information requests, or accessibility to managers may not be as forthcoming as in the thrift examination. Many companies, particularly significant 

subsidiaries with independent management, may not be aware or fully understand the scope of OTS authority in regulating the holding company enterprise. You must maintain professional conduct and 

attempt to achieve an understanding with managers regarding their regulatory responsibilities. If diffiHolding companies and their noninsured 

or unregulated subsidiaries may not be 

as familiar with regulatory examination 

practices as their thrift counterparts. 
Section 200 Administration 

200.10 Holding Companies Handbook March 2009 Office of Thrift Supervision 

culties persist, you may need to request that OTS senior management become involved in order to influence a more cooperative working relationship. 

Continuous Supervision 

Dynamic and complex holding company enterprises require continuous supervision from a dedicated 

examination staff. Continuous supervision and examination combines on-site examination work, routine communications, and off-site planning, monitoring, and analysis into an ongoing examination 

process. OTS uses the continuous supervision program for the most complex thrifts and holding company enterprises. Category III conglomerates and certain Category II complex enterprises are subject to 

the continuous supervision program. The continuous supervision program includes developing planning documents; performing examination work; annually aggregating findings, recommendations, and 

corrective actions into a report of examination; and assigning examination ratings. The key elements of 

continuous supervision are: 

• Developing and maintaining a comprehensive risk assessment 

• Preparing a supervisory plan 

• Scheduling and conducting targeted reviews 

• Coordinating with other domestic and foreign regulators 

• An annual, roll-up examination process and reporting framework 

• Routine management meetings and an annual board of directors meeting 

• Appendix 200B provides a detailed explanation of each element of continuous supervision. 

POSTEXAMINATION PROCEDURES

Once an on-site examination is complete and you have resolved all outstanding factual issues, you must 

communicate your findings to senior management and the board of directors, or an appropriate committee of the board. The principal vehicles for this communication are the closing meeting(s) with 

holding company representatives and the report of examination. 

The Closing Meeting 

The closing meeting with holding company representatives is a critical element in the examination 

process. The meeting should be with executive managers, but may involve directors of the holding 

company as well. The closing meeting serves several purposes. It summarizes the examination and advises senior officials of the conclusions in the report of examination. It also ensures that all parties 

clearly understand the issues and are able to satisfactorily resolve or monitor unresolved issues. If thrift 

and holding company management overlap, then you may combine the presentations for both the hold-
Administration Section 200 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200.11 

ing company and thrift examination. However, separate presentations are appropriate if the findings of 

either or both examinations are significant. 

Meetings with the Board of Directors 

As with thrift examination exit meetings, holding company examinations resulting in composite ratings 

of 4 or 5 require you to meet with the board of directors or an appropriate committee of the board. 

OTS also requires a board meeting when the examination results in a downgrade to a composite 3 during the examination. Regardless of the rating, it is appropriate to meet with the board or its designated 

committee in complex holding companies, holding companies with persistent violations of laws or 

regulations, or holding companies that present a materially adverse effect on the subsidiary thrift. Consult with your manager to determine whether you should schedule a meeting with the board of 

directors. The scope of the meeting should include holding company examination findings and conclusions, necessary corrective actions, and discussions concerning possible enforcement remedies, when 

applicable. You should finalize the report of examination before conducting this meeting with the 

board of directors. 

The Report of Examination 

A final report of examination should fully discuss the significant issues you identify. The report format 

corresponds to the major examination areas in this Handbook. It also includes background information 

on the holding company enterprise as well as information regarding the directorate and executive officers. The report may also include schedules providing financial information. Appendix 200C contains a 

copy of the Holding Company Report of Examination shell. 

Rating the Holding Company Enterprise 

An integral component of the examination report is the holding company rating. Once you complete 

the examination, you must assign a composite rating to the holding company enterprise. The rating becomes part of a valuable management information system from which supervisory personnel can 

monitor OTS’s level of concern with the holding company enterprise’s performance. You will disclose 

the composite and component (when assigned) ratings to the holding company and include them in the 

examination report. 

The composite rating is a consolidation of the components of the holding company review. These 

components include the four CORE areas of review that are discussed in detail in separate sections of 

this Handbook. The Handbook includes rating criteria for each component within each section. 

For Category II and III holding company enterprises,3 you will rate these four components on a scale 

of one to five in descending order of performance quality. The component ratings encompass the full 

nature of the enterprise by: 

 

3 Component ratings may be assigned to Category I holding company enterprises at the examiner’s discretion. Only the overall composite 

rating is mandated for Category I holding company enterprises. 
Section 200 Administration 

200.12 Holding Companies Handbook March 2009 Office of Thrift Supervision 

• Evaluating the consolidated capital level and composition – “C”; 

• Observing the organizational structure and evaluating the risks of the activities conducted by 

each entity within the enterprise – “O”; 

• Assessing whether management and the board of directors implement appropriate risk management strategies – “R”; and 

• Assessing the earnings performance and liquidity of the enterprise as a consolidated entity – 

“E”. 

This system requires you to consider all aspects of the organization’s performance. You will assess the 

separate units and businesses for their contribution to the financial strength of the holding company 

enterprise as well as the condition of the enterprise as a whole for its financial soundness. You will note 

problems whether they are isolated or throughout the enterprise. For example, individual entities may 

exhibit satisfactory condition but, on a consolidated basis, it becomes evident that consolidated capital 

does not support inherent risks. Conversely, the consolidated enterprise may be financially strong with 

good performance, yet there may be subsidiaries that exhibit current or prospective risk that you need 

to reflect in the rating. The resultant composite rating will be a product of this subjective determination 

process. 

The Composite Rating 

The composite rating is the overall assessment of the holding company enterprise as reflected by consolidated risk management and consolidated financial strength. The composite rating encompasses both 

a forward-looking and static assessment of the 

consolidated enterprise. Consistent with current 

OTS practice, you should not derive the composite rating as a simple numeric average of the 

CORE components; rather, the composite rating 

should reflect your judgment with respect to the 

relative importance of each component to the safe 

and sound operation of the holding company enterprise. Some components may receive more weight in 

determining the composite rating, depending on the situation of the holding company enterprise. Assignment of a composite rating may incorporate any factor that bears significantly on the overall 

condition and soundness of the holding company enterprise, although generally the composite rating 

bears a close relationship to the component ratings. Your judgment is essential to give the appropriate 

weighting to the components. The definitions of the composite ratings are: 

Some components may receive more 

weight in determining the composite 

rating, depending on the situation of 

the holding company enterprise.

Composite 1. Holding company enterprises in this group are sound in almost every respect and generally have components rated 1 or 2. Any weaknesses are minor and can be handled in a routine manner 

by the board of directors and management. Risk management practices and financial condition provide 

resistance to external economic and financial disturbances. Cash flow is more than adequate to service 

debt and other fixed obligations. These holding company enterprises exhibit the strongest performance 

and risk management practices relative to their size, complexity, and risk profile. 
Administration Section 200 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200.13 

Composite 2. Holding company enterprises in this group are fundamentally sound but may have modest weaknesses. The weaknesses are well within the board of directors’ and management’s capabilities 

and willingness to correct. For holding company enterprises to receive this rating, generally no component rating should be more severe than 3. Risk management practices and financial condition create 

stability and these holding company enterprises are capable of withstanding business fluctuations. Cash 

flow is adequate to service obligations. Overall, risk management practices are satisfactory relative to 

the enterprise’s size, complexity, and risk profile. 

Composite 3. Holding company enterprises in this group exhibit some degree of supervisory concern 

in one or more of the component areas with weaknesses that range from moderate to severe; however, 

the magnitude of the deficiencies generally will not cause a component to be rated more severely than 

4. Management may lack the ability or willingness to effectively address weaknesses within appropriate 

time frames. These holding company enterprises are less resistant to the onset of adverse business conditions. Risk management practices may be less than satisfactory relative to the enterprise’s size, 

complexity, and risk profile. However, there is only a remote threat to its continued viability. 

Composite 4. Holding company enterprises in this group have serious financial or managerial deficiencies that result in unsatisfactory performance. The problems range from severe to critically deficient. 

The weaknesses and problems are not being satisfactorily addressed or resolved by the board of directors and management. Holding company enterprises in this group are generally not capable of 

withstanding business fluctuations. Risk management practices are generally unacceptable relative to the 

enterprise’s size, complexity, and risk profile. Cash flow needs may be being met only by upstreaming 

imprudent dividends or fees from its subsidiaries. Unless prompt action is taken to correct these conditions, future viability could be impaired. 

Composite 5. The magnitude and character of the risk management or financial weaknesses of a holding company enterprise in this category could lead to insolvency without immediate aid from 

shareholders or supervisory action. The volume and severity of problems are beyond the board and 

management's ability or willingness to control or correct. The effectiveness of the organizational structure and risk management practices are inadequate relative to the enterprise's size, complexity, and risk 

profile. The inability to prevent liquidity or capital depletion places the holding company enterprise's 

continued viability in serious doubt. 

The purpose of rating the holding company, consistent with OTS’s risk-focused supervisory approach, 

is to reflect your assessment of the holding company enterprise, consolidated risk management, and 

consolidated financial strength. It is essential to coordinate your findings with the examiners conducting 

the thrift examination. One aspect of the holding company examination is your assessment of the impact on the thrift. You must consider the risks and positive or negative effect of the holding company 

relationship in reaching conclusions about the thrift. A holding company that is a drain on thrift resources may negatively impact the thrift’s capital rating. Similarly, a holding company that has a wealth 

of financial or managerial strength may positively impact the thrift’s rating. Your assessment should reflect the current financial and operating situation of the holding company enterprise as well as its 

prospective performance. For example, although a holding company may currently have a neutral effect 

on the thrift, there may be new businesses or transactions that have the potential of becoming a substantial burden on the thrift. 
Section 200 Administration 

200.14 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Integration with Thrift Report of Examination 

Because OTS normally conducts concurrent examinations of the thrift and the holding company, you 

should integrate the findings from both examinations. The holding company examination report is the 

primary method to discuss issues affecting the holding company enterprise. However, the thrift examination report should capture those issues from the perspective of the effect that the holding company 

operations may have on the thrift. The examiners-in-charge for both entities should discuss the issues 

and conclusions. The thrift examiner-in-charge should then incorporate the issues into the thrift comments from the perspective of current and potential risks to the thrift from its parent. For example, if 

the holding company review discloses planned transactions that will require significant cash flow, these 

activities may cause a greater funding need from the thrift. The capital comment in the thrift report 

should reflect this potential dividend requirement. In addition, if there is evidence that holding company management is overly influential and subordinating the interests of the thrift to those of the 

holding company, the thrift report should include a comment. It is also appropriate to comment if the 

thrift is dependent on the holding company and its affiliates for operational support. 

Examination Follow-Up 

After the completion of an examination, you should document required supervisory follow-up to examination findings and matters requiring board attention or management corrective actions. 

Responsible staff should: (i) enter matters requiring board attention or holding company actions in the 

examination follow-up system of EDS/ROE; (ii) ensure that the holding company takes timely and appropriate corrective action for any problems identified during the examination; (iii) closely monitor 

(during the examination and through ongoing offsite monitoring) compliance with matters requiring 

board attention and other required corrective actions; and (iv) promptly identify and appropriately address any significant noncompliance or recurrence of identified problems. 

ENFORCEMENT ACTIONS 

The same supervisory and enforcement tools that are available to address supervisory concerns at the 

thrift are also available to address concerns within the holding company enterprise. For a full description of enforcement actions, please refer to Examination Handbook Section 080, Enforcement Actions. 

SUMMARY

Comprehensive supervision of thrift holding companies is a combination of off-site monitoring and 

on-site examinations. Off-site monitoring and examination planning analysis aid in identifying trends, 

defining the risk classification of the holding company enterprise, and establishing a preliminary scope 

of the examination. In the case of conglomerates and certain other complex enterprises, supervision of 

the enterprise may require continuous supervision. Continuous supervision is an ongoing combination 

of on-site examination work, routine communication, off-site planning, monitoring, and analysis. When 

conducting an examination, you must maintain a professional and cooperative relationship with holding 

company management and directors, as well as other interested functional and foreign regulators. 
Administration Section 200 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200.15 

To conclude an examination, you must document your findings in a report of examination and assign a 

composite rating. The report may recommend appropriate actions for the holding company or implement supervisory measures to corrected problems you identify. You should also assign component 

ratings for all high risk or complex holding companies (Category II) and conglomerates (Category III). 

You will disclose the ratings to the holding company and include them in the examination report. You 

should communicate the examination findings to senior management and the directors of the holding 

company, as well as to other interested regulators. You should recommend necessary follow-up action 

to address outstanding issues and monitor compliance with matters requiring board attention and other 

required corrective actions. Each phase of the holding company examination is integral to the overall 

process. The combination of off-site monitoring and on-site examinations allows OTS staff to accurately assess the condition of the holding company enterprise. 

 
THIS PAGE INTENTIONALLY LEFT BLANK 
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 1 of 26 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200A.1 

In order to facilitate the examination of the holding company enterprise, provide the information requested in this 

document. If the information requested for a specific inquiry does not apply to your enterprise, type “N/A.” If you have 

already provided the same information in other examination schedules, or in regular Securities and Exchange Commission 

(SEC) filings transmitted to OTS, you need only provide page references to where various inquiries are addressed. 

The scope of the examination is the entire holding company structure. Therefore, if there is more than one registered 

savings and loan holding company, you must provide the required information for each holding company. If you have any 

questions about the information requested, or if you are seeking a waiver regarding some of the information requested on 

the basis that it represents an unreasonable burden, contact name of EIC at phone # or email at e-mail address . 

Key definitions and explanatory notes regarding terms used in this document are set forth at the end of this document. 

Please provide the requested information by Click Here and Type 

Primary Contact for questions regarding responses: 

Name Title Phone Number Email 

 

Custodian and location of books and records. 

Name Title Location 

 

The undersigned executive officer acknowledges and certifies that the information contained herein, including forms or 

exhibits, has been carefully reviewed, and that such information is true, correct and complete. 

Attest: 

 

Name Title Date 

 

Signature 
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 2 of 26 

 

200A.2 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Response 

Due 

Start 21.1 If not discussed in your business plan, describe your strategy for maintaining a sufficient 

amount of capital relative to the overall risk profile of the enterprise.

 

Start 21.2 Describe how changes in the enterprise’s risk profile are reflected in changes in your 

estimation of “sufficient capital.”

 

Start 21.3 How does your current capital level compare with what your strategy projects as the 

minimum level of capital needed to support your current risk profile?

 

Start 21.4 In your calculation of capital, how much consists of debt instruments like trust preferred or 

other hybrid securities and GAAP intangible assets such as servicing?

 

Start 21.5 When comparing your current capital to what you project as the minimum capital you 

need, do you count all capital the same, or do you apply a discount to such items as debt 

instruments and intangible assets?

 

Start 21.6 If any of your securities are rated, describe the rating you are seeking or trying to 

maintain, as well as any steps you are taking to achieve or maintain the desired rating.

 
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 3 of 26 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200A.3 

Start 21.7 Explain your policy with respect to any possible need to provide your savings association 

with additional capital. 

 

Start 21.8 If you or your subsidiaries have issued any new capital stock or capital notes since the last 

report of examination, provide the following details of the transaction(s): 

Class 

Amount Issued/ 

Previous Amount Outstanding 

Description of Transaction

(price, date, seller, net cash received, use of proceeds) 

 

Start 21.9 If you or your subsidiaries have outstanding or committed debt, provide the following 

details of the transaction(s): 

Outstanding or Committed Debt 

Date of Borrowing: Type Here Maturity Date: Type Here 

Name of Lender: Type Here Original Amount: Type Here 

Amount Outstanding: Type Here Interest Rate: Type Here 

Rating Type Here Rating Agency: Type Here 

Type of Debt: Type Here 

Purpose: Type Here 

Other Terms: Type Here 

Covenants or Restrictions: Type Here 
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 4 of 26 

 

200A.4 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Start 21.10 If you or your subsidiaries have outstanding hybrid securities, provide the following 

details of the transaction(s). Include all securities that are not purely debt or equity. 

Outstanding Hybrid Securities 

Date of Issuance: Type Here Maturity Date: Type Here 

Public Offering or Private Placement: Type Here 

Amount of Issuance: Type Here Callable Date: Type Here 

Rating Type Here Rating Agency: Type Here 

Rating Type Here Rating Agency: Type Here 

Type of Security: Type Here 

Purpose: Type Here 

Other Terms: Type Here 

Covenants or Restrictions: Type Here 

Start 21.11 Describe any scheduled debt or equity offerings. 

Class 

Amount to be Issued/ 

Net Cash Proceeds Expected Anticipated Use of Proceeds

 

Start 21.12 If you have repurchased any of your capital stock since the last report of examination, 

provide the following information: 

Date of 

Repurchase/ 

Class of Stock 

Amount Repurchased/

Average Price per 

Share 

Remaining Shares 

Outstanding/ 

Percentage of Capital 

Repurchased 

Name of Seller* 

(if applicable)/ 

Terms of Repurchase 

(if applicable) 

 

*If you have repurchased stock from insiders or related parties, indicate the name of the 

individual(s) or party(ies), as well as the terms of such repurchases. 
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 5 of 26 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200A.5 

Start 21.13 If you anticipate any major changes in your dividends, or plan any further share 

repurchases, provide details. 

 

Start 21.14 If there has been any adverse change in the condition of your debt or equity securities 

since the last report of examination, such as default or a restructuring in anticipation of a 

default, provide the following details: 

Class of Securities 

Total Amount of 

Principal 

Amount in 

Arrears Nature of Problem 

 

Start 21.15 If any debt is secured by a pledge of the savings association's capital stock, provide the 

following:

Lender/ 

Percent of Shares 

Used as Collateral 

Loan Date/ 

Maturity/ 

Current Balance 

Loan Amount/ 

Interest Rate 

Description of Use of Proceeds, Conditions 

of Forfeiture and Current Status 

 

Start 21.16 If you have made advances to the savings association since the last report of examination, 

describe whether the association has been reporting the funds as debt or equity. 

 

If debt, describe the terms, including the amount borrowed. 

 
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 6 of 26 

 

200A.6 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Start 21.17 Provide details on any of the savings association’s liabilities or contingent liabilities that 

are guaranteed by you or another affiliate. 

 

Start 21.18 Provide details on any liabilities or contingent liabilities of you or your affiliates that are 

guaranteed by the savings association. 

 

Start 21.19 Provide the following information on any other loans, advances, liabilities or other 

obligations, for which you have pledged security, or otherwise have guaranteed, that has 

not been reported as a liability on your financial statements: 

Date of Guarantee/ 

Amount 

If Secured, Describe the 

Type of Security 

Description of Obligation and Explanation Why You Needed 

to Provide a Guarantee 

 

Start 21.20 If you have any financial industry subsidiaries which have minimum required capital 

levels, provide the following information:

Subsidiary Name/ 

Location 

Primary Regulator/ 

Location Minimum Required Capital 

Current 

Capital Level 

 

If you, or any of your regulated financial industry subsidiaries fail to meet minimum 

required capital levels, explain the circumstances.

 
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 7 of 26 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200A.7 

If you, or any of your regulated financial industry subsidiaries are subject to any 

enforcement actions, explain the circumstances.

 

Start 21.21 Organization chart showing all major subsidiaries and the applicable ownership. Provide a 

brief description of subsidiary activities and summarize any changes in your 

organizational chart since the last report of examination.

 

Start 21.22 Provide the North American Industry Classification System (NAICS) code of the business 

activity that produces the highest portion of your consolidated gross revenue. (See 

Appendix for a summary of NAICS sector codes.)

 

Start 21.23 Excluding the savings association, list the three subsidiaries that contribute the greatest 

portion of your consolidated gross revenue. 

Name and Address NAICS Code Description of 

Activity 

 

Start 21.24 Provide a list of other regulators that oversee your, or your subsidiaries, operations. 

Clearly identify whether you have received an examination, inspection or other similar 

report from them since your last examination. 

 
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 8 of 26 

 

200A.8 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Start 21.25 Are you subject to the activity limitations as discussed in Section 400 of the OTS Holding 

Company Handbook? 

 

Start 21.26 Since the last report of examination, describe any significant changes of ownership or 

management.* 

 

If you are contemplating changes, describe the planned changes. 

 

*If a new executive officer or director has been appointed or elected, submit the following 

information, if not already provided, for each new director or officer: 

• A resume summarizing relevant experience; and, 

• A description of any current position as director, officer, employee or controlling 

beneficial stockholder of any nonaffiliated savings association or savings and loan 

holding company. 

Start 21.27 If you, directly or indirectly, or through one or more of your subsidiaries, or any of your 

insiders, partners or trustees; 

• hold any of the voting shares of a savings association or savings and loan holding 

company that is not a subsidiary; or 

• acquire control of a new subsidiary savings association (insured or uninsured) or 

savings and loan holding company during the review period; or 

• acquire additional shares or voting securities of a previously held subsidiary savings 

association or savings and loan holding company during the review period; or 
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 9 of 26 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200A.9 

• hold any proxies with respect to any voting rights in a mutual savings association, then 

provide the following information for each stock savings association or savings and 

loan holding company:

Name of Acquirer 

Nonaffiliated Savings 

Association or 

Holding Company 

Class of Stock 

Held 

Method of 

Ownership or 

Control 

Number 

of Shares/

Percent of 

Total 

Shares 

 

And provide the following information for each mutual savings association or savings and 

loan holding company: 

Name of Acquirer/ 

Number of Shares or Proxies Acquired 

Date Shares or Proxies 

Acquired/ 

Percent of 

Proxies Acquired 

Number of Voting Rights 

Held by Proxy/ 

Percent of Voting Rights 

Held by Proxy 

Term of 

Proxy 

 

Start 21.28 If you are a partnership, provide the following information on all persons or entities that 

have contributed, or are planning to contribute, 10% or more of the capital of the 

partnership: 

Name and Address of Contributor Type of Partner 

Percent of Total 

Capital 

Contributed 

 
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 10 of 26 

 

200A.10 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Start 21.29 If you are a trust, provide the following information on all persons who have more than 

10% beneficial interest: 

Name and Address of Beneficiary 

Type of Trust/ 

Trustee 

Percent of 

Beneficial 

Interest 

 

Start 21.30 Identify any threatened or pending litigation not listed in the Management Letter of 

Representation involving you or your non-thrift subsidiaries either as Plaintiff or 

Defendant. DO NOT include foreclosures in this listing, or other routine litigation 

incidental to the company’s business. For each such matter, explain: 

• The claim and the stage of the proceeding. Include the probable trial date. 

• How Management is responding or intends to respond to the claim. Will the claim be 

vigorously contested or will an out of court settlement be sought? 

• The amount being litigated, and an estimate of the amount of the potential loss or 

recovery or the range of such loss or recovery. 

• The probable effect any such litigation will have on you or your subsidiaries. 

 

Start 21.31 Describe the policies and screening processes you employ to identify individuals that may 

be prohibited from serving at a savings and loan holding company as a result of a 

conviction of a criminal offense involving dishonesty, breach of trust, or money 

laundering. (See 12 CFR Part 585 and 584.9.) Identify and furnish complete details 

regarding any individuals covered by Part 585 or 584.9 that are currently in your employ 

and have been convicted (or agreed to enter into a pretrial diversion of similar program in 

connection with a prosecution for such an office). 

 
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 11 of 26 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200A.11 

Start 21.32 Describe any administrative proceedings that are adverse to you or any of your 

subsidiaries and that involve any of your or your affiliates’ directors, executive officers, 

partners, trustees; or their associates (as defined in 12 CFR 563b.25); or involve the 

related interests of any such person.* 

Agency or Court 

Hearing the Case 

Initiation Date of 

Proceedings 

Principal Parties to the 

Proceeding 

Brief Summation of the 

Case, Including any 

Proposed or Assessed 

Fines or Penalties 

 

*Include similar information as to any such proceedings known to be contemplated by 

governmental or professional authorities, by indicating “Uncertain” under “Initiation Date 

of Proceedings.” 

Start 21.33 If you or any of your affiliates offers or contemplates offering financial services 

complementary to or in competition with the savings association (i.e., mortgage banking, 

commercial banking, credit life insurance, insurance agency, or escrow agency), answer 

the following questions:

• Are the activities coordinated with or expected to be coordinated with the savings 

association? 

 

• Are any of the activities dependent on the savings association for all or most of their 

revenue? 

 
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 12 of 26 

 

200A.12 Holding Companies Handbook March 2009 Office of Thrift Supervision 

• What is the volume of business between such affiliates and the savings association? 

 

• Is the savings association losing revenue due to such activities? 

 

Start 21.34 If there are any loans outstanding from you or your affiliates totaling over $500,000 to any 

single insider, partner, or trustee, provide the following information: 

Name of Borrower Amount of Loan 

Type of Loan/ 

Term of Loan Payment Status 

 

Start 21.35 If, since the last examination report, any of your insiders, partners or trustees held a 

controlling interest in a nonaffiliated depository institution or a nonaffiliated depository 

holding company, furnish the following information: 

Name/ 

Position at Holding Company 

Nonaffiliated Depository Institution or 

Holding Company/ 

Description of Controlling Interest 

 

Start 21.36 If not addressed in the business plan, describe your corporate objectives with respect to the 

savings association.

 

Do you plan for the savings association to grow? 

 
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 13 of 26 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200A.13 

• If so, what growth projections (including acquisitions) have been made? 

 

• What assumptions were used? 

 

What dividend flow do you expect the savings association to produce over the next three 

years? 

 

What annual percentage return on investment do you expect from your investment in the 

savings association? 

 
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 14 of 26 

 

200A.14 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Start 21.37 For all of your insiders, partners, trustees and ESOPs, provide the following information 

with respect to the shares or other securities of you or your affiliates. Include any shares 

or other securities held by an immediate family member. 

Name / 

Occupation 

Title/ 

Year Appointed 

Number of 

Shares Owned/ 

Percent of Total 

Shares 

Number of 

Options Owned/ 

Method of 

Ownership or 

Control 

Amount of 

Any Other 

Securities/ 

Type of 

Securities 

 

Start 21.38 Are there any agreements or understandings between individuals regarding the 

transferability and voting of any of your stock and/or the management or control of you or 

your affiliates? If so, provide detailed information including, but not limited to, names of 

the individuals and specific intentions, along with copies of any agreements. 

 

Start 21.39 If you have an enterprise-wide Bank Secrecy Act/Anti-Money Laundering (BSA/AML) 

compliance policy or program to manage risk, please provide the following:

• A copy of your written enterprise-wide BSA/AML compliance policy or program to 

include all related policies and procedures. 

• A copy of your enterprise-wide BSA/AML risk assessment of the products, services, 

customers, and geographies in which you operate. 

• The name and contact information of the individual or entity responsible for 

coordinating and monitoring day-to-day compliance with the enterprise-wide 

BSA/AML compliance policy or program. 

• Where you have conducted self-assessments, periodic transaction reviews, or 

internal/external audits ensuring enterprise-wide BSA/AML compliance, include the 

standards used to govern the review and copies of written reports presented to the 

board and senior management detailing significant findings, deficiencies, conclusions, 

and recommendations for corrective action. 
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 15 of 26 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200A.15 

• The name and contact information of the individual or entity responsible for 

enterprise-wide BSA/AML training.

 

Start 21.40 If you do not have an enterprise-wide BSA/AML compliance program, please provide a 

brief description of any entities or lines of business, other than the savings association, that 

present a significant risk of money laundering and a brief overview of the policies, 

procedures and processes in place to manage the BSA/AML risk associated with the 

identified entities or lines of business. 

 

Start 21.41 Please identify any entities, other than the savings association, that are engaged in 

mortgage lending. For those identified entities, please provide a brief overview of the 

policies, procedures, and processes in place to ensure compliance with the Fair Housing 

Act, Equal Credit Opportunity Act and Home Mortgage Disclosure Act.

 

Start 21.42 If not described in your business plan, discuss your current earnings and cash flow 

projections. If you have issued any debt or stock, discuss your current earnings and cash 

flow projections. Include details on anticipated dividends from the thrift subsidiary for the 

next 12 months. If you have issued debt, provide the debt service requirements for the 

most recent calendar year and a projection for the current calendar year. If you pay cash 

dividends, provide a schedule of dividends paid for the most recent calendar year and a 

projection for the current calendar year. 

 
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 16 of 26 

 

200A.16 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Explain any material deviation from projected earnings.

 

Explain any material deviation from projected cash flow. 

 

Excluding the savings association, list the three subsidiaries that contribute the largest cash 

flows to the holding company:

Subsidiary Name(s) Cash Flow 

Percentage of 

your total cash 

flow 

 

Start 21.43 If funds from the savings association were paid to you for purposes of income tax 

payments since the last examination report, provide the following information:* 

Payment Date/ 

Payment Amount 

Savings Association Income Tax 

Liability 

Proportion of Consolidated Payment 

Contributed by Savings Association 

 

*If the savings association makes payments on its own behalf, or on behalf of the 

consolidated structure, directly to the IRS, such payments should be listed and footnoted 

with appropriate clarifications. 

Start 21.44 If there has been a change in independent auditors or fiscal year end, explain the reason(s) 

for change, date of change and identify the new auditor/date. 

 
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 17 of 26 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200A.17 

Start 21.45 What effect, if any, have any changes in accounting principles and procedures had on your 

income? 

 

Start 21.46 Most recent independent auditor’s reports including any management letters. 

 
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 18 of 26 

 

200A.18 Holding Companies Handbook March 2009 Office of Thrift Supervision 

(in 000s) 

Current 

Year-To-Date 

mm/dd/yyyy 

Most Recent 

Fiscal Year-Ended 

mm/dd/yyyy 

Prior 

Fiscal Year-Ended 

mm/dd/yyyy 

Internal Funding Sources 

Income 

Dividends from subsidiaries $0 $0 $0 

Interest from subsidiaries 0 0 0 

Management and service fees 0 0 0 

Other operating cash income 0 0 0 

Total Operating Cash Income $ 0 $ 0 $ 0 

 

Expenses 

Interest Paid $0 $0 $0 

Lease and rental 0 0 0 

Salary and employee benefits 0 0 0 

Other operating cash expenses 0 0 0 

Total Operating Cash Expenses $ 0 $ 0 $ 0 

 

Before Tax Cash Income $ 0 $ 0 $ 0 

 

Taxes 

 Income tax payments from: 

 Thrifts $0 $0 $0 

 Other Affiliates 0 0 0 

 Less: Income tax payments 0 0 0 

Net Income Tax $ 0 $ 0 $ 0 

 

After-Tax Cash Income $ 0 $ 0 $ 0 

 
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 19 of 26 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200A.19 

(in 000s) 

Most Recent 

Fiscal Quarter 

mm/dd/yyyy 

Current 

Year-To-Date 

mm/dd/yyyy 

Prior Fiscal Quarter 

mm/dd/yyyy 

External Sources 

Issuance of stock $0 $0 $0 

Net increase in borrowed funds 0 0 0 

Advances to subsidiaries repaid: 

 Thrifts 0 0 0 

 Other Affiliates 0 0 0 

Sale of assets 0 0 0 

Total External Sources $ 0 $ 0 $ 0 

External Uses 

Net decrease in borrowed funds $0 $0 $0 

Dividend payments: 

 Preferred 0 0 0 

 Common 0 0 0 

Equity investment in subsidiaries 

 Thrifts 0 0 0 

 Other Affiliates 0 0 0 

Advances to subsidiaries: 

 Thrifts 0 0 0 

 Other Affiliates 0 0 0 

Purchase of assets 0 0 0 

Total External Uses $ 0 $ 0 $ 0 

Net External Position $ 0 $ 0 $ 0 

 (External Sources less External Uses) 

Net Change In Cash Position $ 0 $ 0 $ 0 

(After-tax cash income plus net external cash)

i i )

 

Cash Balance Beginning $0 $0 $0 

Cash Balance Ending $ 0 $ 0 $ 0 
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 20 of 26 

 

200A.20 Holding Companies Handbook March 2009 Office of Thrift Supervision 

1. Net Worth Requirement

a. The portion of your consolidated net worth at the close of the last 

preceding fiscal year on an actual or pro forma basis represented 

by: 

i. Subsidiary savings association $0.00

ii. Other related business activities specified in 12 CFR Sections 

584.2(b), 584.2-1, and 584.2-2. $0.00

b. Total of Line 1.a.(i) plus Line 1.a.(ii) $0.00

c. Your consolidated net worth as of same date $0.00

d. Ratio of Line 1.b to Line 1.c 

2. Net Earnings Requirement

a. Net earnings for the last preceding fiscal year on an actual or pro 

forma basis as follows: 

i. Total net earnings that the subsidiary savings association 

contributed to consolidated net earnings $0.00

ii. Total net earnings that other related business activities 

specified in 12 CFR Sections 584.2(b), 584.2-1 and 584.2-2 

contributed to consolidated net earnings $0.00

b. Total of Line 2.a.(i) plus Line 2.a.(ii) $0.00

c. Your total consolidated net earnings for the last preceding fiscal 

year $0.00

d. Ratio of Line 2.b to Line 2.c 
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 21 of 26 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200A.21 

PREPARE TO PROVIDE EXAMINER ACCESS TO THOSE ITEMS BELOW THAT ARE APPLICABLE:

• Board Packages 

• Risk Management Reports 

• Policies and Procedures 

• Tax Sharing Agreement 

• Analyst Reports from Underwriters, Credit Agencies or Security firms 

• Reports dealing with Bank Secrecy Act/Anti-Money Laundering Activities

• Schedule of Investments

• Loan Trial Balance

Definitions and Explanatory Notes

“Affiliate” is defined in 12 CFR Section 563.41. 

“Depository Institution” and “Depository Holding Company” are defined in 12 CFR Section 563f.2. 

“Enterprise-wide” refers to compliance policies or programs that coordinate the BSA/AML regulatory requirements 

throughout an organization inside a larger risk management framework. Such frameworks enable an organization to have a 

consolidated understanding of its risk exposure to money laundering and terrorist financing across all business units, 

functions, and legal entities. 

“Executive officer” includes the president, chief executive officer, chief operating officer, chief financial officer, chief 

lending officer, chief investment officer, and any other individual OTS identifies that exercises significant influence over, 

or participates in, major policymaking decisions of an institution or a savings and loan holding company. (12 CFR Section 

215.2(e)(1)) 

“Insider” is defined as an executive officer, director, or principal shareholder, and includes any related interest of such a 

person. (12 CFR Section 215.2(h)) 

“Principal Shareholder” is defined as a person that directly or indirectly, owns, controls, or has the power to vote more than 

10 percent of any class of voting securities of an institution or company. Shares owned or controlled by a member of an 

individual's immediate family are considered to be held by the individual. (12 CFR 215.2(m)(1)) 

“Related interest” of a person is defined as a company, partnership or other entity that is controlled by that person; or a trust 

or other fund which benefits that person. (12 CFR 215.2(n)) 
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 22 of 26 

 

200A.22 Holding Companies Handbook March 2009 Office of Thrift Supervision 

All other terms used in this document, have the meaning commonly ascribed to them in commercial/financial usage or as 

specified in Section 10 of the Home Owners’ Loan Act, as amended, and 12 CFR Parts 583, 574 and 561. 
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 23 of 26 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200A.23 

 

Appendix 

North American Industry Classification System1

 

Business Activity Sector Codes 

Sector 110000-119999 —Agriculture, Forestry, Fishing and Hunting 

111000 Crop Production 

 115000 Support Activities for Agriculture and Forestry 

Sector 210000-219999 – Mining 

Sector 220000-229999 — Utilities 

Sector 230000-239999 — Construction 

 233000 Building, Developing, and General Contracting 

 234000 Heavy Construction 

Sector 310000-339999 — Manufacturing 

 311000 Food Manufacturing 

 321000 Wood Product Manufacturing 

 322000 Paper Manufacturing 

 323000 Printing and Related Support Activities 

 324000 Petroleum and Coal Products Manufacturing 

 325000 Chemical Manufacturing 

 326000 Plastics and Rubber Products Manufacturing 

 331000 Primary Metal Manufacturing 

 332000 Fabricated Metal Product Manufacturing 

 333000 Machinery Manufacturing 

 334000 Computer and Electronic Product Manufacturing 

 335000 Electrical Equipment, Appliance, and Component Manufacturing 

 336000 Transportation Equipment Manufacturing 

 337000 Furniture and Related Product Manufacturing 

 339000 Miscellaneous Manufacturing 

Sector 440000-459999 — Retail Trade 

 441000 Motor Vehicle and Parts Dealers 

 442000 Furniture and Home Furnishings Stores 

 443000 Electronics and Appliance Stores 

 444000 Building Material and Garden Equipment and Supplies Dealers 

1

 For a detailed listing of all codes, go to www.census.gov/epcd/naics02/naicod02.htm
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 24 of 26 

 

200A.24 Holding Companies Handbook March 2009 Office of Thrift Supervision 

 445000 Food and Beverage Stores 

 448000 Clothing and Clothing Accessories Stores 

 452000 General Merchandise Stores 

 453000 Miscellaneous Store Retailers 

 454000 Nonstore Retailers 
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 25 of 26 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200A.25 

Sector 510000-519999 — Information

511000 Publishing Industries 

 512000 Motion Picture and Sound Recording Industries 

 513000 Broadcasting and Telecommunications 

 514000 Information Services and Data Processing Services 

Sector 520000-529999 — Finance and Insurance 

522000-522999 - Banking and Finance 

522110 Commercial Banking 

522120 Savings Institutions 

522130 Credit Unions 

522190 Other Depository Credit Intermediation 

522210 Credit Card Issuing 

522220 Sales Financing 

522291 Consumer Lending 

522292 Real Estate Credit 

522293 International Trade Financing 

522294 Secondary Market Financing 

522298 All Other Nondepository Credit Intermediation 

522310 Mortgage and Nonmortgage Loan Brokers 

522320 Financial Transactions Processing, Reserve and Clearinghouse Activities 

522390 Other Activities Related to Credit Intermediation 

523000-523999 - Securities, Commodities and Other Financial Investments 

523100 Securities, Commodity Contracts, and Other Financial Investments and Related Activities 

523110 Investment Banking and Securities Dealing 

523120 Securities Brokerage 

523130 Commodity Contracts Dealing 

523140 Commodity Contracts Brokerage 

523210 Securities and Commodity Exchanges 

523910 Miscellaneous Intermediation 

523920 Portfolio Management 

523930 Investment Advice 

523991 Trust, Fiduciary, and Custody Activities 

523999 Miscellaneous Financial Investment Activities 

524000-524999 - Insurance 

524100 Insurance Carriers 

524113 Direct Life Insurance Carriers 
Appendix A: Administration Section 200 

HOLDING COMPANY 

Preliminary Examination Response Kit 

Office of Thrift Supervision 

Structure #: > 

HC Responsible for Assessment: > 

Examination As Of Date: > 

Review Period: > 

PERK 21 (02/2008) Holding Company Page 26 of 26 

 

200A.26 Holding Companies Handbook March 2009 Office of Thrift Supervision 

524114 Direct Health and Medical Insurance Carriers 

524126 Direct Property and Casualty Insurance Carriers 

524127 Direct Title Insurance Carriers 

524128 Other Direct Insurance 

524130 Reinsurance Carriers 

524210 Insurance Agencies and Brokerages 

524291 Claims Adjusting 

524292 Third Party Administration of Insurance and Pension Funds 

524298 All Other Insurance Related Activities 

525000-525999 - Other Financial 

525100 Insurance and Employee Benefit Funds 

525110 Pension Funds 

525120 Health and Welfare Funds 

525900 Other Investment Pools and Funds 

525910 Open-End Investment Funds 

525920 Trusts, Estates, and Agency Accounts 

525930 Real Estate Investment Trusts 

525990 Other Financial Vehicles 

Sector 530000-539999 — Real Estate and Rental and Leasing 

531100 Lessors of Real Estate 

531200 Offices of Real Estate Agents/Brokers 

531300 Activities Related to Real Estate 

 532000 Rental and Leasing 

Sector 540000-549999 — Professional, Scientific, and Technical Services 

Sector 550000-559999 — Management of Companies and Enterprises 

Sector 560000-569999 — Administrative and Support and Waste Management and Remediation 

Services 

Sector 620000-629999 — Health Care and Social Assistance 

Sector 710000-719999 — Arts, Entertainment, and Recreation 

Sector 720000-729999 — Accommodation and Food Services 

Sector 810000-819999 — Other Services (except Public Administration) 

 813000 Religious, Grantmaking, Civic, Professional, and Similar Organizations 
Appendix B: Administration Section 200 

 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200B.1 

CONTINUOUS SUPERVISION

OTS uses a continuous supervision program for our most complex savings associations and holding 

companies. OTS determines on a case-by-case basis whether to supervise a complex savings association or 

holding company on a continuous basis. There is not a specific equation or trigger for this purpose. 

Rather, OTS bases this determination on the risk profile and resource needs of the institution or holding 

company enterprise. 

Continuous supervision and examination combines on-site examination work, routine communication, 

and off-site planning, monitoring, and analysis into one ongoing examination process. The ongoing 

examination process includes developing planning documents; performing examination work; annually 

aggregating findings, recommendations, and corrective actions into a report of examination; and assigning 

examination ratings. Continuous supervision and examination comprises several key elements: 

• Developing and Maintaining a Comprehensive Risk Assessment 

• Preparing a Three-year Supervisory Plan 

• Preparing an Annual Staffing Plan 

• Scheduling and Conducting Targeted Reviews 

• Coordinating with Other Regulators 

• Instituting an Annual, Roll-up Examination Process and Reporting Framework 

• Holding Routine Management Meetings and an Annual Board of Directors Meeting 

Risk Assessment is fundamental for continuous supervision and examination. Examination staff is 

responsible for documenting the risk profile of an organization and cataloguing the systems and controls 

the organization enacts to manage and mitigate those risks. The risk assessment should include a clear 

summary of the operations of the consolidated organization in order to form a basis for the examination 

scope. It is a living document that the examination team will update as the organization evolves; however, 

the examiner-in-charge (EIC) should formally document, update, and finalize the risk assessment no less 

than annually. 

The risk assessment should clearly identify risks from the insured depository, the holding company, and 

affiliates. It should also identify significant functionally regulated entities and non-regulated entities. The 

assessment considers all relevant sources of information including company-prepared risk assessments, 

examination findings, internal and external audit assessments and reports, reports from other depository 

institution and functional regulators, and financial and rating analyst reports. Staff consistency throughout 

the continuous examination process along with the documentation of a risk assessment of the organization 

will ensure a reliable basis for developing the three-year supervisory plan, the staffing plan, and scheduling 

components of examinations. 
Appendix B: Administration Section 200 

 

 

 

200B.2 Holding Companies Handbook March 2009 Office of Thrift Supervision 

 

Supervisory Plans are examination maps that develop from risk assessments. They cover a three-year 

period. They address key examination areas including broad, organization-wide issues, and narrow, higherrisk, or discreet areas of review. The caseload manager will develop a supervisory plan in coordination with 

the EIC of the complex institution or holding company enterprise. The plan, which is subject to approval 

by senior management, defines the scope and timing of examination work and identifies resource needs. 

The supervisory plan is an active document that should incorporate significant examination findings and 

changes in risk profile. You should upload updated supervisory plans to the Electronic Continuing 

Examination File (ECEF) upon annual revision. 

Each plan should be flexible to react to changes in the organization. The focus of the plan should be on 

the current examination year, but the document should include a summation of the proposed examination 

activities in subsequent years. By identifying and scheduling prospective examination areas for the current 

year and future years, OTS will be able to risk-focus our review. The supervisory plan enables us to 

logically proceed from one examination area to the next, building upon examination findings. 

Each supervisory plan should also reflect the importance of the review of the insured depository. The 

supervisory plan and overall examination of a highly complex insured depository will require a more 

granular focus than for a complex holding company enterprise. In holding company examinations, the 

supervisory plan should outline how the examination team will coordinate with and incorporate the 

findings of the savings association examination. 

Each complex organization subject to continuous supervision should have an annual Staffing Plan. The 

staffing plan should develop as a product of the supervisory plan and should remain flexible to 

accommodate changes in risk profile, staff availability, and examination scope. The plan should project 

staffing needs for the upcoming year, including required examiner skill sets and the projected timing, 

duration, and location of specific assignments. The staffing plan must be complete for each organization 

by the end of July in order for senior management to consider it during OTS’s annual resource allocation 

and staffing meetings. The risk assessment will also help OTS prioritize and assign examination resources. 

Targeted Reviews examine and assess particular risk areas or activities of an organization. Examiners 

should use targeted reviews to support annual ratings assignments (CAMELS, CORE, MOECA, IT, CRA, 

and Compliance). EICs should incorporate a schedule for targeted reviews of these areas into the 

supervisory and staffing plans, explaining how they will meet the examination objectives. 

Targeted reviews are conceptually similar to limited review examinations or field visits. Each targeted 

review should have a scope. Examiners should develop a customized PERK or notification letter for the 

institution, subsidiary, and/or affiliate’s management. Examiners conduct examination work, hold interim 

and exit meetings with management, and prepare a targeted review report to document their findings. OTS 

incorporates material findings into the annual examination report and considers the findings when revising 

the risk assessment and supervisory plan. The examination team, in accordance with OTS examination 

procedures, establishes corrective actions and follow-up schedules when necessary. 

Complex institutions often have multiple regulated entities. As part of continuous supervision, examiners 

and managers are responsible for Coordinating with Other Regulators. For complex holding 

companies, the examination staff must identify all significant regulated entities within the corporate 

structure, including OTS-regulated savings associations. OTS examiners reviewing a subsidiary or affiliate 
Appendix B: Administration Section 200 

 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200B.3 

of an organization that is subject to continuous supervision, should communicate with the complex 

organization’s examination team to identify risks or material items that may affect the supervisory plan for 

the complex organization. Once the examination team identifies significant regulated entities, OTS staff 

should establish communication protocols, request examination reports, coordinate with and leverage off 

the work other regulators perform, and consolidate the material findings of other regulators into our 

overall examination conclusions. 

Continuous supervision and examination incorporates an Annual Examination Process. The process 

requires the EIC to compile and summarize the results of the risk assessment, supervisory planning, 

targeted reviews, and continuous monitoring and examination into an annual, roll-up examination report. 

The process is necessary to refresh information and to aggregate each area of review into one cohesive 

summary. The annual examination process should frame all elements of continuous supervision and 

should include the elements of OTS’s current examination approach (i.e. review of CAMELS, CORE, 

MOECA, IT, CRA, and Compliance areas). It guarantees that OTS updates the organization’s supervisory 

ratings to reflect organizational changes or findings when necessary. 

The annual examination process should also include a method to follow-up, track, and monitor 

examination findings, corrective actions, and management’s progress in addressing outstanding items. The 

tracking and monitoring system should correlate to the risk assessment and supervisory plan to ensure 

both documents reflect the organization’s progress in correcting weaknesses. The EIC is responsible for 

tracking and ensuring the timely resolution of all examination issues. 

Continuous supervision and examination includes formal Routine Management Meetings. While the 

timing of the meetings should be flexible to accommodate supervisory needs, it is important to have 

established, formal interaction with senior management. These meetings should take place quarterly, at a 

minimum. The meetings are a bilateral forum to provide and receive information regarding the 

organization and examination. The organization should communicate operating results, changes in risk 

profile or strategic direction, steps taken to resolve material audit or examination deficiencies, etc. OTS 

should communicate changes to the supervisory plan, pertinent examination findings or corrective actions, 

proposed examination activities, etc. The formal quarterly meetings establish a routine dialogue between 

OTS and the organization that will support the continuous examination process. 

Continuous supervision and examination also includes a formal Annual Board of Directors Meeting. 

The board meeting should coincide with the issuance of the annual examination report. It is a forum for 

communicating ratings changes, material supervisory concerns, and for discussing the supervisory plan. It 

should also serve as the basis for soliciting board commitment for required corrective action. Meetings 

with the Audit or other appropriate board committee in lieu of the full board may be appropriate 

depending on case-by-case circumstances. The continuous examination approach emphasizes frequent, 

ongoing communications with the regulated organization. 

Continuous supervision and examination provides staff continuity while allowing us to allocate and rotate 

resources effectively. It provides consistency in supervisory approach and greater flexibility for scheduling 

comprehensive, risk-based reviews of an organization’s higher-risk areas. This program will ensure that our 

supervisory objectives are clear, we identify and align our staffing needs, and we regularly communicate 

with OTS-regulated complex organizations. 
Appendix B: Administration Section 200 

 

 

 

200B.4 Holding Companies Handbook March 2009 Office of Thrift Supervision 

RISK MATRIX

OTS’s objective is to examine a holding company enterprise in the areas that pose the greatest risk to the 

overall enterprise and the thrift subsidiary. This guidance outlines procedures for completing a risk matrix; 

an OTS-designed tool that enables supervisory staff to systematically assess the enterprise within a 

framework; identify areas within an enterprise where problems exist or are likely to emerge; prioritize areas 

to examine, review, and/or monitor; and when warranted, initiate timely corrective actions. The risk matrix 

is a key component of continuous supervision program for complex holding company enterprises. 

Risk Focused Principles 

The continuous supervision of complex holding company enterprises is risk-focused. Key elements of this 

approach are: 

• Continuous monitoring and re-evaluation of the holding company enterprise’s risk profile 

including updating the supervisory plan; 

• Emphasis on assessing and monitoring the enterprise’s management processes and core 

proficiencies for identifying, measuring, monitoring, and controlling risks inherent to its business; 

• Greater leverage of management and board reports, internal audit reports, and external audit 

reports to supplement OTS’s supervisory processes; 

• Communication and coordination with foreign and functional supervisors; and 

• Establishing a communication program with the enterprise to maintain a current understanding of 

risk levels, risk management programs, strategic initiatives, and material developments. 

Risk Assessment 

The examination team uses the risk matrix to develop a comprehensive, risk-focused profile of the holding 

company enterprise. The risk matrix is a structured format that identifies and summarizes an enterprise’s 

significant business activities, the types and levels of inherent risks in those activities, and the adequacy of 

risk management over those activities. 

The risk matrix is a tool that documents the risk assessment and helps guide the supervision process. It is 

not intended to impose an inflexible approach on the examination. Examiner judgment, current events, 

and resource availability may result in examination or review of areas that reflect lower risk before those 

that reflect higher risk. However, examination staff should consider what the matrices show, and ensure 

that all risks facing business units are factored in to the decisions. 

The risk matrix can be developed for the consolidated organization, by legal entity, by business line, or by 

function. In developing the enterprise level matrix, examiners should use discretion in determining the 

detail and number of sub matrices necessary to document significant activities and the inherent risks. 

The key components of the risk matrix are: 

• Significant activities; 
Appendix B: Administration Section 200 

 

• Exposure; 

• Level of inherent risks; 

• Level of risk mitigation or quality of risk management; 

• Composite or net risk; 

• Direction of composite or net risk; and 

• Supervisory sequence 

Significant Activities and Exposure 

Significant activities should include any significant business line, unit, and process. Examiners should 

identify significant activities using multiple sources including organization charts, strategic business plans, 

capital allocations, and internal/external financial reporting. You should use sound judgment to determine 

the significance or materiality of any activity in which a holding company enterprise engages. The 

following are examples of criteria that you may use: 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200B.5 
Appendix B: Administration Section 200 

 

 

 

200B.6 Holding Companies Handbook March 2009 Office of Thrift Supervision 

• Assets generated by the activity in relation to total assets (on- and off-balance sheet); 

• Risk-weighted assets generated by the activity in relation to total risk weighted assets; 

• Revenue generated by the activity in relation to total revenue; 

• Net income (before taxes) for the activity in relation to total net income (before tax); 

• Risk-weighted capital for the activity in relation to total risk-weighted capital; 

• Internal allocation of capital to the activity in relation to total capital; 

• Insurance underwriting exposure in relation to capital; and 

• Reserves allocated and held as a percentage of total reserves. 

Inherent Risks 

Risk is intrinsic to a business activity and arises from the exposure and its relationship to potential future 

events. You should evaluate inherent risk by considering the likelihood of the risk exposure to the adverse 

event or events and the resulting adverse impact on the holding company enterprise, financial and/or nonfinancial. With all types of risk, consideration should be given to how differences in foreign regulatory 

frameworks and market characteristics may mitigate or exacerbate firm-wide risk. 

The CORE Holding Company Rating System identifies the following major types of risks: 
Appendix B: Administration Section 200 

 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200B.7 

TYPE OF 

RISK DESCRIPTION 

Credit/Asset 

Credit risk arises from the potential that a borrower or counterparty will fail to perform on 

an obligation. Asset risk is the risk related to market changes or performance of a financial 

asset. 

Market 

Market risk is the risk to a financial institution's condition resulting from adverse 

movements in market rates or prices, such as interest rates, foreign exchange rates, or equity 

prices. 

Liquidity 

Liquidity risk is the potential that an institution will be unable to meet its obligations as they 

come due because of an inability to liquidate assets or obtain adequate funding (funding 

liquidity risk) or that it cannot easily unwind or offset specific exposures without 

significantly lowering market prices because of inadequate market depth or market 

disruptions (market liquidity risk). 

Operational 

Operational risk arises from the potential that inadequate information systems, operational 

problems, breaches in internal controls, fraud, or unforeseen catastrophes will result in 

unexpected losses. Transaction risk arises from problems with service or product delivery. 

This risk is a function of internal controls, information systems, employee integrity, and 

operating processes. 

Legal / 

Compliance 

Legal risk arises from the potential that unenforceable contracts, lawsuits, or adverse 

judgments can disrupt or otherwise negatively affect the operations or condition of a 

banking organization. Compliance risk is the risk to earnings or capital arising from 

violations of, or nonconformance with, laws, rules, regulations, prescribed practices, or 

ethical standards. 

Reputation 

Reputation risk is the potential that negative publicity regarding an institution's business 

practices, whether true or not, will cause a decline in the customer base, costly litigation, or 

revenue reductions. 

Country/ 

Sovereign 

Country risk arises from the general level of political, financial, and economic uncertainty in 

a country, which affects the value of the country's bonds and equities. Sovereign risk is the 

risk that a central bank will impose foreign exchange regulations that will reduce or negate 

the value of foreign exchange contracts. It also refers to the risk of government default on a 

loan made to a country or guaranteed by it. 

Contagion / 

Systemic 

Contagion entails the risk that financial difficulties encountered by a business line or 

subsidiary of a holding company could have an adverse impact on the financial stability of 

the enterprise and possibly even on the markets in which the constituent parts operate. 

Systemic risk is defined by financial system instability, potentially catastrophic, caused or 

exacerbated by idiosyncratic events or conditions in financial intermediaries. Impacted areas 

include market value of positions, liquidity, credit-worthiness of counterparties and obligors, 

default rates, liquidations, risk premia, and valuation uncertainty. 

Concentration The exposure to losses due to a concentration (assets, liabilities, off-balance-sheet) at the 

subsidiary, business line, geographic, and/or enterprise level. 
Appendix B: Administration Section 200 

 

 

 

200B.8 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Intra-Group 

Transactions 

Exposures to risk that result from transactions between affiliates. 

Strategic 

And 

Execution 

Strategic and execution risk is the risk to earnings or capital arising from adverse business 

decisions or improper implementation of those decisions. This risk is a function of the 

compatibility of an organization’s strategic goals, the business strategies developed to 

achieve those goals, the resources deployed against these goals, and the quality of 

implementation. The resources needed to carry out business strategies are both tangible and 

intangible. They include communication channels, operating systems, delivery networks, and 

managerial capacities and capabilities. Strategic risk focuses on more than an analysis of the 

written strategic plan. It focuses on how plans, systems, and implementation affect the 

enterprise’s franchise value. It also incorporates how management analyzes external factors 

that affect the strategic direction of the company. 

Pricing/ 

Underwriting 

Risk

Pricing and underwriting practices of the insurance entity are inadequate to provide for the 

risks assumed. 

Reserving Risk An insurance company’s actual losses or other contractual payments reflected in reported 

reserves or other liabilities will be greater than estimated. 

Level of Risk 

After identifying significant activities, examiners should assess the level of inherent risk in those activities 

as low, moderate, or high. You should make this assessment without considering the impact of risk 

mitigation through the institution’s risk management processes and controls. The matrix considers the 

quality of these factors separately and combines them with the inherent risk assessment to determine the 

net risk of each activity. 

Level of Inherent Risk 

Low Volume, size, or nature of activity poses immaterial or minimal impact, in the 

event of loss, on the holding company enterprise’s condition. 

Moderate Volume, size, or nature of activity is average comprising traditional or typical 

risks. Loss exposures could be absorbed in the normal course of business. 

High Volume, size, or nature of activity could result in significant and harmful loss. 
Appendix B: Administration Section 200 

 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200B.9 

Risk Mitigation - Adequacy of Risk Management 

You should evaluate the adequacy of risk management for each significant activity in relation to the 

following key elements of a sound risk management system: 

Elements of Risk Management Systems 

Governance / 

Board and Senior Management 

Oversight

A review of this area evaluates the adequacy and effectiveness of board and 

senior management’s understanding and management of risk inherent in the 

holding company enterprise’s activities, as well as the general capabilities of 

management. It also considers management’s ability to identify, understand, 

and control the risks within the holding company enterprise, to hire 

competent staff, to manage cross-border and cross-cultural variables, and to 

respond to changes in risk profile or industry innovations. 

Policies, Procedures, and Limits

A review of this area evaluates the adequacy of policies, procedures, and 

limits given the risks inherent in the activities of the consolidated enterprise 

and its stated goals and objectives. Your analysis should consider the 

adequacy of the enterprise’s accounting and risk disclosure policies and 

procedures. 

Risk Monitoring and 

Management Information 

Systems

A review of this area assesses the adequacy of risk measurement and 

monitoring, and the adequacy of its management reports and information 

systems. Your analysis should include a review of the assumptions, data, and 

procedures used to measure risk and the consistency of these tools with the 

level of complexity of the enterprise’s activities. 

Internal Controls

A review of this area evaluates the adequacy of internal controls and internal 

audit procedures, including the accuracy of financial reporting and disclosure 

and the strength and influence, within the enterprise, of the internal audit 

team. Your analysis should include a review of the independence of control 

areas from management, the consistency of internal audit procedures across 

geographic lines, and the appropriateness of the scope coverage of the 

internal audit team for the complexity of the enterprise. 

Considering these key elements, examiners should assess the relative strength of the risk management 

processes and controls for each identified function or activity. For the risk assessment, you should 

characterize the relative strength as Strong (1), Satisfactory (2), or Fair (3). 

These definitions are identical to the Risk Management component rating of CORE. You should primarily 

use the risk matrix for risk assessment and supervisory planning. Consequently, anything worse than a Fair 

risk management rating (4 or 5) is not necessary since a Fair rating in this area would prompt a high level 

of response. However, the adequacy of risk management serves as a starting point for assessing the relative 

strength or weakness of the holding company enterprise’s risk mitigation and the overall risk management 

rating of the enterprise. 
Appendix B: Administration Section 200 

 

 

 

200B.10 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Adequacy of Risk Management Definitions 

1 Strong risk 

management 

Management effectively identifies and controls all major enterprise risks. Management is 

fully prepared to address risks emanating from new products and changing market 

conditions. The board and management are forward-looking and active participants in 

managing risk. Management ensures that appropriate policies and limits exist and that the 

board understands, reviews, and approves them. Policies and limits are supported by risk 

monitoring procedures, reports, and management information systems that provide 

management and the board with the information and analysis necessary to make timely 

and appropriate decisions in response to changing conditions. Risk management 

practices and the enterprise’s infrastructure are flexible and highly responsive to changing 

industry practices and current regulatory guidance. Staff has sufficient expertise and 

depth to manage the risks assumed. Internal controls and audit procedures are 

sufficiently comprehensive and appropriate to the size and activities of the holding 

company. There are few noted exceptions to the enterprise's established policies and 

procedures, and none is material. Management effectively and accurately monitors the 

condition of the enterprise consistent with applicable laws, regulations, and guidance, 

and in accordance with internal policies and procedures. Risk management processes are 

fully effective in identifying, monitoring, and controlling risks.

2 

Satisfactory 

risk 

management 

The enterprise’s management of risk is largely effective, but exhibits some minor 

weaknesses. Management and the board demonstrate a responsiveness and ability to 

cope successfully with existing and foreseeable risks in the business plans. While the 

enterprise may have some minor risk management weaknesses, management and the 

board have recognized and are resolving these problems. Overall, board and senior 

management oversight, policies and limits, risk monitoring procedures, reports, and 

management information systems are satisfactory and effective. Risks are controlled and 

do not require additional supervisory attention. The holding company enterprise’s risk 

management practices and infrastructure are satisfactory, and management makes 

appropriate adjustments in response to changing industry practices and current 

regulatory guidance. Staff expertise and depth are generally appropriate to manage the 

risks assumed. Internal controls may display modest weaknesses or deficiencies, but they 

are correctable in the normal course of business. The examiner may have 

recommendations for improvement, but the weaknesses noted should not have a 

significant effect on the condition of the enterprise.

3 Fair risk 

management 

There are moderate deficiencies in risk management practices and, therefore, there is 

cause for additional supervisory attention. One or more of the four elements of sound 

risk management is not acceptable, which precludes the enterprise from fully addressing 

one or more significant risks to its operations. Certain risk management practices need 

improvement to ensure that management and the board are able to identify, monitor, 

and control all significant risks. In addition, the risk management structure may need 

improvement in areas of significant business activity, or staff expertise may not be 

commensurate with the scope and complexity of business activities. Management’s 

response to changing industry practices and regulatory guidance may not be sufficient. 

The internal control system may be lacking in some important aspects, leading to 

continued control exceptions and a failure to adhere to written policies and procedures. 

The risk management weaknesses could have adverse effects if management does not 

take corrective action.
Appendix B: Administration Section 200 

 

The following grid provides guidance on assessing the composite risk of an activity by balancing the 

observed quantity and degree of risk with the perceived strength of related management processes and 

internal controls. The composite risk in these activities is the aggregate inherent risk offset by the aggregate 

quality of risk management. 

Inherent Risks mitigated by Adequacy of Risk Management = Composite (Net) Risk

Composite Risk Assessment 

INHERENT RISK OF THE ACTIVITY Risk Mitigation Low Moderate High 

Weak Low or 

Moderate Moderate or High High 

Acceptable Low Moderate High 

Strong Low Low or Moderate 

Moderate 

or High 

Composite Risk Definitions 

You determine the composite risk for each significant activity by balancing the overall inherent risk of the 

activity with the overall strength of risk management systems for that activity arriving at net risk. 

For example, you may evaluate the investment banking activity of an entity as having a high aggregate level 

of inherent risk arising from a combination of high credit risk, high market risk, and high liquidity risk. 

However, you may rate the net risk for the activity as moderate due to mitigation by a strong aggregate 

quality of risk management resulting from strong operational management, strong internal audit, strong 

risk management, and strong directorate oversight. 

Another example would be commercial real estate loans, which are usually higher risk. However, the 

institution may reduce the probability and magnitude of possible loss by having conservative underwriting 

standards, effective credit administration, strong internal loan review, and a good early warning system. 

Consequently, after accounting for these mitigating factors, the overall risk profile and level of supervisory 

concern associated with commercial real estate loans may be moderate. 

The following grid provides guidance on assessing the composite risk of an activity by balancing the 

observed quantity and degree of risk with the perceived strength of related risk management processes and 

mitigants. 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200B.11 
Appendix B: Administration Section 200 

 

 

 

200B.12 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Composite Risk Definitions 

Low 

You should assign low composite risk to an activity, function, or product that 

has low inherent risks. You may also assess a low composite risk for an 

activity with moderate inherent risk when internal controls and risk 

management systems are strong and effectively mitigate much of the risk. 

Moderate 

You should assign moderate composite risk to an activity, function, or 

product with moderate inherent risk where the risk management systems 

appropriately mitigate the risk. For an activity with low inherent risk, 

significant weaknesses in the risk management system may result in a 

moderate composite risk assessment. Concurrently, a strong risk management 

system may reduce the risks of an inherently high-risk activity so that any 

potential (financial) loss from the activity would have only a moderate negative 

impact on the financial condition of the organization. 

High 

You should assign high composite risk to an activity, function, or product 

when the risk management system does not significantly mitigate the high 

inherent risk of the activity. Thus, the activity could potentially result in a 

(financial) loss that would have a significant negative impact on the enterprise. 

Direction 

In arriving at net risk through the composite exercise, it is important to determine the current direction of 

composite risk. You may assess the direction of risk as decreasing, stable, or increasing over an appropriate 

time horizon for the institution. This indicates risk movement and not changes in the composite rating. In 

determining the appropriate time horizon for each holding company enterprise, examiners should consider 

the enterprise’s business activities, markets, and strategic plans. 

Direction of Risk Definitions 

↓ Decreasing direction indicates the examiner anticipates based on current information that the composite 

risk will decline over the next 12 months. 

↔ Stable direction indicates the examiner anticipates that composite risk will remain unchanged. 

↑ Increasing direction indicates the examiner anticipates that composite risk will be higher 12 months in the 

future. 

Supervisory Sequence Gauge (SSG) 

The SSG provides a general framework to prioritize examination activities according to the level and 

direction of net risk. The matrices and risk assessments are tools that reflect risk and help guide the 

examination and supervision process. They should not impose an inflexible approach to examination 

work. Judgment, current events, and resource availability may lead to examinations or reviews of units that 

the matrices show to be of lower risk before other units that reflect higher risk. However, examiners 

should make those decisions in consideration of what the matrices show, ensuring that they factor the risks 

facing business units into the decisions. 
Appendix B: Administration Section 200 

 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200B.13 

Supervisory Sequence Gauge 

 DIRECTION 

RISK PROFILE (weighted) 

Decreasing 

→

Stable ↕

Increasing 

←

Low/↓ Low/ ↔ Low/ ↑ Low 

Monitor 1 Monitor 1 Target 1 

Moderate/ ↓ Moderate/ ↔ Moderate/ ↑ Moderate 

Monitor 2 Target 1 Target 2 

High/ ↓ High/ ↔ High/ ↑

High 

Target 1 Target 2 Immediate 

Matrix 

Ranking Supervisory Response 

Monitor 1 Lowest priority - annual/high level monitoring annual 

Monitor 2 Low priority - quarterly or annual monitoring / extended target review cycle 

Target 1 Medium priority - regularly scheduled targeted review 

Target 2 High priority - targeted review scheduled for next cycle / monitored quarterly

Immediate Highest priority - targeted review scheduled within current cycle / monitoring

 

rvisory Plan

The supervisory plan should outline the examination team’s supervisory approach, focus on the risk areas 

The supervisory plan merges the results of the risk assessment with the supervisory activities necessary to 

Supe

the risk matrix identifies, and develop a framework for examining and monitoring those risks. 

oversee those risks. It is a high level document that describes the holding company enterprise’s operational 

structure, outlines OTS’s supervisory approach, and tracks examination activities and the activities of 

functional or foreign supervisors. Each developed plan, with attendant supervisory activities (CORE 

reviews, targeted reviews, off-site monitoring, communications), should be robust and should include a 

current and thorough view of the holding company enterprise’s risk and operational profile including risk 

management systems. Furthermore, the consolidated view of the holding company enterprise should 

include applicable supervisory strategies for reviewing information technology, compliance, the federal 

savings bank, material financial services activities (i.e. banking, insurance, asset management, 

securitizations, etc.), and other key operations of the complex holding company enterprise. 
Appendix B: Administration Section 200 

 

 

 

200B.14 Holding Companies Handbook March 2009 Office of Thrift Supervision 

PROCEDURES

The examination team should annually develop the supervisory plan. The supervisory plan should be an 

active document that receives updates as material events, significant acquisitions or dispositions, and 

changes in corporate strategy occur. The examination team should ensure that the plan is current and 

relevant to the holding company enterprise’s risk profile. The plan should address how the examination 

team will review and monitor key risk areas based on the results of the risk assessment or from identified 

concerns in the prior roll-up examination or recent targeted reviews. 

A supervisory plan should include the following key elements: 

• Risk profile of the holding company enterprise; 

• Supervisory strategic goals; 

• Examination objectives; 

• Three-year planning; 

• Communication; and 

• Foreign and domestic relations. 

Risk Profile 

A supervisory plan should summarize the risk profile of the holding company enterprise. The goal of the 

risk profile summary is to express a holistic, risk-focused view of the enterprise and to focus the 

examination on key risk areas. The profile should: 

• Compile the results of the risk assessment including identifying the composite or net risk of the 

holding company enterprise; 

• Describe the enterprise’s inherent risks and the direction of the risks; 

• Identify the significant activities (major functions, business lines, products, or legal entities) that 

could affect the risk profile; 

• Relate composite risk positions and directions to the holding company enterprise’s risk 

management system; 

• Identify the strengths and weaknesses of internal or external audit; 

• Describe the ability of the holding company enterprise to manage risk prospectively. 
Appendix B: Administration Section 200 

 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200B.15 

Supervisory Strategic Goals 

The supervisory plan should outline the strategic goals of supervision for the examination cycle. This 

section should describe the examination team’s proposed activities to monitor and examine the risk profile 

of the holding company enterprise during a one-year time horizon. This section is flexible and should also 

include improvements to administrative processes that facilitate the examination. Examples of strategic 

goals include: 

• Enhancing knowledge of risk management systems or lines of business; 

• Improving communication with specific committees or managers in the enterprise; 

• Implementing systems to achieve greater resource efficiency; 

• Enhancing compliance with objectives and policy guidance; 

• Developing strategic relationships with other supervisors. 

Examination Objectives 

You should formulate examination objectives to achieve the supervisory strategic goals and to prepare the 

examination team to rate the CORE elements for the corresponding supervisory cycle. You should outline 

the examination program and provide a comprehensive listing of examination activities including targeted 

reviews, monitoring activities, CORE analysis, etc. 

Objectives should include: 

• A discussion of the objectives for the current supervisory cycle. 

• An identification of the ongoing holding company enterprise supervisory activities and the targeted 

reviews recommended for the cycle; 

• A brief description of the procedures the examination team will perform including whether 

sampling is indicated or not; 

• A description of the level of reliance and coordination with internal risk management systems, 

internal audit, and external audit; 

• A discussion of how findings of the targeted reviews will factor into the CORE roll-up; 

• A discussion on the reliance and coordination with other functional or foreign supervisors. 

Three-year Planning 

You should develop a broad, three-year, supervisory plan to document recommendations for future 

reviews of key risk areas that the examination team will not perform during the current examination cycle. 

The primary focus of the supervisory plan should remain on the current examination year. However, it is 
Appendix B: Administration Section 200 

 

 

 

200B.16 Holding Companies Handbook March 2009 Office of Thrift Supervision 

important to identify key risk areas you will not review during the current examination cycle and to identify 

how you will prioritize them. The three-year planning portion of the supervisory plan will be a dynamic 

map of activities that should evolve with changes in the risk assessment, the enterprise’s operations, and 

examination findings. The three-year planning process should also contribute to the continuity of the 

examination 

Communication 

The supervisory plan should identify meeting schedules and other communications with key parties in the 

holding company enterprise. It should identify and list key management contacts. The communication plan 

should outline coordination with other functional and relevant supervisors, identify central points of 

contact, and address exit/annual meetings according to OTS policy. Examples of regularly scheduled 

meetings include: 

• Quarterly updates (risk management, internal audit, compliance, etc.) 

• Entry and exit meetings for targeted reviews 

• Annual roll-up meeting with the board of directors 

• Follow-up meetings to discuss outstanding issues/remediation 

• Routine meetings with senior management and business leaders 

Foreign and Domestic Relations 

The supervisory plan should identify key foreign and functional regulators with which the examination 

team plans to coordinate during the examination cycle. It should identify plans for joint examinations, 

supervisors meetings, and sharing examination findings, when applicable. This section should also identify 

plans for communication with foreign or functional supervisors, including meeting schedules, planned 

correspondence, and key contacts. 

Targeted Reviews 

Each targeted review should focus on one significant activity, process, legal entity, or product/business 

line. To conduct a targeted review, you should follow the same administrative process you perform for full 

scope examinations. Specifically, you should: 

• Review available pre-examination materials. 

• Develop a scope document. 

• Develop a work program. 

• Develop a customized Preliminary Examination Response Kit (PERK). 
Appendix B: Administration Section 200 

 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200B.17 

• Schedule and conduct an opening meeting. 

• Develop and upload work papers to support conclusions. 

• Prepare and upload a targeted review report to document your findings. 

• Hold interim and exit meetings with management. 

Targeted reviews are conceptually similar to limited review examinations. Before commencing a targeted 

review, you should open a Type 93 examination (Holding Company Limited) in EDS/ROE. As with a 

regular examination, examiners should allocate all hours and travel expenses dedicated to a targeted review 

to the applicable docket number and examination through the WebTA and Travel Expense Report Filing 

(TERF) systems. 

Throughout the stages of the targeted review, you should maintain open communications with OTS staff 

involved in the supervision of the holding company enterprise. This is particularly important in developing 

the PERK and scope document. You should avoid making duplicative information requests. If you are 

conducting a targeted review that affects the thrift subsidiary, you should communicate with the 

individual(s) responsible for supervising the thrift institution (i.e. regional field and caseload managers). 

You should also invite these individuals to opening briefings and other meetings, including the exit 

conference. It is essential that you communicate all material findings and corrective actions to management 

before you communicate them to holding company management. 

The following sections provide guidance on each step of the targeted review. 

DOCUMENTING THE SCOPE OF A TARGETED REVIEW

Targeted reviews require a written scope document. In the scope, you should identify the specific areas for 

review and outline the objectives you want to achieve in conducting the review. You should include the 

final scope document in the work papers you upload to the EDS/ROE at the conclusion of the targeted 

review. 

Before commencing a targeted review, you should consult with OTS staff involved in monitoring or 

supervising the firm or affiliates of the firm. The scope should consider information from the prior 

examination and reviews of other pertinent documents. The scope document should: 

• Identify the target of the review (business line, legal entity, product, activity, or process). 

• Discuss the risk characteristics of the business line, legal entity, product, activity, or process 

(including inherent risks and risk management practices). 

• Discuss why the review is necessary (i.e. high risk, new product/activity, high growth, strategic 

importance, identified deficiencies). 

• Identify the review objective. The fundamental review objective in most cases is to verify that the 

firm’s risk management processes function according to management’s representations. It is 
Appendix B: Administration Section 200 

 

 

 

200B.18 Holding Companies Handbook March 2009 Office of Thrift Supervision 

important that you understand how the enterprise manages the business line or subsidiary within 

the holding company structure. Through the targeted review, you should gain a clear 

understanding of the operation to assess the reliability of the risk management processes. 

• Outline the review methodology and program steps. 

• Identify review logistics (location, staffing, and timeframes). 

DEVELOPING A WORK PROGRAM

You should develop a work program that describes specific procedures/activities that the examination 

team will perform during the targeted review. In developing the work program, you should review relevant 

risk focused procedures/programs in OTS Handbooks and other guidance. If you intend to conduct 

sampling or transaction testing, describe your objectives. Also, describe how you will leverage off work 

performed by internal audit, external audit, or other functional regulators. 

You should develop program steps to fulfill your targeted review objectives and to ensure you can support 

your conclusions. Some key areas you should include in the program steps include reviewing: 

• Board and senior management oversight. 

• The adequacy of key policies, procedures, controls, and exposure limits. 

• Risk management practices, including monitoring procedures and reporting procedures (Are 

reports provided to management timely, accurate, and appropriately detailed to allow management 

to fulfill its oversight responsibilities?). 

• Internal audit coverage. 

Uniform work programs and procedures are not possible for every targeted review. In many 

circumstances, you will have to develop specific procedures that target a particular risk area. In situations 

where there are no clear procedures or reference points, you should work with other relevant subject 

matter experts to develop appropriate review procedures. 

Developing the PERK 

You should develop a customized PERK or notification letter for the managers of the targeted review 

area. You should coordinate with appropriate office staff to develop a PERK for items you will need from 

the firm to complete the review. You should only request items that are not publicly available and that the 

firm has not already provided during the normal monitoring process. You should not request reports from 

other functional regulators through the company unless the functional supervisor has already agreed to 

such an arrangement. Ensure the PERK includes target dates for delivery of the requested materials. 

OPENING MEETING 

When you submit the PERK to the firm, you should schedule an opening meeting. Schedule the meeting 

to allow the examination team sufficient time to receive and review the PERK information. Attendees at 

the opening meeting should include appropriate firm/business line and risk managers, relevant members 
Appendix B: Administration Section 200 

 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200B.19 

of the onsite team, appropriate subject matter experts, and representatives from senior management as 

appropriate. 

Use the meeting to confirm, modify, or supplement your understanding of the business line, legal entity, 

product, or process, and to pose questions from your review of the PERK. The opening meeting should 

provide you with information to narrow and refine the scope of the targeted review. You should develop 

an agenda or summary memo of the opening meeting to include in the work papers that you upload to the 

EDS/ROE at the conclusion of the targeted review. 

As necessary, you should schedule follow up meetings, request additional information for clarification, or 

request additional materials critical to the review. 

CONDUCTING THE TARGETED REVIEW

Implement the work program. As work progresses, you should modify the work program or the scope of 

the review based on your findings. It is important that you maintain ongoing communication with regional 

management and other subject matter experts. 

WORK PAPERS

You must document the work you perform during the targeted review. The work papers must support the 

conclusions you reach and should include: 

• The scope document 

• The work program and procedures 

• The PERK request 

• Policies, procedures, schedules, or reports that contribute to your conclusions 

• Summaries of meetings 

Before concluding the targeted review, upload all work papers to EDS/ROE and remove them from the 

shared N:\ drive folder. 

HOLDING INTERIM AND EXIT MEETINGS WITH MANAGEMENT

Section 070 of the Examination Handbook contains guidance on conducting meetings with management. 

At a minimum, you should conduct an exit conference at the conclusion of the targeted review. You 

should also hold interim meetings with management when necessary. You should base the list of attendees 

on the nature and seriousness of the findings and recommendations in the report. If the findings and 

recommendations are routine, attendees should include the business line/product/function manager, the 

lead examiner of the targeted review, the examiner in charge, and other appropriate OTS staff. If there are 

material findings, you should include a senior representative from internal audit, appropriate 

senior/executive holding company managers for the firm, and a representative from OTS senior 

management. 
Appendix B: Administration Section 200 

 

 

 

200B.20 Holding Companies Handbook March 2009 Office of Thrift Supervision 

You should provide a final copy of the targeted review report to the firm at the exit meeting. 
Appendix C: Administration Section 200 

 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200C.1 

HOLDING COMPANY

REPORT OF EXAMINATION

entity name 

Street address 

City state 

Structure Number: 

OTS Supervisory Office: 

Type of Examination: 

Examination Start Date: 

Examination Completion Date: 

Prohibition of Disclosure or Release 

This document is the property of the Office of Thrift Supervision. OTS furnishes this document to the holding 

company for its confidential use. Except as provided in 12 C.F.R. Section 510.5, the holding company, its 

directors, officers, or employees may not disclose the report, or any portion of it, to unauthorized persons or 

organizations. Unauthorized persons or organizations include anyone not officially connected with the holding 

company as an officer, director, employee, attorney, auditor, independent auditor, subsidiary institution, or 

affiliated holding company. 

If the holding company receives a subpoena or other legal process calling for production of this document, 

notify the appropriate Supervisory Office immediately. Advise the attorney and, if necessary, the court of the 

above prohibition and refer them to 12 C.F.R. Section 510.5. 
Appendix C: Administration Section 200 

 

Office of Thrift Supervision Examination Date: 

Holding Company Examination S- Number: 

Holding Company Structure 

2 

200C.2 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Name and Address of Holding Companies H Number 

Thrift Subsidiaries (Name, City, State) Region Docket No. 

Other Affiliates Reviewed 
Appendix C: Administration Section 200 

 

3 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200C.3 

Office of Thrift Supervision

Department of the Treasury Institution Region 

entity name 

street address 

city state 

Members of the Board or their Representative: 

Pursuant to Section 10 of the Home Owners’ Loan Act, we performed a risk-focused examination of the 

holding company enterprise that controls ____________. The thrift holding companies and other significant 

affiliates reviewed as part of this examination are listed on the Holding Company Structure page of this report. 

The examination began on August 18, 1989. 

The comments that follow summarize conditions, policies, practices, and trends that affect the risk level of the 

holding company enterprise. All matters of criticism, violations of laws and regulations, and other matters of 

concern identified within this Report of Examination require the Board of Directors’ and management’s timely 

corrective action. 

Information, comments and conclusions contained in this report are based on filings made with the Office of 

Thrift Supervision or other financial regulators, and the books and records of entities in the holding company 

enterprise. OTS prepared this report for supervisory purposes, and you should not consider it an audit report. 

Please review the report in its entirety at your next meeting and note your review in the minutes of that 

meeting. You need not prepare or send OTS a written response to the report. 

Please review the report in its entirety at your next meeting, adopt any corrective actions called for, and note 

your review and actions in the minutes of that meeting. You need not prepare or send OTS a written response 

to the report. 

Please review the report in its entirety at your next meeting. Please send us a certified copy of excerpts from 

your minutes stating that you reviewed the report. Also please advise us of what action you took, or will take, 

regarding each point discussed in the Matters Requiring Board Attention section of this report. In order to 

expedite the processing of the report, please reply within ____ days from the date of this letter. 

If you have any questions, please call me at______________. If I am unavailable, please call __________, at 

____________. 
Appendix C: Administration Section 200 

 

Office of Thrift Supervision Examination Date: 

Holding Company Examination S- Number: 

Signatures of Directors 

4 

200C.4 Holding Companies Handbook March 2009 Office of Thrift Supervision 

We, the undersigned directors of entity name or their representatives, have personally reviewed the contents of 

this report of examination. 

Signature Date 

Note: This form may remain attached to the report of examination and be retained in the holding company’s file for 

review during subsequent examinations or may be sent to the OTS Supervisory Office. 
Appendix C: Administration Section 200 

 

Office of Thrift Supervision Examination Date: 

Holding Company Examination S-Number: 

Table of Contents 

5 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200C.5 

OVERVIEW.........................................................................................................................................................................6

EXAMINATION CONCLUSIONS AND COMMENTS .................................................................................................................6

MATTERS REQUIRING BOARD ATTENTION.........................................................................................................................7

EXAMINER FINDINGS .....................................................................................................................................................8

MAJOR AREAS OF REVIEW.................................................................................................................................................8

FINANCIAL AND OTHER DATA ....................................................................................................................................9

COMPLIANCE WITH ENFORCEMENT ACTIONS.....................................................................................................................9

DIRECTORS, SENIOR EXECUTIVE OFFICERS, AND ATTORNEYS.........................................................................................10

SUMMARY OF HOLDING COMPANY STOCK OWNERSHIP ..................................................................................................11

STATEMENTS OF FINANCIAL CONDITION .........................................................................................................................12

STATEMENTS OF OPERATIONS..........................................................................................................................................13

RECONCILEMENT OF CONSOLIDATED NET WORTH..........................................................................................................14

OUTSTANDING DEBT........................................................................................................................................................15

OUTSTANDING HYBRID SECURITIES.................................................................................................................................16

CASH ANALYSIS...............................................................................................................................................................17

RISK CONCENTRATIONS...................................................................................................................................................19

SIGNIFICANT INTRA-GROUP TRANSACTIONS ...................................................................................................................20

OTHER SUBSIDIARIES’ CONSOLIDATED OR UNCONSOLIDATED STATEMENTS ..................................................................21

MISCELLANEOUS .............................................................................................................................................................23

APPENDIX PAGES .............................................................................................................................................................24

HOLDING COMPANY DEFINITIONS ...................................................................................................................................25
Appendix C: Administration Section 200 

 

Office of Thrift Supervision Examination Date: 

Holding Company Examination S- Number: 

Examination Conclusions and Comments 

6 

200C.6 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Current 

Examination

Previous Examinations a

08/18/1989 

Composite Holding Company Rating 

Component Ratings: 

Capital 

Organizational Structure 

Risk Management 

Earnings/Liquidity 

Current Category Prior Category 

Holding Company Risk/Complexity Category 

/s/ 

 Examiner-in-Charge 

 

a

 For holding company examinations commencing before January 1, 2008, OTS assigned one of the following composite ratings: 

 A – Above Average, S – Satisfactory or U – Unsatisfactory. 
Appendix C: Administration Section 200 

 

Office of Thrift Supervision Examination Date: 

Holding Company Examination S- Number: 

Matters Requiring Board Attention 

7 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200C.7 

The examiner’s review disclosed no matters requiring a written response from the board of directors; however, 

the board is responsible for the adoption and implementation of any corrective actions called for in other 

sections of this report. 

The examiner’s review disclosed the following matters that the board should specifically address in their 

written response to this examination report. The board is also responsible for the adoption and implementation 

of any corrective actions called for in other sections of this report. 

Due Date Required Response

•

•

•

•

•

•

•

•

•

•

•

•
Appendix C: Administration Section 200 

 

Office of Thrift Supervision Examination Date: 

Holding Company Examination S- Number: 

Examiner Findings 

8 

200C.8 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Major Areas of Review 

Capital 

The Capital component reflects the adequacy of an enterprise’s consolidated capital position, from a regulatory 

perspective and an economic capital perspective, as appropriate to the holding company enterprise. Capital 

adequacy is evaluated in terms of the risk inherent in an enterprise’s activities and the ability of capital to 

absorb unanticipated losses, support business activities including the level and composition of the parent 

company and subsidiaries’ debt, and support business plans and strategies. 

Organizational Structure 

The Organizational Structure component assesses the operations and risks in the holding company enterprise. 

Organizational structure is evaluated in relation to lines of business, affiliate relationships, concentrations, 

exposures, and the overall risk inherent in the structure. 

Risk Management 

The Risk Management component assesses board and senior management oversight; policies, procedures, and 

limits; risk monitoring and management information systems; and internal controls. These areas are evaluated 

in the context of inherent risks as related to the size and complexity of the holding company’s operations. 

Earnings/Liquidity

The Earnings component reflects the consolidated holding company enterprise’s overall financial performance, 

including measures such as the quality of consolidated earnings, profitability, and liquidity. Earnings is 

evaluated in terms of the level, trend, and sources of earnings on a consolidated level, as well as for material 

legal entities or business lines, and in terms of the ability of earnings to augment capital and to provide 

ongoing support for an enterprise’s activities. 

This component also assesses the liquidity of the holding company enterprise, including the ability to attract 

and maintain the sources of funds necessary to achieve financial efficiency, support operations, and meet 

obligations. 
Appendix C: Administration Section 200 

 

Office of Thrift Supervision Examination Date: 

Holding Company Examination S- Number: 

Compliance With Enforcement Actions 

9 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200C.9 
Appendix C: Administration Section 200 

 

Office of Thrift Supervision Examination Date: 

Holding Company Examination S- Number: 

Directors, Senior Executive Officers, and Attorneys 

10 

200C.10 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Number of Directors Meetings Held During Past 12 Months: 

Number of Directors Authorized: 

Number of Vacancies: 

Percent of 

Name Title No. of Shares No. of Shares Total 

Occupation Year Appt. Under Option Owned Outstanding

 

 
Appendix C: Administration Section 200 

 

Office of Thrift Supervision Examination Date: 

Holding Company Examination S- Number: 

Summary of Holding Company Stock Ownership 

11 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200C.11 

Stock Ownership No. of Shares 

Under Option 

No. of Shares 

Owned 

Percent of Total 

Outstanding 

 Affiliated Entities (including employee stock ownership plans) 

Total 

Others Owning 5% or More of Outstanding Shares 

Total 

Total Shares Authorized: 

Total Shares Outstanding: 

Par Value: $ 

Market Value (as of____________): $ 
Appendix C: Administration Section 200 

 

Office of Thrift Supervision Examination Date: 

Holding Company Examination S- Number: 

Statements of Financial Condition 

12 

200C.12 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Statement of Financial Condition Current 

Year-to-Date 

Most Recent 

Fiscal Year 

Ended 

Prior 

Fiscal 

Year Ended 

(000s) mm/dd/yyyy mm/dd/yyyy mm/dd/yyyy 

Assets 

$ $ $ 

Total Assets 

Liabilities and Net Worth 

$ $ $ 

Total Liabilities and Net Worth 
Appendix C: Administration Section 200 

 

Office of Thrift Supervision Examination Date: 

Holding Company Examination S- Number: 

Statements of Operations 

13 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200C.13 

Comparative Statement of Operations Current 

Year-to-Date 

Most Recent 

Fiscal Year 

Ended 

Prior 

Fiscal Year 

Ended 

 (000s) mm/dd/yyyy mm/dd/yyyy mm/dd/yyyy 

Income 

$ $ $ 

Total Income 

Expenses 

$ $ $ 

Total Expenses 

Net Income 
Appendix C: Administration Section 200 

 

Office of Thrift Supervision Examination Date: 

Holding Company Examination S- Number: 

Reconcilement of Consolidated Net Worth 

14 

200C.14 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Net Worth Reconciliation Capital Retained Paid-in Total 

(000s) Stock Earnings Surplus Net Worth 

Balance at Beginning of Fiscal Year: $ $ $ $ 

Additions: 

 

Total Additions $ $ $ $ 

Deductions: 

$ $ $ $ 

 

 

Total Deductions $ $ $ $ 

Balance at Close of Fiscal Year: $ $ $ $ 
Appendix C: Administration Section 200 

 

Office of Thrift Supervision Examination Date: 

Holding Company Examination S- Number: 

Outstanding Debt 

15 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200C.15 

Outstanding or Committed Debt 

Date of Borrowing: Maturity Date: 

Name of Lender: Original Amount: 

Amount Outstanding: Interest Rate: 

Rating: Rating Agency: 

Type of Debt: 

Purpose: 

Other Terms: 

Covenants or Restrictions: 
Appendix C: Administration Section 200 

 

Office of Thrift Supervision Examination Date: 

Holding Company Examination S- Number: 

Outstanding Hybrid Securities 

16 

200C.16 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Outstanding Hybrid Securities 

Date of Issuance: Maturity Date: 

Public Offering or Private Placement: 

Amount of Issuance: Callable Date: 

Rating: Rating Agency: 

Rating: Rating Agency: 

Type of Security: 

Purpose: 

Other Terms: 

Covenants or Restrictions: 
Appendix C: Administration Section 200 

 

Office of Thrift Supervision Examination Date: 

Holding Company Examination S- Number: 

Cash Analysis 

17 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200C.17 

Cash Analysis Fiscal Year Ended Fiscal Year Ended 

(000s) mm/dd/yyyy mm/dd/yyyy 

Internal Funding Sources 

Income 

Dividends from subsidiaries $ $ 

Interest from subsidiaries 

Management and service fees 

Other operating cash income 

Total Operating Cash Income 

Expenses 

Interest Paid $ $ 

Lease and rental 

Salary and employee benefits 

Other operating cash expenses 

Total Operating Cash Expenses 

Before Tax Cash Income 

Taxes 

 Income tax payments from: 

 Thrifts $ $ 

 Other Affiliates 

 Less: Income tax payments 

Net Income Tax 

After-Tax Cash Income 
Appendix C: Administration Section 200 

 

Office of Thrift Supervision Examination Date: 

Holding Company Examination S- Number: 

Cash Analysis (continued) 

 

200C.18 Holding Companies Handbook March 2009 Office of Thrift Supervision 

18

Cash Analysis Fiscal Year Ended Fiscal Year Ended 

(000s) mm/dd/yyyy mm/dd/yyyy 

External Sources 

Issuance of stock $ $ 

Net increase in borrowed funds 

Advances to subsidiaries repaid: 

 Thrifts 

 Other Affiliates 

Sale of assets 

Total External Sources 

External Uses 

Net decrease in borrowed funds $ $ 

Dividend payments 

Equity investment in subsidiaries: 

 Thrifts 

 Other Affiliates 

Advances to subsidiaries: 

 Thrifts 

 Other Affiliates 

 Purchase of assets 

Total External Uses 

Net External Position (External Sources less External Uses) 

Net Change In Cash Position 

 (After-tax cash income plus net external cash position) 

Cash Balance Beginning 

Cash Balance Ending 
Appendix C: Administration Section 200 

 

Office of Thrift Supervision Examination Date: 

Holding Company Examination S- Number: 

Risk Concentrations 

19 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200C.19 
Appendix C: Administration Section 200 

 

Office of Thrift Supervision Examination Date: 

Holding Company Examination S- Number: 

Significant Intra-Group Transactions 

20 

200C.20 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Transaction 

Description and Date 

Affiliate Paying or 

Guaranteeing Funds 

Affiliate Receiving Funds or 

Guarantee 
Appendix C: Administration Section 200 

 

Office of Thrift Supervision Examination Date: 

Holding Company Examination S- Number: 

Other Subsidiaries’ Consolidated or Unconsolidated Statements 

21 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200C.21 

Statement of Financial Condition 

[Name of Subsidiary] 

Fiscal Year 

Ended 

Fiscal Year 

Ended 

Fiscal Year 

Ended 

(000s) mm/dd/yyyy mm/dd/yyyy mm/dd/yyyy 

Assets 

$ $ $ 

Total Assets 

Liabilities and Net Worth 

$ $ $ 

Total Liabilities and Net Worth 
Appendix C: Administration Section 200 

 

Office of Thrift Supervision Examination Date: 

Holding Company Examination S- Number: 

Other Subsidiaries’ Consolidated or Unconsolidated Statements (continued) 

 

200C.22 Holding Companies Handbook March 2009 Office of Thrift Supervision 

22

Statement of Operations 

[Name of Subsidiary] 

Fiscal Year 

Ended 

Fiscal Year 

Ended 

Fiscal Year 

Ended 

(000s) mm/dd/yyyy mm/dd/yyyy mm/dd/yyyy 

Income 

$ $ $ 

Total Income 

Expenses 

$ $ $ 

Total Expenses 

Net Income 
Appendix C: Administration Section 200 

 

Office of Thrift Supervision Examination Date: 

Holding Company Examination S- Number: 

Miscellaneous 

23 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200C.23 
Appendix C: Administration Section 200 

 

Office of Thrift Supervision Examination Date: 

Holding Company Examination S- Number: 

24 

200C.24 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Appendix Pages 
Appendix C: Administration Section 200 

 

Office of Thrift Supervision Examination Date: 

Holding Company Examination S- Number: 

Holding Company Definitions 

25 

Office of Thrift Supervision March 2009 Holding Companies Handbook 200C.25 

Holding Company Rating Definitions 

Upon completion of the examination, the holding company enterprise is rated by the OTS. The holding company rating 

reflects the overall condition of the holding company enterprise. 

The five holding company ratings are defined as follows: 

Composite 1. A holding company enterprise in this group is sound in almost every respect and generally has components 

rated 1 or 2. Any weaknesses are minor, and the board of directors and management can correct them in the normal 

course of business. The enterprise is able to withstand economic, financial, and risk exposure changes because of an 

effective organizational structure, solid risk management practices, more than sufficient capital and strong earnings. Cash 

flow is more than sufficient and adequately services debt and other obligations. This holding company enterprise exhibits 

strong performance and risk management practices relative to its size, complexity, and risk profile. 

Composite 2. A holding company enterprise in this group is fundamentally sound but may have modest weaknesses. The 

board of directors and management are capable and willing to correct any weaknesses. Generally, no component rating 

should be more severe than 3 for this holding company enterprise. The organizational structure, risk management 

practices, capital and earnings create stability, and this holding company enterprise is capable of withstanding business 

fluctuations. Cash flow is adequate to service obligations. Overall, risk management practices are satisfactory relative to 

the enterprise’s size, complexity, and risk profile. 

Composite 3. A holding company enterprise in this group raises some degree of supervisory concern in one or more of the 

component areas, with weaknesses that range from moderate to severe. The magnitude of the deficiencies is generally 

not severe enough to rate a component more severely than 4. Management may lack the ability or willingness to 

effectively address weaknesses within appropriate time frames. The holding company enterprise’s capital structure and 

earnings leave it less resistant to adverse business conditions. The effectiveness of the organizational structure and risk 

management practices may be less than satisfactory relative to the enterprise’s size, complexity, and risk profile. 

However, there is only a remote threat to the holding company enterprise’s continued viability. 

Composite 4. A holding company enterprise in this group has serious financial or managerial deficiencies that result in 

unsatisfactory performance. The supervisory concerns, which management and the board are not satisfactorily 

addressing, range from severe to critically deficient. A holding company enterprise in this group generally does not have 

sufficient capital and earnings to withstand adverse business fluctuations. The effectiveness of the organizational structure 

and risk management practices are generally unacceptable relative to the enterprise’s size, complexity, and risk profile. 

The enterprise may place undue pressure on subsidiaries to meet its cash flow by upstreaming imprudent dividends or 

fees. Unless there is prompt action to correct these conditions, future viability could be impaired. 

Composite 5. The magnitude and character of the risk management or financial weaknesses of a holding company 

enterprise in this category could lead to insolvency without immediate aid from shareholders or supervisory action. The 

volume and severity of problems are beyond the board and management’s ability or willingness to control or correct. The 

effectiveness of the organizational structure and risk management practices are inadequate relative to the enterprise’s 

size, complexity, and risk profile. The inability to prevent liquidity or capital depletion places the holding company 

enterprise’s continued viability in serious doubt. 
Appendix C: Administration Section 200 

 

Office of Thrift Supervision Examination Date: 

Holding Company Examination S- Number: 

Holding Company Definitions (continued) 

 

200C.26 Holding Companies Handbook March 2009 Office of Thrift Supervision 

26

Holding Company Risk/Complexity Category Definitions 

The three holding company risk/complexity categories are defined as follows: 

Category I 

This category holding company is viewed as noncomplex and having relatively low risk. 

Category II 

This category holding company is considered to have a complex structure and/or a higher risk. 

Category III 

This category holding company is one of the most complex or highest risk holding companies. It is made up of a number 

of different companies or legal enterprises that offer products from more than one financial sector. 
Capital Section 300 

Introduction 

Capital serves many purposes, and the level and composition of capital a company holds is an important measure of its overall financial health, as well as the health of its subsidiaries. Holding companies 

must ensure that they have sufficient capital to support their underlying risks. Capital provides a holding company with a buffer in times of poor operating performance, maintains public confidence in the 

holding company, and supports growth. Raising capital for the enterprise often takes place at the holding company level. An efficient capital structure is one that combines the appropriate mix of equity and 

debt to fund an enterprise’s strategic plan and enhance financial performance without unduly burdening 

subsidiaries, particularly the thrift. Hybrid instruments add one more option to the capital funding mix. 

A hybrid instrument is generally a security that has both equity and debt characteristics.1

The scope and complexity of banking and other financial services, particularly the array of financial 

products, makes it important to evaluate capital based on a company’s overall risk 

profile. High capital ratios alone do not indicate capital adequacy, especially when 

an organization is involved in risky activities or capital arbitrage techniques. Organizations use internal processes to assess risks and to ensure that capital, 

liquidity, and other financial resources are sufficient in relation to their risk profile. The sophistication 

and level of detail of a holding company’s capital management techniques varies based on the complexity and size of the enterprise. You should request the holding company’s support and analysis for its 

capital management strategies in the pre-examination response kit or during the course of the examination. 

OTS-regulated holding companies should have a 

prudential level of capital to support their risk 

profile. OTS does not impose consolidated or 

unconsolidated regulatory capital requirements on 

thrift holding companies. As a result, examiners must 

consider all aspects of an organization’s risk profile to determine if capital is adequate on a case-by-case 

basis. In the capital component you will review: 

L INKS

 Appendix A 

OTS-regulated holding companies 

should have a prudential level of 

capital to support their risk profile. 

• The level of debt/hybrid instruments and the ability of the holding company to service its obligations. 

• The quality and quantity of capital using several different measures as well as the availability of 

capital and the ability of the holding company to raise new capital if needed. 

• The holding company’s dividend practices. 

 

1 Appendix A provides an overview of hybrid capital instruments. 

Office of Thrift Supervision March 2009 Holding Companies Handbook 300.1 
Section 300 Capital 

300.2 Holding Companies Handbook March 2009 Office of Thrift Supervision 

CAPITAL SUFFICIENCY/RISK ANALYSIS 

Assessing the Overall Risk Profile 

The need to assess overall risk is inherent in each component of the holding company examination. 

This process starts by completing the Risk Classification Checklist in the Administrative Program, Section 710. The examination team then refines and updates this preliminary risk assessment as its 

understanding of the holding company evolves during the examination. Many of the conclusions that 

you will make in addressing the capital strength of a holding company will be dependent on findings in 

other examination components. For example, the following questions help assess the overall risk profile 

of a holding company’s capital structure. In many cases, you will need to review other sections of this 

handbook to properly address them: 

Organizational Structure Issues 

• What is the nature and level of risk associated with the holding company’s activities? 

• Is the volume or term of intra-group transactions cause for regulatory concern? 

• Are levels of exposures or concentrations acceptable? 

Risk Management Issues 

• Does management effectively identify and control major risks? 

• Are internal controls and audit procedures reliable? 

• Are board and senior management oversight, policies and limits, risk monitoring procedures, 

reports and management information systems effective? 

Earnings Issues 

• Is the overall financial condition of the holding company deteriorating, stable, or improving? 

• Does the holding company have sufficient earnings to support dividends? 

Other Capital Related Issues 

• Do the holding company and other affiliates have off-balance sheet contracts or activities (with 

explicit or implied recourse) that result in a higher degree of risk exposure than is apparent from 

the balance sheet? 

• Are there any terms, conditions, or covenants in the holding company’s or other affiliate’s securitization documents or securities prospectuses that could trigger early amortization, the transfer 

of servicing, or other events? 
Capital Section 300 

Office of Thrift Supervision March 2009 Holding Companies Handbook 300.3 

• How does the holding company capital level compare to its peers? 

• How do ratings and other industry analysts perceive the holding company? 

• Has the holding company issued equity securities with terms that could adversely affect its ability to raise capital by issuing additional shares? 

EVALUATING DEBT AND HYBRID INSTRUMENTS

Financial leverage is the use of debt to supplement the equity in a company’s capital and funding structure. Debt includes borrowings with specific terms and excludes deposits and transactional liabilities. 

To analyze the holding company’s overall use of leverage, you should also include trust preferred securities or similar hybrid instruments that possess both debt and equity characteristics. 

From the perspective of management and stockholders, debt/hybrid instruments can represent a favorable financial tool as the owners only need to provide a small portion of the total financing, and the 

lenders will bear much of the financial risk. This allows the existing owners to maintain control with a 

limited investment at stake and, assuming the proceeds are reinvested at a positive spread, the earnings 

generated will increase the overall Return on Equity (ROE). Some companies use debt/hybrid instruments for the acquisition of other entities. 

Although the judicious use of leverage is a favorable financial management technique, you should be 

alert to the following pitfalls: 

• Leverage may pressure management to produce short-term revenues to service obligations resulting in greater risk taking. 

• Highly leveraged firms are more susceptible to losses during economic downturns in the general 

economy or in specific industries. These losses compound because declining financial condition 

increases borrowing costs. As debt or hybrid securities mature, the company must renew them, 

often at higher interest rates. 

• The use of leverage reduces management’s flexibility in making future decisions; lenders may 

impose the following types of covenants that could adversely affect the thrift: 

⎯ Limits on future issues; 

⎯ Provisions to accelerate repayment in certain circumstances; 

⎯ Limits on dividend payments; or 

⎯ Specific constraints on operating ratios. 
Section 300 Capital 

300.4 Holding Companies Handbook March 2009 Office of Thrift Supervision 

You must assess the role of leverage within the consolidated holding company operations/financial 

structure. You should also assess the actual and potential affect such leverage may have on its operations, or on the operations of the thrift. Implicit in such analysis, you need to identify the extent the 

holding company utilizes debt or hybrid instruments to capitalize/fund the thrift’s operations, and the 

degree to which the parent relies upon the thrift to provide cash flow to service obligations resulting 

from debt or hybrid issuances. 

Holding company boards of directors should develop prudent capital management plans before undertaking financing activities in the marketplace. Otherwise, they may be implementing a funding strategy 

that creates financial burdens. You should 

review the way the holding company deploys the 

proceeds of such financings and services such 

obligations. You will also need to determine if 

the holding company is overextended given its 

financial characteristics. 

Holding company boards of directors 

should develop prudent capital management plans before undertaking 

financing activities in the marketplace. 

You should consider the following questions: 

• What is the ratio of holding company debt as a percentage of tangible capital?2

• What is the ratio of holding company hybrid instruments as a percentage of tangible capital? 

• Is the level of debt/hybrid instruments rising? 

• What investments or activities do the debt/hybrid instruments fund? 

• What effect could the terms, conditions, or covenants have? 

• What is the maturity schedule for debt or hybrid instruments’ effect on liquidity? 

• What is the level of interest expense? 

• Is interest expense a significant percentage of recurring income? 

• What is the primary source of funds to pay interest or principal payments? 

• If the holding company will repay debt/hybrid instruments with an additional issuance, or the 

interest rate on the instrument is adjustable, what is the interest rate risk? 

• What ratings on its debt or hybrid securities has the holding company received from nationally 

recognized credit organizations? 

There are several ratios that you may use to assess these factors. 

 

2 Tangible Capital = Capital minus intangible assets. 
Capital Section 300 

Office of Thrift Supervision March 2009 Holding Companies Handbook 300.5 

Calculate the parent company leverage by looking at the debt to capital ratio. Include trust preferred or 

other hybrid instruments in the numerator with long-term debt: 

Debt to Capital Ratio = Long-Term Debt

 Tangible Capital 

A holding company with a low debt to capital ratio will generally have greater access to the capital markets. 

There are no “bright line” thresholds for categorizing highly leveraged operations, and the company’s 

earnings power primarily dictates the acceptable level of long-term obligations. Accordingly, you should 

focus your review on the ability of the company to generate cash flow to meet its fixed debt service. 

The higher the debt ratio, the more attention you should focus on holding company cash flow needs 

and earnings power. You should be sensitive to long- and short-term trends and management’s plans 

for using leverage. 

You should also compute the total debt to equity ratio on a book and market value basis including trust 

preferred securities or other hybrid instruments with total debt in the numerator. 

Total Debt to Equity Ratio at Book Value = Total Debt at Book Value

 Equity at Book Value 

Total Debt to Equity Ratio at Market Value = Total Debt at Book Value

 Equity at Market Value 

If the market value of equity is higher than the book value, the market value ratio will be lower than the 

book value ratio. This indicates a favorable market perception and the ability to raise capital at an attractive price. However, if the market value of equity is lower than the book value, the market value 

ratio will exceed the book value ratio, indicating the market will only provide capital at a discount to 

book value. 

Note: For holding companies with significant nonthrift operations, the ratio of debt to total assets may 

be more meaningful. This would be especially true for holding companies involved in industries with a 

high percentage of fixed assets. (Such debt should be long-term to match the maturity of the assets acquired.) Ratios over ten percent may require follow-up. You should also compare the ratios to the 

holding company’s peers. 

Another important step in analyzing parent company leverage is calculating the debt leverage ratio. Include trust preferred securities along with long-term debt in the numerator and denominator. 

Debt Leverage Ratio = Long-Term Debt

Long-Term Debt plus Capital 

A lower ratio signifies less exposure to loss when the company’s performance is poor, but also a lower 

return on equity when performance is good. 
Section 300 Capital 

300.6 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Simple versus Double Leverage

The parent company may advance the proceeds of long-term debt or hybrid instruments to the thrift as 

debt or equity. Simple leverage exists when the holding company advances the proceeds as debt. Such 

debt should have repayment terms matching those of the holding company, and the thrift should service it from its current earnings. Double leverage exists when the holding company invests funds it 

obtains from debt or hybrid instrument proceeds into the thrift subsidiary as equity. Increasing the 

capital base of the thrift allows the thrift to increase its borrowings, thereby compounding the original 

holding company debt and resulting in higher consolidated leverage. In this situation, thrift revenues 

must be sufficient to service both levels of debt because typically the parent will rely upon dividends 

from the thrift subsidiary to fund its debt service requirements.3 This can generate substantial pressure 

on the thrift to maintain its earnings to support future dividend payments, thereby increasing the temptation for the thrift to engage in higher risk operations. 

Within complex operations, double leverage will not always be evident, as holding companies may not 

directly allocate parent level debt/hybrid instruments to provide equity in the thrift. You can use the 

double leverage ratio as a proxy to identify the role of double leverage: 

Double Leverage Ratio = Thrift $ Equity

Holding Company $ Equity 

Higher ratios or a trend of increasing ratios can indicate the existence or growth of double leverage in 

the holding company/thrift relationship. A ratio of 100 percent indicates that there is no double leverage in the organization, while a ratio of 125 percent indicates that the thrift derived 20 percent of its 

equity capital from sources other than parent equity investments. You should review the impact of 

double leverage on both the holding company and the thrift. 

You should also identify when nonthrift subsidiaries of highly leveraged holding companies experience 

operating problems. Even when the holding company does not advance debt/hybrid instrument proceeds to the thrift, the parent may rely on the thrift for cash flow. This can result in the parent imposing 

a more aggressive or high risk operating philosophy upon the thrift to generate near term earnings to 

support higher dividends, management fees, or tax sharing payments. 

If you determine that any further leveraging of the holding company poses a risk to the stability of the 

holding company or the thrift, you must immediately advise the Regional Director. It may be appropriate to require the holding company to provide specific information on its capital planning and 

allocation process or notice before incurring, renewing, or rolling over any debt or hybrid securities 

with debt-like characteristics. Such action may be most appropriate for holding companies: 

• Whose subsidiary thrift institution has a composite CAMELS rating of 3, 4, or 5; 

• That have a holding company composite rating of 3, 4, or 5; or 

 

3 Capital distributions must be within the limits prescribed by 12 CFR 563, Subpart E (563.140 – 563.146). 
Capital Section 300 

Office of Thrift Supervision March 2009 Holding Companies Handbook 300.7 

• That would cause supervisory concern by issuing additional debt. 

QUALITY AND AVAILABILITY OF CAPITAL 

Capital provides a secondary source of financial protection for the holding company if operating capacity is insufficient. A holding company that has capital does not necessarily have sufficient cash flow to 

meet contractual obligations when they are due. Capital can provide cash only if the holding company 

can sell selected assets, use the capital to secure new debt, or issue new equity. A particular capital position can be a function of a company’s accounting practices, and you should not view capital as a proxy 

of a company’s financial health. Accounting standards are often assumption driven and aggressive accounting assumptions can overstate the value of assets and shield a company’s true capital position. 

OTS typically considers three capital measures in determining thrift holding company capital sufficiency: 

GAAP Equity 

Before you can calculate any relevant quantitative capital measures, you must determine the GAAP total 

equity of the holding company. GAAP total equity represents the aggregate of holding company equity, 

including all subsidiaries, after the elimination of intercompany items. The holding company must 

compute total equity in accordance with GAAP, or some other approved regulatory accounting for 

functionally or foreign regulated affiliates. For functionally or foreign regulated affiliates, determine if 

there are any agreements or conditions imposed that would require the holding company to devote financial resources (including capital contributions) to that entity. If such agreements or conditions exist, 

determine what effect they could ultimately have on other subsidiaries in the enterprise, including the 

subsidiary thrift. 

Holding companies report GAAP equity on their financial statements in accordance with generally accepted accounting principles (GAAP). OTS does not adjust this number, which companies often 

express as a percentage of consolidated total assets. You must review GAAP equity relative to risk to 

accurately assess a holding company’s capital adequacy. 

Tangible Capital 

Tangible capital is a more conservative measure than GAAP equity. You derive tangible capital by deducting intangible assets from GAAP equity. In banking organizations, mortgage servicing rights are 

often the largest intangible asset. You may express tangible capital as a percentage of tangible assets 

(consolidated total assets minus intangible assets). 

Proxy Regulatory Measure 

Banking regulators may impose regulatory capital levels that rely on additions or deductions from 

GAAP equity. Other functional or foreign regulators may also impose regulatory capital measures that 

rely on adjusting a common capital calculation to meet regulatory requirements. This measure becomes 
Section 300 Capital 

300.8 Holding Companies Handbook March 2009 Office of Thrift Supervision 

less helpful for diversified holding companies that engage in financial and commercial activity, which 

have a much different balance sheet than monoline financial companies. Nevertheless, such an analysis 

can lead to important findings. OTS considers regulatory conventions, including the thrift and the bank 

holding company regulatory capital framework, when appropriate for its assessment of the holding 

company’s financial condition. 

Although savings and loan holding companies (SLHCs) are not subject to an explicit uniform minimum 

regulatory capital requirement, if a thrift holding company’s activities are mostly banking-related, OTS 

performs a proxy regulatory capital calculation. Calculating a regulatory proxy facilitates comparison 

with bank holding company peers. OTS calculates the capital level by including or deducting certain 

balance sheet items to create an approximation of a Tier 1 core capital calculation. You should calculate 

a proxy using the formula below: 

Proxy Formula

Tier 1

Proxy 

Numerator Calculation

HC630 Consolidated HC Total Equity 

HC620 Plus Minority Interests4 (see discussion below on restricted elements) 

HC670 Plus Trust Preferred Instruments (see discussion below on restricted elements) 

HC655 Minus Intangible Assets (Nonmortgage Servicing Assets and Others) 

Denominator Calculation

HC600 Consolidated Total Assets 

HC655 Minus Intangible Assets (Nonmortgage Servicing Assets and Others) 

There are a few points to note with regard to the proxy calculation: 

Nonfinancial equity investments. The proxy calculation does not deduct nonfinancial equity investments to recognize the difference in the scope of permissible activities for SLHCs. Depending on 

the risk and amount of nonfinancial investments, you may choose to exclude all or a portion of nonfinancial equity investments. 

 

4 On December 4, 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (FAS 

160). As a result, the noncontrolling interest (minority interest) will be reclassified from a liability or “mezzanine” item to equity, and reported in the consolidated statement of financial position within equity, separately from the parent’s equity. FAS 160 will become 

effective for most entities with a calendar year-end on January 1, 2009. The proxy formula will be modified accordingly once this change 

in GAAP is implemented. 
Capital Section 300 

Office of Thrift Supervision March 2009 Holding Companies Handbook 300.9 

Restricted elements – Noncummulative perpetual preferred stock (including trust preferred securities and other hybrid investments) and minority interest. In the proxy 

calculation you should limit the amount of these investments to 25% of the tier 1 proxy capital amount 

(15% for large internationally active holding companies5). This limit should also include all minority interest except that related to qualifying common or noncumulative perpetual preferred stock directly 

issued by a consolidated U.S. depository institution or foreign bank subsidiary. 

Reaching a Conclusion on Capital Sufficiency 

You must assess capital sufficiency on qualitative and quantitative factors. To determine whether the 

holding company’s capital is sufficient, you should answer several questions: 

• How do the different measures of capital compare and do they highlight any particular weakness? 

• To what extent does the holding company rely on trust preferred securities or other hybrid equity securities as a source of financing? Did you include such securities as restricted elements in 

the regulatory proxy calculation? Is the amount of restricted elements approaching 25 percent 

of the regulatory proxy calculation? If you did not compute a regulatory proxy measure, you 

should closely scrutinize any holding company that has trust preferred securities, or similar hybrid instruments with both debt and equity characteristics, that approach 25 percent of the 

holding company’s tangible capital. 

• Does the holding company have a high proportion of assets that a thrift would be unable to 

count as capital? 

• Does the holding company have the ability to raise new equity capital or generate capital internally, through earnings other than from the thrift? 

• Has the holding company’s capital position deteriorated since the last examination, and if so, 

why? 

• Have significant asset/liability restructurings, acquisitions, or divestitures occurred? 

 

5 An internationally active holding company is defined as one that has 1) total consolidated assets equal to $250 Billion or more or 2) on a 

consolidated basis reports total on-balance-sheet foreign exposure of $10 Billion or more. The 15% limit increases to 25% for trust preferred securities that mandatorily convert into an equity instrument within a short period. 
Section 300 Capital 

300.10 Holding Companies Handbook March 2009 Office of Thrift Supervision 

As you review capital, there are some positive factors that enhance capital protection. These include: 

• Strong management that has a record of superior capital management; 

• Sound asset quality; and 

• A history of strong, consistent, and recurring operating earnings and cash flow. 

Similarly, potential adverse factors that detract from the holding company’s capital condition include: 

• Demonstrably weak or ineffective management; 

• Poor asset quality; 

• A history of weak earnings or reliance on nonrecurring earnings; 

• Low liquidity, high interest rate risk exposure, or high foreign exchange exposure; 

• Significant levels of off-balance sheet activities, including asset securitization activities, which 

can result in the retention of substantial recourse; 

• Reliance on wholesale and short-term funding sources, or a significant amount of longer-term 

debt that will mature soon; 

• Engaging in higher risk activities, unless adequately hedged and well-managed; 

• Internal inability to generate sufficient capital because asset growth exceeds sustainable equity 

capital formation; 

• No, or limited, access to capital markets; and 

• Excessive capital distributions paid to, or the divestiture of subsidiaries to, stockholders. 

DIVIDENDS

Dividends are the primary way that organizations provide return to shareholders on their investment. 

During profitable periods, dividends represent a return of a portion of an organization’s net earnings to 

its shareholders. During less profitable periods, dividend rates are often reduced or sometimes eliminated. The payment of cash dividends that are not fully covered by earnings, in effect, represents the 

return of a portion of an organization’s capital at a time when circumstances may indicate instead the 

need to strengthen capital and concentrate financial resources on resolving the organization’s problems. 
Capital Section 300 

Office of Thrift Supervision March 2009 Holding Companies Handbook 300.11 

The dividend practices of the holding company may affect the financial position of its thrift and other 

subsidiaries. Dividend policy influences the sustainable growth rate of any organization based on its effect on retained internal capital. 

You should determine if the holding company’s dividend payout and prospective rate of earnings retention are consistent with its capital needs, asset quality, growth, cash flow, and overall financial 

condition. You may calculate the dividend payout ratios for the parent and any holding company subsidiaries. 

Dividend Payout Ratio = Dividends Paid

 Net Income 

The holding company’s dividend payout ratio should be reasonable and consistent with its existing 

business plan. You should compare the dividend payout ratio, net income, and asset growth of each 

significant affiliate of the holding company. When analyzing holding company dividends the following 

guidance applies: 

• Sustainable core earnings should suffice to pay the dividend over the long term. 

• There should be adequate liquid assets on hand to make dividend payments. 

• Generally, a holding company and its thrift should avoid borrowing funds for stock repurchases, or to provide for the payment of dividends to shareholders of the holding company. 

(Management may propose this when it wants to avoid the negative market reaction that may 

result if it cuts the dividend. Similarly, the company may need borrowing if its cash flows are 

seasonal, such as a retailer heavily dependent on holiday sales.) 

• Neither the holding company nor the thrift should have to sell assets to provide funds for the 

payment of dividends to the holding company’s shareholders. 

• The prospective rate of earnings retention should be consistent with the organization’s capital 

needs, asset quality, and overall financial condition. Dividends should not be paid if there is a 

reasonable expectation that the capital will be needed to support the subsidiary thrift or to cover 

losses, deteriorating asset quality, or downturns in the economy. 

The inability to sustain or increase stockholders’ dividends may demonstrate holding company weaknesses. Often, the suspension of dividends results from a shortage of liquidity. Even the perception of 

the holding company running low on cash can lead to repercussions for its subsidiaries. When the thrift 

subsidiary’s public identity links to the holding company, a crisis or loss of confidence in the holding 

company could adversely affect the subsidiary regardless of its financial stability. For example, consumers not familiar with the distinction between the thrift and its parent may withdraw deposits if there 

is the perception that the holding company is running out of cash. To avoid loss of market confidence, 

a thrift may face pressure to provide extra support to a holding company or affiliate to avoid a crisis. 
Section 300 Capital 

300.12 Holding Companies Handbook March 2009 Office of Thrift Supervision 

CAPITAL MANAGEMENT AND OVERSIGHT 

Strong capital management is a positive qualitative factor affecting the adequacy of capital. Managers 

and directors should anticipate capital needs and maintain adequate capitalization. Holding company 

management should develop a capital management plan if the holding company’s ratios are low or fluctuating relative to others with similar risk profiles in its industry. A good plan outlines management’s 

specific strategies to reach its established goals. 

Most financial organizations consider several factors in evaluating capital adequacy. These include: 

• Peer comparison of capital ratios; 

• Risk concentrations in credit and other activities; 

• Current and desired credit-agency ratings; and 

• Historical experiences, including severe adverse events. 

Many holding companies and other financial organizations use stress testing and scenario analysis as 

tools to estimate unexpected losses. This helps organizations project the performance of their assets 

under conservative “stress test” scenarios. Stress testing can estimate the portfolio exposure to deteriorating economic, market, and business conditions. It also allows management to input different 

assumptions and thereby foresee potential consequences. 

Holding companies should demonstrate sound capital and risk management. One method of demonstrating this is to meet an objective measure of financial health, such as a target public-agency debt 

rating or a statistically measured maximum probability of becoming insolvent over a given time horizon. This latter method is the foundation of the Basel Framework’s treatment of capital requirements 

for market and foreign-exchange risk. Risk assessment must address all relevant risks including credit 

risk, market risk, liquidity risk, interest rate risk, operational risk, legal risk, and others. 

You should criticize a holding company without adequate procedures to estimate and document the 

level of capital necessary to support its activities. 

You should interview holding company management to identify its plans for ensuring a safe cushion of 

capital. During your conversations, you also should emphasize that the holding company’s level of capital is a major consideration in the overall examination rating. Specifically, you should inquire whether it 

plans: 

• New debt issues or sales of equity; 

• Additional capital contributions; 

• Loans, transfers, or distributions of holding company assets within the holding company structure; or 
Capital Section 300 

Office of Thrift Supervision March 2009 Holding Companies Handbook 300.13 

• Acquisitions. 

RATING THE CAPITAL COMPONENT 

To properly assess risk at the holding company, you must consider the thrift subsidiary, the nonbank 

subsidiaries, the parent only and the consolidated entity. You should consider capital on a consolidated 

basis because holding company management has some discretion for the allocation of capital within the 

organization. It may also be useful to consider capital after deducting thrift capital. For holding companies with functionally regulated subsidiaries, you should also analyze capital after deducting capital held 

within such functionally regulated subsidiaries. 

Evaluate capital sufficiency, on a case-by-case basis, considering among other things, the holding company’s documented analysis of the capital it needs to support its activities. Capital levels should be risk 

sensitive. 

Further, all the holding company examination components are integral to the overall examination process. For example, your findings about earnings will have an impact on your conclusions about capital 

adequacy. 

The capital rating reflects the adequacy of an enterprise’s consolidated capital position, from a regulatory perspective and an economic capital perspective, as appropriate to the holding company enterprise. 

During your review of capital adequacy, you should consider the risk inherent in an enterprise’s activities and the ability of capital to absorb unanticipated losses, to provide a base for growth, and to 

support the level and composition of the parent company and subsidiaries’ debt. The capital rating is 

based on the following rating definitions: 

• Capital Rating 1. A rating of 1 indicates that the consolidated holding company enterprise 

maintains a more than sufficient amount of capital to support the volume and risk characteristics of its business lines and products; to provide a significant cushion to absorb unanticipated 

losses; and to fully support the level and composition of borrowing. In addition, the enterprise 

has more than sufficient capital to support its business plans and strategies, it has the ability to 

enter capital markets to raise additional capital as necessary, and it has a strong capital allocation 

and planning process. 

• Capital Rating 2. A rating of 2 indicates that the consolidated holding company enterprise 

maintains sufficient capital to support the volume and risk characteristics of its business lines 

and products; to provide a sufficient cushion to absorb unanticipated losses; and to support the 

level and composition of borrowing. In addition, the enterprise has sufficient capital to support 

its business plans and strategies, it has the ability to enter capital markets to raise additional 

capital when necessary, and it has a satisfactory capital allocation and planning process. 

• Capital Rating 3. A rating of 3 indicates that the consolidated holding company enterprise may 

not maintain sufficient capital to support the volume and risk characteristics of certain business 

lines and products; the unanticipated losses arising from the activities; or the level and composi-
Section 300 Capital 

300.14 Holding Companies Handbook March 2009 Office of Thrift Supervision 

tion of borrowing. In addition, the enterprise may not maintain a sufficient capital position to 

support its business plans and strategies, it may not have the ability to enter into capital markets 

to raise additional capital as necessary, or it may not have a sufficient capital allocation and 

planning process. The capital position of the consolidated holding company enterprise could 

quickly become insufficient if there is deterioration in operations. 

• Capital Rating 4. A rating of 4 indicates that the capital level of the consolidated holding 

company enterprise is significantly below the amount needed to ensure support for the volume 

and risk characteristics of certain business lines and products; the unanticipated losses arising 

from activities; and the level and composition of borrowing. In addition, the weaknesses in the 

capital position prevent the enterprise from supporting its business plans and strategies, it may 

not have the ability to enter into capital markets to raise additional capital as necessary, or it has 

a weak capital allocation or planning process. 

• Capital Rating 5. A rating of 5 indicates that the level of capital of the consolidated holding 

company enterprise is critically deficient. Immediate assistance from shareholders or other external sources of financial support is required. 

SUMMARY

The capital sufficiency of a holding company is a critical factor in the regulation of thrift holding companies. You must consider the: 

• Necessary capital based on the risk exposure of each holding company and nonbank subsidiary 

activity; 

• Relationship between debt, hybrid instruments, and capital; 

• Existence of long-term debt in the capital structure; 

• Extent and use of debt at the parent to fund capital investments of subsidiaries; 

• Trend of capital in comparison to peer groups; 

• Ability of management to devise capital plans for capital deficiencies or planned expansions; 

• Ability to access the capital markets; 

• Extent of concentration in any one asset or type of asset, including intangibles, interest only 

(I/O) strips, illiquid assets, and deferred tax assets; and 

• Extent of off-balance sheet exposure. 

 
Appendix A: Capital Section 300 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 300A.1 

HYBRID INSTRUMENTS

Hybrid capital instruments have characteristics of both common stock and unsecured debt. They resemble 

debt because they generally pay a fixed or floating interest rate, coupon, or dividend. At the same time, 

these securities are deeply subordinated, often have long maturities, and may be similar to common equity 

in their ability to absorb losses. Banking organizations in the United States rely on hybrid capital 

instruments and other innovative instruments for capital funding. Sources of hybrid capital funding are 

continually evolving. These sources of funding, especially if double leveraged,1 can increase an institution’s 

risk profile by generating substantial pressure to maintain earnings to support dividend payments. An 

institution’s over-reliance on double leverage will trigger increased supervisory scrutiny. 

Advantages to issuers for considering hybrid instruments include a lower cost of capital, tax deductibility, 

regulatory and rating agency equity credit recognition, and diversity in funding source. However, the 

overuse of hybrid instruments could lead to increased levels of risk that warrant management’s close 

attention. Risks may include increased leverage, a thinner capital base for the consolidated organization 

(including both the savings association and its holding company), increased interest rate risk, and increased 

funding and liquidity risks. 

During the thrift and holding company examinations, as well as through ongoing supervisory monitoring, 

OTS will review capital levels and the ability to service debt both individually and on a consolidated basis. 

While hybrid capital instruments can help banking organizations manage their capital structure, OTS 

expects parent-infused Tier 1 capital to derive predominantly from voting common stock or retained 

earnings of its parent. In addition, OTS considers the following features as guiding principles when 

evaluating hybrid instruments: loss absorption ability, permanence of the instrument, ability to suspend 

dividend payments, and certainty in cost of funding. 

Some of the more familiar types of hybrid capital instruments include trust preferred securities (TPS) and 

asset-driven securities, particularly real estate investment trust (REIT) preferred securities. There are also 

innovative hybrid instruments such as mandatory convertible preferred securities and enhanced trust 

preferred securities that have resulted from regulatory and rating agency changes. 

Trust Preferred Securities 

Trust preferred securities are non-perpetual cumulative preferred securities. In most cases, the holding 

company establishes a special purpose entity (SPE), usually in the form of a trust, to issue the securities. 

The SPE issues preferred securities to outside investors. With the proceeds, the SPE purchases an 

equivalent amount of junior subordinated debentures with stated maturities from the holding company. 

The subordinated note, which is senior only to a holding company’s common and preferred stock, has 

terms that generally mirror those of trust preferred securities, except that the subordinated note often has 

a fixed maturity of at least 30 years. 

Generally, the terms of the trust preferred securities allow the trust to defer dividends for at least a twentyconsecutive-quarter period without creating an event of default or acceleration. If the trust fails to pay the 

 

1 For a source of capital, savings associations sometimes rely on debt the holding company issues. Double leverage exists when a holding 

company invests funds it obtains from debt proceeds into the savings association as equity. Increasing the capital base allows the savings 

association to increase its borrowings as well, thereby compounding the original holding company debt resulting in higher consolidated 

leverage. 
Appendix A: Capital Section 300 

 

300A.2 Holding Companies Handbook March 2009 Office of Thrift Supervision 

cumulative dividend after this period, default occurs, and the principal and interest on the note becomes 

immediately due and payable. Dividends paid on trust preferred securities are a tax deductible interest 

expense thus representing a key advantage for holding companies. 

Pooled issuances of trust preferred securities typically involve thirty or more separate holding company 

issuers and have made the issuance of trust preferred securities possible for small holding companies, most 

of which did not previously have this form of capital market access. 

Real Estate Investment Trust (REIT) Preferred Securities 

Subordinate organizations of the savings association often issue REIT preferred securities. A thriftcontrolled REIT issues noncumulative perpetual preferred securities into the market and uses the proceeds 

to buy mortgages and mortgage-backed securities from its majority common shareholder, its parent 

institution. A SPE must qualify under federal tax laws to be a REIT. The two main qualifications for a 

REIT are that it must (a) hold predominantly real estate assets and (b) annually pay out a substantial 

portion of its income to investors. The benefit of qualifying as a REIT is that its income is not subject to 

an entity-level tax. Rather, taxation occurs at the investor level. 

In a typical structure where the thrift controls a REIT, the REIT subsidiary preferred securities, in general, 

could qualify for inclusion in Tier 1 capital as minority interests in a consolidated subsidiary subject to 

certain prudential standards. The terms and conditions include but are not limited to a capital limitation 

and a convertibility provision. Preferred securities may constitute no more than 25 percent of a savings 

association’s Tier 1 capital. In addition, the convertibility provision allows the thrift to exchange 

noncumulative REIT preferred securities directly for issued noncumulative perpetual preferred securities 

of the parent institution upon the occurrence of certain events, such as the institution becoming 

undercapitalized, going into receivership, or at the direction of the regulator. 

Enhanced Trust Preferred Securities 

Enhanced trust preferred securities have more equity characteristics than traditional trust preferred 

securities and receive equity credit from credit-rating agencies. Revised rating agency guidelines that allow 

partial equity credit treatment of these securities has driven the growth of enhanced trust preferred 

securities. Enhanced trust preferred securities differ from traditional trust preferred securities in several 

ways: 

• A longer maturity of 60-80 years versus 30 years; 

• A longer deferral period of ten years versus five years; 

• Inclusion of replacement capital covenant (similar hybrid security needs to be issued to replace an 

existing hybrid in the event of redemption); and 

• Alternative payment mechanism (permits issuer to settle omitted coupon payments in cash via the 

market issuance of securities, or by giving the hybrid holder equity-like securities). 
Appendix A: Capital Section 300 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 300A.3 

Mandatory convertible preferred securities 

Mandatory convertible preferred securities involve the joint issuance by a holding company to investors of 

trust preferred securities and a forward purchase contract. The forward contract obligates the investors to 

purchase a fixed amount of the holding company’s common stock, generally in three to five years. 
THIS PAGE INTENTIONALLY LEFT BLANK 
Organizational Structure Section 400 

Office of Thrift Supervision March 2009 Holding Companies Handbook 400.1 

Introduction 

In the Organizational Structure component of the holding company examination, you will assess the 

operations and risks in the holding company enterprise. You will consider the enterprise’s corporate 

structure, its lines of business, affiliate relationships, concentrations, exposures, and the overall risk inherent in the structure. Your analysis should consider existing as well as prospective issues and risks. In 

this section it is important that you identify material shifts or changes in organizational structure and 

the reasons for the changes, including plans for future structural changes. 

Every holding company enterprise has a unique structure with different risks and issues. These risks 

change from enterprise to enterprise and over time within a given holding company enterprise. This 

section highlights several types of holding company structures. It is important to review and understand 

each structure. This section also provides an overview of control thresholds to help determine if there 

have been changes in the ownership structure, and, if so, what regulatory processes apply. In addition, it 

outlines the framework for determining the activities in which a holding company may engage. There is a correlation between the holding company structure 

and its permitted activities. 

The review of organizational structure will vary based on the size and complexity 

of the holding company. The review will be simple for noncomplex holding 

companies. In most of those cases, you can apply your analysis of the risks at the thrift to the holding 

company review with limited additional analysis. For more complex holding companies and financial 

conglomerates, you should conduct a more detailed assessment of the holding company’s level and type 

of risk exposure. You should evaluate the following risk types, as applicable: 

L INKS

 Appendix A 

 Appendix B 

 Appendix C 

• Credit/Asset 

• Market 

• Liquidity 

• Operational 

• Legal/Compliance 

• Reputation 

• Country/Sovereign 
Organizational Structure Section 400 

400.2 Holding Companies Handbook March 2009 Office of Thrift Supervision 

• Contagion/Systemic 

• Concentration 

• Intra-group transactions 

• Pricing and Underwriting 

• Reserving 

• Strategic/Execution 

You will identify the inherent risks in the holding company enterprise and assess the level of risk. In determining the level of risk, you should consider risk concentrations and exposures throughout the 

company to accurately assess the risk of the enterprise. In the Risk Management section, you will assess 

how effectively the holding company identifies, manages, monitors, and controls the risks that you 

identify in this section. 

In conducting the holding company examination, you also should determine how the thrift institution 

fits in the overall corporate structure. You should consider whether there are elements of the holding 

company structure, or business interests of the holding company enterprise, that hold potential risks for 

the thrift. For example, a holding company or one of its affiliates may be using the thrift to hold lowquality or high-risk assets or as a vehicle for conducting risky activities. You should discuss your findings from the holding company examination with the savings association’s caseload manager and/or 

examination team. 

You should review material intra-group transactions and identify concerns or weaknesses. You should 

also consider the materiality of specific companies or lines of business, including the thrift, to the holding company enterprise and its controlling shareholders. Use your discretion in determining materiality. 

You should base your analysis on a combination of financial, risk exposure, and strategic business planning information. If a line of business is immaterial to the holding company or controlling shareholders, 

there may be less incentive for them to ensure the viability of its operation or to provide financial support. On the other hand, the holding company may want to avoid reputation risk by doing whatever is 

necessary to address problems. The holding company may divert resources to the troubled affiliate to 

protect the company’s reputation. 

STRUCTURE

A savings and loan holding company is any company that directly or indirectly controls a savings association. This ownership interest can result in several forms of organization. In their most basic form, 

holding companies are either unitary or multiple. The majority of thrift holding companies are unitary. 

• A unitary holding company controls one thrift. 
Organizational Structure Section 400 

Office of Thrift Supervision March 2009 Holding Companies Handbook 400.3 

• A multiple holding company controls more than one thrift. 

Many times a holding company is noncomplex and its sole purpose is ownership of a thrift. These 

companies have the following characteristics: 

• Low or insignificant amounts of debt; 

• Minimal activities, other than holding the stock in the thrift; and 

• Low risk, highly liquid investments. 

OTS designates thrift holding companies as diversified or nondiversified. This distinction is based on 

the business interests of the company. The majority of OTS-regulated holding companies are nondiversified.1 

• A diversified holding company’s thrift and related activities2 represent less than 50 percent of 

the company’s consolidated net worth and consolidated earnings. 

• A nondiversified holding company does not meet those thresholds, and banking or related 

businesses are its principal operations. 

You may also encounter other types of holding companies that own thrifts including a mutual holding 

company (MHC), a HOLA 10(l) holding company, and a bank or financial holding company. 

An MHC structure combines the elements of a mutual thrift, which is owned/controlled by its depositors (or borrowers), with elements of a stock thrift. In a MHC, the depositors (and borrowers, if 

applicable) own/control the mutual holding company, which in turn holds a majority of the voting 

stock of its subsidiary thrift. The remainder of the thrift stock can be sold to outside investors to raise 

capital. Some MHCs have mid-tier stock holding companies. Handbook Section 920 contains specific 

examination issues for mutual holding companies. 

Section 10(l) of the Home Owners’ Loan Act (HOLA) established HOLA 10(l) holding companies by 

allowing state savings banks and cooperative banks that are not OTS-regulated to elect to be treated as 

savings associations for purposes of regulating their holding company. Without such an election, the 

Board of Governors of the Federal Reserve (Federal Reserve) would regulate these holding companies 

as bank holding companies. In order to qualify as a HOLA 10(l) holding company, the subsidiary bank 

must be a qualified thrift lender. These structures present novel examination concerns because OTS 

regulates the holding company, but not the subsidiary financial institution. Handbook Section 910 contains specific examination issues for this population of holding companies. 

 

1 A holding company must claim its diversified status. To claim this status, it has to demonstrate that it meets the above percentages. Historically, diversified holding companies were exempt from certain regulatory requirements. The most notable exception dealt with debt 

notices. Today, few regulatory distinctions remain. The management interlock regulations contain one exemption that still exists for diversified holding companies.

2 12 CFR 584.2(b), 584.2-1 and 584.2-2 define related activities.
Organizational Structure Section 400 

400.4 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Bank or financial holding companies can control a thrift as well as a bank. In structures where a thrift is 

controlled by a bank or financial holding company, the Federal Reserve is the primary regulator of the 

holding company because of its bank ownership. OTS is the primary regulator of the thrift itself, but 

does not regulate the holding company. OTS will coordinate and provide relevant information to the 

Federal Reserve regarding material concerns that arise at a thrift subsidiary of a bank or financial holding company. 

The holding company examination encompasses a review of the entire holding company enterprise. 

Structure is one of the first indicators of how to review a holding company enterprise from an examination perspective. Understanding the structure is essential to make an effective assessment of the holding 

company. There is a substantial difference in approach between a low risk, noncomplex holding company compared to a complex, diversified holding company that is involved in multiple nonbanking 

businesses. Understanding the structure also makes it easier to focus attention on the entities that are 

material and pose potential risk to the enterprise or its affiliates, including the subsidiary thrift. 

ACQUISITIONS AND CONTROL

The issue of control is significant in the regulatory process since it determines who has the power over 

management, policies, and the direction of the thrift or holding company.3 It is also important to be 

aware of potential acquirers of control. There are specific statutory and regulatory requirements that 

apply to companies that directly or indirectly control a thrift. OTS must grant approval before any 

company can acquire control of a thrift. You must understand the control thresholds and presumptions 

in order to recognize situations where a controlling party has not properly identified itself, and, therefore, has not received the requisite approvals from OTS. 

Persons or entities exercising control have widely diverse interests. In most cases, those interests are to 

oversee and reasonably benefit from the success of the entire organization. However, there may be parties that abuse their control relationship. You need to identify control issues and be alert for evidence of 

corporate abuse. You must be particularly watchful for indications that the thrift is the target of abuse 

for the benefit of other corporate interests. Similarly, you should identify situations where the thrift is 

not material to the interests of the holding company or its controlling shareholders and lacks support or 

oversight. 

Control of a thrift or holding company can take multiple forms and sometimes is not obvious. Some 

simple facts about control include: 

• Control can be direct or indirect. 

• Control can occur by persons or entities acting in concert to influence the thrift or holding 

company. 

 

3

 Direct or indirect control of a thrift by the same person or group of persons that control a foreign bank raises unique supervisory concerns. For a better understanding of the characteristics and potential risks associated with such parallel-owned banking organizations, see 

the Joint Agency Statement on Parallel-Owned Banking Organizations included as Appendix 400A.
Organizational Structure Section 400 

Office of Thrift Supervision March 2009 Holding Companies Handbook 400.5 

• Control can occur by means other than stock ownership. 

Control of a thrift or holding company is often straightforward based on stock ownership or the ability 

to control the stock. The parties involved ordinarily acknowledge control and undertake the proper application or notification process with OTS. However, there are also situations where the question of 

control is less clear. You should identify and monitor these situations to be aware of possible control issues which have not been acknowledged, and which OTS has not reviewed. 

Control may arise due to changes beyond the new controlling entity’s or person’s actions. For example, 

if a holding company or thrift repurchases stock on a non pro rata basis, the repurchase will raise the 

percentage of ownership of the remaining shareholders. Someone who once owned only nine percent 

of voting stock may own 11 percent after the stock repurchase. There may also be proportional ownership shifts as a result of corporate changes such as mergers with, or purchase of, another thrift or 

holding company. Further, beneficial ownership interests that carry the right to acquire stock through, 

for example, exercisable options, may result in control. 

The regulations covering acquisition and control issues are at 12 CFR Part 574. Determinations of control can be complex, and OTS may have to draw conclusions outside the scope of the examination. 

However, it is important that you are aware of the significant elements of control to identify and make 

preliminary assessments of potential control issues. 

Conclusive Control 

Conclusive control is where an acquirer, either person or entity, owns or controls more than 25 percent 

of the voting stock of a thrift or holding company. This can arise from outright ownership, holding irrevocable proxies, or a combination of both. In addition, if a person or company exercises a controlling 

influence over the management or policies of the entity, including controlling the election of a majority 

of directors, then the acquirer has conclusive control. An acquirer can also have conclusive control if it 

is a general partner or trustee of the entity, or has contributed more than 25 percent of the capital of a 

holding company. 

Rebuttable Control 

Rebuttable control occurs when a person or entity does not have conclusive control, but there are 

combined circumstances present that suggest that a controlling influence exists. These circumstances 

generally involve holding ten percent or more of the voting stock or 25 percent or more of any class of 

stock, together with a control factor. Section 574.4(c) of the regulation outlines possible control factors. 

For example, an acquirer might have between 10 and 25 percent of the voting stock of the thrift, but be 

one of the two largest holders of any class of voting stock. Rebuttable control may also arise through 

holdings of revocable proxies, under Section 574.4(b)(2). 

Prior to acquiring the stock, or triggering any other element that gives rise to the rebuttable control issue, the acquirer must: 

• Acknowledge its intent to control and obtain the appropriate approvals; or 
Organizational Structure Section 400 

400.6 Holding Companies Handbook March 2009 Office of Thrift Supervision 

• Successfully rebut control. 

In the latter case, OTS must accept the rebuttal before the acquirer consummates the transaction. The 

ability to rebut control enables passive investors who do not intend to control or influence the thrift or 

holding company to have a sizeable investment without undergoing the scrutiny of an acquisition filing. 

However, if OTS does not accept the rebuttal, the acquirer would have to proceed with an application 

or notice to OTS in the normal course of acquisition. 

Acting in Concert 

In assessing control issues, there is the possibility that persons or entities may be acting in concert to 

secure control. Acting in concert is a process whereby persons or entities exercise conclusive or rebuttable control by acting collectively. Section 574.4(d) sets forth several rebuttable presumptions of 

concerted action. Parties may rebut a presumption of concerted action by filing a submission supporting their contention that no concerted action exists. OTS may accept a rebuttal that meets applicable 

standards under Section 574.4, including showing by clear and convincing evidence that concerted action does not exist. Even where concerted action presumptions do not apply, OTS may consider parties 

to act in concert under the general definition at 574.2(c). 

Other Control-related Filings 

In addition to rebuttals of control and concerted actions, there are multiple other filings related to control. The Applications Processing Handbook contains application forms and detailed filing instructions 

for holding companies and ownership control.4 If you identify a control situation where an entity or 

individual has not filed an appropriate application or notice, you should review the exemptions set forth 

at 12 CFR 574.3(c) and (d), before citing a violation or seeking corrective action. There are a few instances where OTS does not require approval or notice or allows them after the acquisition. One 

example is where control results from a pledge or hypothecation of stock to secure a loan. 

Companies seeking to acquire control of a thrift or thrift holding company must file one of several 

holding company acquisition filings. OTS refers to them as H-(e) applications. When an individual 

seeks to acquire control, the acquirer must file a Change-in-Control notice. Section 574.6 sets forth the 

procedural requirements and outlines the appropriate type of application or notice for each acquirer. 

OTS requires these processes whether control is conclusive or, in a rebuttable scenario, where the acquirer does not dispute control or OTS has not accepted a prior rebuttal submission. 

Individuals or companies that acquire ten percent or more ownership of any class of stock, but do not 

trigger the rebuttable or conclusive control thresholds, must file a certification of ownership. 12 CFR 

574.5 specifies the required language of the certification. 

 

4 The Application Processing Handbook is available on the OTS website at www.ots.treas.gov. 
Organizational Structure Section 400 

Office of Thrift Supervision March 2009 Holding Companies Handbook 400.7 

PERMISSIBLE ACTIVITIES 

Once you have a clear understanding of the holding company structure, including identifying all controlling parties and affiliates, you can analyze the holding company’s activities. The permissible activities 

of a holding company are dependent on many factors. Some holding companies operate without any 

activities limitations, while others are subject to activities restrictions. Even when activity restrictions 

apply, there are a significant number of permissible, banking-related businesses. Therefore, it is important that you review what activities the holding company enterprise conducts and what risks they 

present. 

To determine whether activity restrictions apply, you must consider the following factors: 

• Holding company type – unitary or multiple; 

• Whether the holding company came into existence or filed an application to become a savings 

and loan holding company prior to May 4, 1999; and 

• Whether the subsidiary thrift(s) have Qualified Thrift Lender (QTL) status. 

The following table summarizes the factors that determine permissible activities. The discussion that 

follows explains the terminology used. 

Type of 

HC 

+ 

HC in 

Existence or Filed 

Application by 5/4/1999 

+ 

QTL 

Status 

= 

Activity 

Limitations 

Unitary Yes Yes No 

Unitary Yes No Yes 

Unitary No Yes or No Yes 

Multiple5 Yes Yes Yes or No 

Multiple Yes No Yes 

Multiple No Yes or No Yes 

Type of Holding Company 

Beyond the basic definition of a multiple holding company, if an insider of the holding company controls another thrift, then special treatment will apply. Specifically, if an individual meeting certain criteria 

controls more than one savings association (directly or indirectly), OTS will treat any holding company 

 

5 For a multiple holding company to have no activity limitations, all or all but one of the subsidiary thrifts must have been acquired as part 

of a supervisory acquisition. 
Organizational Structure Section 400 

400.8 Holding Companies Handbook March 2009 Office of Thrift Supervision 

controlled by that individual as a multiple holding company in determining whether activity restrictions 

apply. The individuals that this provision applies to are: 

• Directors or officers of a holding company, or 

• Individuals who own, control, or hold with the power to vote (including proxies) more than 25 

percent of the voting shares of the holding company. 

The significance of being a unitary or multiple holding company is that multiple holding companies 

must acquire all, or all but one, of their thrifts as part of a supervisory acquisition to be free from activity restrictions. This requirement applies in addition to the qualified thrift lender status and the date of 

acquisition/application. To qualify as a supervisory acquisition, the holding company must invoke provisions of Sections 13(c), 13(i), or 13(k) of the Federal Deposit Insurance Act or the former Section 

408(m) of the National Housing Act. 

In addition to whether the holding company is unitary or multiple, you must also consider whether it is 

a mutual holding company. As discussed in Section 920, all mutual holding companies are subject to activities restrictions. 

Date of Acquisition or Application 

The Gramm-Leach-Bliley Act (GLBA) of 1999, restricted the creation of new thrift holding companies 

that engage in commercial or other nonfinancial activities. GLBA grandfathered most holding companies in existence at the time. Specifically, those holding companies that were in existence or had filed an 

application on or before May 4, 1999, to acquire a thrift, can operate without activity restriction if: 

• The holding company continues to hold at least one thrift (or its successor) that it controlled on 

May 4, 1999, or that it acquired under an application pending with OTS on or before that date; 

and 

• The subsidiary thrift(s) have QTL status.

Qualified Thrift Lender Status 

To operate without activity restrictions, all of the holding company’s subsidiary thrifts must be qualified 

thrift lenders. This means that the thrift must satisfy the: 

• OTS QTL Test; or 

• Internal Revenue Service tax code Domestic Building and Loan Association (DBLA) test. 

To be a QTL under the OTS test, the thrift must maintain qualifying thrift investments equal to or exceeding 65 percent of portfolio assets for nine out of every 12 months. Initially, these investments were 

predominantly mortgage loans and mortgage-related securities. However, 1996 legislation liberalized the 
Organizational Structure Section 400 

Office of Thrift Supervision March 2009 Holding Companies Handbook 400.9 

definition to include small business loans, education loans, and credit card loans. This allowed a thrift to 

expand its consumer portfolios without the consequence of losing QTL status. 

To be a QTL under the DBLA test (IRS regulation 20 CFR Section 301.7701-13A), a thrift must meet a 

“business operations test” and a “60 percent assets test.” 

If the subsidiary thrift fails to maintain its QTL status, the holding company’s activities are restricted. 

Further, it must discontinue any nonpermissible business, although OTS may grant a grace period up to 

two years for good cause. Nonetheless, any company that controls a thrift that does not have QTL 

status must register as a bank holding company within one year of the thrift’s failure to meet the QTL 

test. 

Permissible Activities 

If activities restrictions apply, you must determine whether the activities the holding company or other 

affiliates conduct are permissible. The following activities are permissible for all holding companies: 

• Furnishing or performing management services for its thrift subsidiary; 

• Conducting an insurance agency or an escrow business; 

• Holding, managing, or liquidating assets owned by, or acquired from, its thrift subsidiary; 

• Holding or managing properties used or occupied by its thrift subsidiary; 

• Acting as trustee under deed of trust; 

• Any activity that the Board of Governors of the Federal Reserve System (Federal Reserve) has 

permitted for financial holding companies under Section 4(k) of the Bank Holding Company 

Act (as outlined in 12 CFR 225.86 or 225.88 and 225.89); 

• Any activity that the Federal Reserve permits for financial holding companies with foreign operations under Section 4(c) of the Bank Holding Company Act; and 

• Any activity that multiple savings and loan holding companies were authorized (by regulation) 

to engage in directly on March 5, 1987.6 

Appendix 400B contains a summary list of permissible activities for Savings and Loan Holding Companies. 

 

6 These activities are outlined in 12 CFR 584.2-1 (including, for example, investment in various lending transactions, furnishing various 

services to affiliates, and acquiring improved and unimproved real estate). 
Organizational Structure Section 400 

400.10 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Prohibited Acts and Acquisitions 

Evasion of Laws and Regulations 

Despite the broad range of activities in which thrift holding companies may engage, there is a general 

prohibition regarding evasion of laws and regulations. Section 584.2(a) prohibits a holding company 

from engaging in any activity or rendering any service with the purpose of evading any law or regulation 

that applies to the thrift. You must exercise judgment in deciding when a thrift holding company is 

evading a law or regulation. Often, a company structures its operations to take full advantage of the 

flexibility that the holding company and its subsidiaries possess without intending to evade laws or 

regulations. You must assess the holding company’s purpose and intent, as well as the effect on the 

thrift, when making your determinations. 

Multi-State Multiple Holding Companies 

Section 574.3(e) generally prohibits the formation of an interstate multiple thrift holding company. 

Unless the acquisition meets certain criteria, this applies to any acquisition that would result in a holding 

company that controls thrifts in more than one state where the thrifts were not previously affiliated. 

Nonaffiliated Ownership 

Section 584.4 generally prohibits the acquisition of voting stock of nonaffiliated thrifts or thrift holding 

companies. Specifically, unless several exceptions apply, no thrift holding company may acquire more 

than five percent of the voting stock of a thrift or thrift holding company that is not a subsidiary, except with prior written OTS approval. Nor can any multiple thrift holding company acquire more than 

five percent of the voting stock of any company that is not a subsidiary unless that company is engaged 

in permissible activities. 

Management Interlocks 

The Depository Institution Management Interlock Act7 and the OTS’s management interlocks regulation8, promote competition by generally prohibiting a management official from serving simultaneously 

with two unaffiliated depository institutions or their holding companies when the management interlock may have an anticompetitive effect. The scope of the prohibition depends on the size and the 

location of the organizations. For example, there is generally a prohibition on management interlocks if 

the unaffiliated depository organizations, or any of their affiliates, have offices in the same community. 

Management officials also cannot serve two unaffiliated depository organizations with offices or a depository institution affiliate in the same Relevant Metropolitan Statistical Area (RMSA) if both 

institutions have assets of $50 million or more. A management official of a depository organization (or 

any depository institution affiliate) with assets over $2.5 billion may not serve as a management official 

at an unaffiliated depository organization (or any depository institution affiliate) with assets over $1.5 

billion. 

 

7

 See 12 USC Sections 3201-3208. 

8 See 12 CFR 563f. 
Organizational Structure Section 400 

Office of Thrift Supervision March 2009 Holding Companies Handbook 400.11 

If management interlocks exist, you need to determine if the interlock is a permitted interlocking relationship as noted in 12 CFR Section 563f.4. If not, the institution or its holding company may apply for 

OTS to provide a general exemption or to determine eligibility for a small market exemption. OTS may 

grant an exemption if the official’s dual service does not result in a monopoly, a substantial lessening of 

competition, or threaten safety and soundness. The small market share exemption allows interlocks for 

depository organizations (and affiliates) that in aggregate hold no more than 20 percent of the deposits 

in each common RMSA or community, provided that the interlock does not violate the major asset 

prohibition noted above (12 CFR 563f.5). The depository organization does not need to apply to OTS 

for the small market exemption, but the institution must maintain records supporting its eligibility for 

the small market exemption and reconfirm such determination annually. 

Management must institute corrective action if it did not obtain a required prior approval. You can detect the existence of management interlocks through interviews, reviewing minutes, contacting other 

agencies, or reviewing other public records (i.e. Lexis/Nexis or Westlaw). 

Prohibited Service 

Section 19(e) of the Federal Deposit Insurance Act (FDIA) places prohibitions on any person with a 

conviction for any criminal offense involving dishonesty, breach of trust, or money laundering or who 

has agreed to enter into a pretrial diversion or similar program in connection with a prosecution for 

such an offense. Those individuals may not become, or continue as, an institution-affiliated party of an 

insured depository institution; own or control, directly or indirectly, any insured depository institution; 

or otherwise participate, directly or indirectly, in the conduct of the affairs of any insured depository institution. The Financial Services Regulatory Relief Act of 2006 expanded the prohibited service outlined 

in FDIA to include savings and loan holding companies. 

In your review, you should assess the ownership structure of the holding company to determine 

whether there are any prohibited individuals. OTS regulation 12 CFR part 585 outlines the prohibitions. 

Part 585 also provides limited exceptions for certain employees. If you identify prohibited individuals, 

you should assess whether they applied to OTS for an exemption. The Director of OTS may also approve case-by-case exemptions. 

You should consider the results of your review of prohibited service when you review corporate governance and the composition of the board of directors and senior management in the Risk Management 

section of the Holding Company Handbook. 

Other Prohibited Acts 

Section 584.9 outlines other prohibitions regarding control of mutual thrifts. 

Risk Assessment 

Holding companies’ activities are diverse and expose the companies to a spectrum of risk. Assessing the 

inherent risks of the holding company enterprise is an essential element of the Organizational Structure 

review. For a complex holding company enterprise, you should identify material operations, legal enti-
Organizational Structure Section 400 

400.12 Holding Companies Handbook March 2009 Office of Thrift Supervision 

ties, and business lines. Once you understand the holding company’s structure, ownership and control 

issues, and permissible activities, you can complete your analysis of the risk of that structure and activities. 

You should identify and assess the risk exposures 

within material entities and across company lines. The 

risks these activities create can range from minor to 

significant and from permissible to inappropriate. Different entities within the enterprise might have 

exposure to the same or similar risk factors, or to unrelated risk factors that may interact under stressful 

scenarios. Increased risk taking in holding company investments or businesses can be detrimental to the 

holding company as well as its subsidiaries and affiliates. 

You should identify and assess the 

risk exposures within material 

entities and across company lines. 

The examination should review the current and prospective businesses and investments of the holding 

company enterprise and assess the level of risk. You should identify and assess any material acquisitions, dispositions, or other structural or strategic changes. You should also review whether the holding 

company’s risks are similar to its peers and whether investments and other assets are typical for the 

business or more speculative. You should consider how these risks affect the insured thrift. In your assessment, you should also identify and consider potential future risks for the enterprise. The fact that a 

company meets legal and regulatory objective criteria for its structure does not alleviate supervisory 

concerns. 

In your assessment of risk you should incorporate the viewpoints of the holding company’s internal audit risk assessment or other enterprise-wide risk assessment systems. For complex companies, you 

should reference Section 200, Appendix B thereto includes a risk assessment matrix that examiners 

should use to document their assessment of risk. The risk assessment matrix relies on identifying inherent risks (Organizational Structure) and the effectiveness of controls to manage those risks (Risk 

Management). 

You should identify the level and extent of the following types of risk in the holding company enterprise: 

Credit/Asset Risk 

Credit risk is one of the most common and serious forms of risk. It arises from the potential that a borrower or counterparty will fail to perform on an obligation in accordance with agreed terms. 

Counterparties can include individuals, businesses, sovereign governments, and many others. Their obligations can range from personal and business loans to derivatives transactions. Credit risk arises from 

both on- and off-balance sheet transactions. A related risk is asset risk (also known as investment risk), 

which is the risk related to market changes or performance of a financial asset. 

Market Risk 

There are several types of market risk you should assess, including interest rate, currency, commodity, 

and equity risk. Interest rate risk is a company’s financial exposure to movements in interest rates. Cur-
Organizational Structure Section 400 

Office of Thrift Supervision March 2009 Holding Companies Handbook 400.13 

rency risk results from exposure to changes in the values of foreign currencies. Commodity risk arises 

when the values of particular commodities change (i.e. precious metals, oil, etc.). Equity risk results 

from fluctuations in stock prices. The complexity of each type of market risk will vary based on the 

complexity of the holding company enterprise and its investments. 

Liquidity Risk 

Liquidity risk is the potential that an institution will be unable to meet its obligations as they come due 

because of an inability to liquidate assets or obtain adequate funding (funding liquidity risk). Liquidity 

risk also arises when a company cannot easily unwind or offset specific exposures without significantly 

lowering market prices because of inadequate market depth or market disruptions (market liquidity 

risk). Liquidity risk increases when companies experience unexpected cash outflows or downgrades in 

credit ratings. Liquidity risk is often higher in low volume markets or emerging markets where there are 

not as many market participants. 

Operational/Transaction Risk 

Operational risk arises from the potential that inadequate information systems, operational problems, 

breaches in internal controls, fraud, or unforeseen catastrophes will result in unexpected, direct, and indirect losses. Operational risk can be internal (processes, people, or systems) or external. Business lines 

with high turnover, tight deadlines, large volumes, and complex support systems have the most operational risk exposure. Transaction risk is a similar risk that arises directly from the inability to deliver 

products or services because of fraud, error, or system deficiencies. This risk is a function of internal 

controls, information systems, employee integrity, and operating processes. 

Legal/Compliance Risk 

Legal risk is a form of operational risk that arises from the potential that unenforceable contracts, lawsuits, or adverse judgments can disrupt or otherwise negatively affect the operations or condition of an 

organization. Compliance risk arises from violations of, or nonconformance with, laws, rules, regulations, prescribed practices, or ethical standards. 

Reputation Risk 

Reputation risk arises when a company’s business practices receive negative publicity that may result in 

a decline in the customer base, costly litigation, or revenue reductions. Aside from the public reaction, 

the risk exposure also includes the effect of negative publicity on government or regulatory agencies in 

the countries in which it operates, or intends to operate. Even minor subsidiaries with limited operations can expose the enterprise to significant risk when they operate under the corporate name. The 

appearance of inappropriate activities within the enterprise will result in greater scrutiny of the enterprise as a whole. 
Organizational Structure Section 400 

400.14 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Country/Sovereign Risk 

Country risk arises from the general level of political, financial, and economic uncertainty in a country, 

which affects the value of the country’s bonds, equities, and business activities. Sovereign risk is the risk 

that a central bank or other government body will impose foreign exchange regulations or other restrictions that will reduce or negate the value of foreign exchange contracts and other business transactions. 

It also refers to the risk of government default on a loan made to a country or guaranteed by it. 

Generally, there is higher risk exposure in emerging markets or markets where senior management and 

the board are not familiar with local government, customs, or the economic environment. In your assessment of this risk area, you should attribute higher risk exposure to markets where the holding 

company has less experience or does not evidence a full understanding of the unique considerations of 

that country. 

Contagion/Systemic Risk 

Contagion risk is the risk that financial difficulties encountered by a business line or subsidiary of a 

holding company could have an adverse impact on the financial stability of other entities or the entire 

enterprise. In extreme cases, contagion risk can extend to the markets in which the enterprise or its affiliates operate. Systemic risk results from financial system instability and can be potentially 

catastrophic. Idiosyncratic events or conditions in financial intermediaries can cause or exacerbate this 

risk. Impacted areas include market value of positions, liquidity, credit-worthiness of counterparties and 

obligors, default rates, liquidations, risk premia, and valuation uncertainty. 

Strategic/Execution Risk 

Strategic and execution risk is the risk to earnings or capital arising from adverse business decisions or 

improper implementation of those decisions. This risk is a function of the compatibility of an organization’s strategic goals, business strategies, resources, and the quality of implementation. The resources 

needed to carry out business strategies are both tangible and intangible. They include communication 

channels, operating systems, delivery networks, and managerial capacities and capabilities. Strategic risk 

focuses on more than an analysis of the written strategic plan. It focuses on how plans, systems, and 

implementation affect the enterprise’s franchise value. It also incorporates how management analyzes 

external factors that affect the strategic direction of the company. 

Insurance Risks 

Please refer to Section 930 of the Holding Company Handbook for a discussion of insurance risks including reserving risk and pricing and underwriting risk. 

Risk Concentrations 

A risk concentration is an aggregate exposure or loss potential that an entity or entities within the enterprise bear. Risk concentrations are often large enough to threaten the capital adequacy or the 

financial position of the entities or the holding company enterprise. However, risk concentrations can 
Organizational Structure Section 400 

Office of Thrift Supervision March 2009 Holding Companies Handbook 400.15 

be material for other reasons, including reputation risk and contagion risk. There can be risk concentrations in an enterprise’s assets, liabilities, or off-balance sheet items. Risk concentrations can take many 

forms, including exposures to: 

• Individual counterparties; 

• Groups of individual counterparties or related entities; 

• Industry sectors; 

• Specific products; 

• Service providers; and 

• Specific geographic areas. 

You should identify the material risk concentrations in the holding company enterprise. Complex and 

sophisticated holding company enterprises, including conglomerates, should have comprehensive policies and systems to measure, monitor, manage, and report risk concentrations. You should review and 

assess the sufficiency of the enterprise’s policies and procedures for identifying, managing, and reporting risk concentrations as part of your review of the Risk Management component. You should 

document material risk concentrations in the holding company report of examination. 

Intra-group Transactions and Tax Sharing Arrangements 

In many cases, it is appropriate and beneficial for a company to engage in business transactions with its 

affiliates and insiders. Intra-group transactions are an important element of corporate governance and 

internal control. Examiners should review all material intra-group transactions in their assessment of 

Organizational Structure. While intra-group transactions can improve cost efficiency and allow affiliates 

to leverage off the successes of other parts of the enterprise, the reverse is also true. Intra-group transactions also expose affiliates to weaknesses in other areas of the holding company enterprise. By 

making an unsound loan or risky investment to an affiliate, the holding company could jeopardize the 

financial resources it has available to support other subsidiaries. Furthermore, to compensate for a poor 

investment, the holding company may place additional pressure on the subsidiary to pay dividends, engage in other transactions, or pursue higher yielding investments. 

You should identify and review transactions that the holding company engages in with its insiders and 

other affiliates. While the transaction with affiliate regulations at 12 CFR 563.41, and insider lending restrictions at 12 CFR 563.43, do not technically apply to such transactions, you cannot ignore 

transactions that the holding company enters into with such parties and the potential effect of those 

transactions on the holding company enterprise. While you will not apply the specific standards and 

thresholds outlined in the affiliate and insider regulations that apply to the thrift, you should review 

these transactions and consider the following elements to determine the inherent risk of the transactions: 
Organizational Structure Section 400 

400.16 Holding Companies Handbook March 2009 Office of Thrift Supervision 

• Holding company documentation and monitoring of intra-group transactions. Does senior 

management routinely and adequately identify and monitor material intra-group transactions? 

• The principal business of the holding company. If the transaction is a loan, and the principal 

business of the holding company is lending, there may be less of a concern. If the holding company is a nonfinancial company, lending is outside of its primary business and should be a red 

flag. 

• The purpose of the transaction. A mortgage on a principal residence would be less of a concern 

than a loan to support the purchase of the company’s stock. Loans to support stock purchases 

can have the effect of a company’s equity being financed by its own debt. 

• Whether the company has an ethics or conflicts of interest policy. If so, does the transaction 

conform to the policy? If not, did the board approve the policy exception? 

• The terms of the transaction. Did the holding company or affiliate enter into the transaction on 

favorable terms or at market rates? The more favorable the terms, the greater the possibility of 

corporate abuse. 

• Performance of the intra-group loan. Is the loan performing? If not, why not and what actions 

has the holding company taken to address the situation? 

• Whether the board of directors or committee of the board approved the transaction. Does 

management report material intra-group transactions to the board? You should use your judgment to determine whether the transaction is material enough to warrant the board’s attention. 

If there was approval, you should determine whether independent directors participated in the 

decision, and interested directors abstained. 

• The size of the transaction. You should assess the size of the transaction in relation to the holding company’s capital and other investments, and its potential impact on the holding company’s 

capital, cash flow, and earnings. 

It is important that you identify signs of corporate abuse within the holding company enterprise. Not 

only is there reputation risk to the enterprise, but if insiders have found a way to abuse resources, there 

may be additional instances of abuse. If you identify a material loan or other intra-group transaction 

that is problematic, you should: 

• Bring the transaction to the attention of your manager. 

• Discuss the transaction with holding company management. 

• Factor the effect of transaction into your assessment of the component and composite ratings. 
Organizational Structure Section 400 

Office of Thrift Supervision March 2009 Holding Companies Handbook 400.17 

• Consider what, if any, supervisory measures are appropriate to safeguard the holding company 

enterprise and its affiliates, including the thrift (for example, limiting dividends from the thrift, 

requiring prior notice of intra-group transactions, or instructing the holding company to amend 

its policies and procedures for governing transactions with affiliated entities or insiders). 

Transactions with the Thrift 

When intra-group transactions directly involve a thrift, the holding company must adhere to specific 

regulatory requirements. The transactions must also be in the thrift’s best interests. Historically, there 

are two areas of common abuse in the holding company relationship: intra-group transactions and tax 

sharing arrangements. Holding companies can inappropriately use these arrangements to divert funds 

from the thrift. OTS reviews thrift payments in the course of the thrift examination, but you should 

augment this review by cross-checking the holding company’s records and its valuation of transactions 

with those of the thrift. This will allow you to ensure that the holding company properly identifies and 

records intra-group transactions, including tax payments. 

An evaluation of transactions between the holding company and thrift is an important element of holding company examinations of all complexities. In addition to ensuring regulatory compliance and 

avoiding abuses, evaluating intra-group transactions with the thrift will: 

• Help you understand the thrift’s position within the consolidated entity; 

• Reveal any stresses placed upon the thrift by the parent; and 

• Disclose the relative weaknesses of affiliates. 

It is important to distinguish appropriate transactions from those that are, or could become, abusive or 

are otherwise inconsistent with safe and sound operations. Permissible affiliate transactions should: 

• Not be abusive or detrimental to the thrift; 

• Adhere to safe and sound practices; and 

• Comply with applicable statutory and regulatory standards. 

OTS regulations regarding transactions with affiliates are in 12 CFR 563.41.9 Beyond identifying specific transactions to determine regulatory compliance, you must also understand the motives for such 

transactions. For additional information on the restrictions and limitations that apply to affiliate transactions, you should refer to Examination Handbook Section 380, Transactions with Affiliates and 

Insiders. You should coordinate your review of intra-group transactions with the examiner performing 

the review of affiliate transactions on the thrift examination. 

 

9 In addition to the transaction with affiliate rules, additional regulatory standards set forth in 12 CFR 563.43 limit how much and on 

what terms a thrift may lend to its own insiders (directors, officers, principal shareholders and related interests) and insiders of an affiliate. 
Organizational Structure Section 400 

400.18 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Tax settlements between the subsidiary thrift and the consolidated group should result in no less favorable treatment to the institution than if the institution had filed a separate return. The timing of tax 

payments between the holding company and its affiliates is also important. For thrift tax sharing agreements, if the timing of tax payments to a holding company is too far in advance of when the holding 

company must submit its taxes, or if the holding company does not promptly downstream a tax refund 

due to the thrift, it may be an unsecured loan and a violation of the affiliate regulations. A holding 

company and its subsidiaries should enter into a written, comprehensive tax allocation agreement. The 

respective boards of directors should approve the agreement. The agreement should: 

• Limit a subsidiary thrift’s tax payments to what the thrift would pay if computing its own income taxes; 

• Discuss the amount and timing of the thrift’s payments for current tax expense, including estimated tax payments; 

• Discuss reimbursements to a thrift when it has a loss for tax purposes; and 

• Prohibit the payment or other transfer of deferred taxes by the thrift to another member of the 

consolidated group. 

For additional guidance, refer to the November 23, 1998, “Interagency Policy Statement on Income 

Tax Allocation in a Holding Company Structure” (see Appendix 400C) or contact your regional accountant. 

RATING THE ORGANIZATIONAL STRUCTURE COMPONENT 

To assess risk at the holding company, you must consider the entire holding company enterprise. The 

Organizational Structure component is an assessment of the operations and risks in the holding company enterprise. The rating of this component should reflect your evaluation of the organizational 

structure, considering the lines of business, affiliate relationships, concentrations, exposures, and the 

overall risk inherent in the structure. 

Organizational Structure Rating 1. A rating of 1 indicates that the organizational structure, including the nature and level of risks associated with the affiliates’ activities, pose minimal concern. 

Management controls and monitors intra-group exposures. Any concerns posed by strategic plans, the 

control environment, concentrations, legal or reputational issues, or other types of risk within the enterprise are minor, and management and the board can address them in the normal course of business. 

Organizational Structure Rating 2. A rating of 2 indicates that the organizational structure exhibits minor weaknesses, but the nature and level of risks associated with the holding company’s activities 

are unlikely to be material concerns. Intra-group exposures, including servicing agreements, are generally acceptable, but isolated transactions or exposures may present limited cause for regulatory concern. 

Concerns posed by strategic plans, the control environment, concentrations, legal or reputational issues, 
Organizational Structure Section 400 

Office of Thrift Supervision March 2009 Holding Companies Handbook 400.19 

or other types of risks within the enterprise are modest, and management and the board can address 

them in the normal course of business. 

Organizational Structure Rating 3. A rating of 3 indicates that there are organizational structure 

weaknesses that raise supervisory concern. The nature and level of risks associated with the holding 

company activities are moderately likely to cause concern. Intra-group exposures, including servicing 

agreements, have the potential to undermine the financial condition of other companies in the enterprise. Strategic growth plans, weaknesses in the control environment, concentrations, legal or 

reputational issues, or other types of risk within the enterprise are may cause regulatory concern. The 

enterprise may have one or more entities in the structure that could adversely affect the operation of 

other entities in the enterprise if management does not take corrective action. 

Organizational Structure Rating 4. A rating of 4 indicates that there are weaknesses in the organizational structure of the enterprise, and/or the nature and level of risks associated with the holding 

company’s activities are, or have a considerable likelihood of becoming, a cause for concern. Intragroup exposures, including servicing agreements, may also have the immediate potential to undermine 

the operations of companies in the enterprise. Strategic growth plans, weaknesses in the control environment, concentrations, legal or reputational issues, or other types of risk within the enterprise may be 

of considerable cause for regulatory concern. The weaknesses identified could seriously affect the operation of one or more companies in the enterprise. 

Organizational Structure Rating 5. A rating of 5 indicates that there are substantial weaknesses in 

the organizational structure of the enterprise, and/or the nature and level of risks associated with the 

activities are, or pose a high likelihood of becoming, a significant concern. Strategic growth plans, a deficient control environment, concentrations, legal or reputational issues, or other types of risk within 

the enterprise may be of critical concern to one or more companies in the enterprise. The weaknesses 

identified seriously jeopardize the continued viability of one or more companies in the enterprise. 

SUMMARY

There are multiple corporate structures for thrift holding companies. These structures determine the 

operating ability of the entities and establish how examiners should assess them during the examination. 

Likewise, control of the entities arises numerous ways. Control may be conclusive or rebuttable. You 

must be knowledgeable of and identify events that could result in a change of control. 

Once you determine the structure and control of the holding company enterprise and identify potential 

changes, you should examine the actual operation of the entities. You should identify and assess the risk 

of all material business activities, including determining if the activities are permissible for the holding 

company structure. Your assessment of risk should also review the enterprise’s risk concentrations and 

intra-group transactions. You should be especially alert for material risks including those that may affect 

the thrift, so that OTS may initiate appropriate supervisory measures or monitoring. 
THIS PAGE INTENTIONALLY LEFT BLANK 
Appendix A: Organizational Structure Section 400 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 400A.1 

See Attached Joint Agency Statement on 

Parallel-Owned Banking Organization 
Date: April 23, 2002 Page 1 of 6

Office of the Comptroller of the Currency

Board of Governors of the Federal Reserve System

Federal Deposit Insurance Corporation

Office of Thrift Supervision

JOINT AGENCY STATEMENT ON PARALLEL-OWNED BANKING 

ORGANIZATIONS

PURPOSE

This statement discusses the characteristics of parallel-owned banking organizations, reviews 

potential risks associated with these banking organizations, and sets forth the approach of the 

Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, 

Federal Deposit Insurance Corporation, and Office of Thrift Supervision (collectively, “the 

banking agencies”) to supervision of those risks. It also provides information on the applications 

process for proposals involving parallel-owned banking organizations.

The banking agencies’ supervisory approach seeks to better understand how the overall strategy 

and management of a parallel-owned banking organization affects a U.S. depository institution 

within such a structure, how the activities of foreign affiliates are supervised, how home-country 

supervisors view the condition and operations of foreign affiliates, and how affiliates could affect 

the U.S. depository institution. Through this understanding, the banking agencies may be better 

able to monitor and address risks affecting a U.S. depository institution that arise in parallelowned banking organizations. Enhanced communication and cooperation with foreign bank 

supervisors is important to this process. 

The supervisory approach outlined in this statement cannot eliminate the risks inherent with a 

parallel-owned banking structure. However, this supervisory approach may assist the banking 

agencies in determining the extent of inter-organizational transactions, for example, loan 

participations or sales, insider loans and contractual obligations for services. The banking 

agencies may also be better able to assess the effects that another member of the organization 

may have on a U.S. depository institution.

IDENTIFYING PARALLEL-OWNED BANKING ORGANIZATIONS

A parallel-owned banking organization is created when at least one U.S. depository institution 

and one foreign bank1 are controlled either directly or indirectly by the same person or group of 

persons

2

 who are closely associated in their business dealings or otherwise acting in concert. It 

does not include structures in which one depository institution is a subsidiary of the other, or the 

organization is controlled by a company subject to the Bank Holding Company Act, 12 USC 

 

1

 References to “foreign bank” or “foreign parallel bank” also include a holding company of the foreign bank and 

any U.S. or foreign affiliates of the foreign bank. References to “U.S. depository institution” do not include a U.S. 

depository institution that is controlled by a foreign bank.

2

 The term person(s) includes both business entities and natural person(s), which may or may not be U.S. citizens. 
Joint Agency Statement

Parallel-Owned Banking Organizations

Date: April 23, 2002 Page 2 of 6

1841 et seq., or the Savings and Loan Holding Company Act, 12 USC 1467a.3 The banking 

agencies consider whether a person or group of persons may control a depository institution if 

the person or group of persons controls 10 percent or more of any class of voting shares of the 

depository institution.4 

The characteristics listed below may be indicators that a U.S. depository institution is directly or 

indirectly controlled by a person or group of persons that also controls a foreign bank. If one or 

more of the following factors exist, depending upon the circumstances, the banking agencies 

may conduct additional inquiries: 

• An individual or group of individuals acting in concert that controls a foreign bank also 

controls any class of voting shares of a U.S. depository institution; or financing for persons 

owning or controlling the shares is received from, or arranged by, the foreign bank, 

especially if the shares of the U.S. depository institution are collateral for the stock purchase 

loan.

• The U.S. depository institution has adopted particular or unique policies or strategies similar 

to those of the foreign bank, such as common or joint marketing strategies, sharing of 

customer information, cross-selling of products, or linked Web sites.

• An officer or director of the U.S. depository institution either: 1) serves as an officer or 

director5 of a foreign bank; or 2) controls a foreign bank or is a member of a group of 

individuals acting in concert or with common ties that controls a foreign bank.

• The name of the U.S. depository institution is similar to that of the foreign bank. 

Parallel-owned banking organizations are established and maintained for a variety of reasons, 

including tax and estate planning, and risks of nationalization. While these reasons may be 

legitimate and not prohibited by U.S. or foreign law, the structure of such organizations creates 

or increases the risks outlined below and may make it more difficult for supervisors to monitor 

and address such risks.

 

3

 The approach outlined in this statement applies only to those parallel-owned banking organizations that are not 

controlled by a “bank holding company” under the Bank Holding Company Act or a “savings and loan holding 

company” under the Savings and Loan Holding Company Act. Such companies would be subject to the application, 

notice, and supervisory requirements in the Bank Holding Company Act or Savings and Loan Holding Company 

Act and not the procedures described in this statement and other related issuances. A bank holding company or 

savings and loan holding company, however, may be a component of a parallel-owned banking organization. This 

situation may arise when a bank holding company or savings and loan holding company controls the U.S. depository 

institution, and the holding company, in turn, is controlled by a person or group of persons who also controls a 

foreign bank.

4

 A variety of presumptions of control and technical rules apply to determinations of control. See 12 CFR 5.50, 

225.41, 303.82, 574.4.

5

 The sharing of a director, by itself, is unlikely to indicate common control of the U.S. and foreign depository 

institutions.
Joint Agency Statement

Parallel-Owned Banking Organizations

Date: April 23, 2002 Page 3 of 6

SUPERVISORY RISKS IN PARALLEL-OWNED BANKING ORGANIZATIONS

Parallel-owned banking organizations present supervisory risks similar to those arising from 

chain banking organizations in the United States. The fundamental risk presented by these 

organizations is that they may be acting in a de facto organizational structure that, because it is 

not formalized, is not subject to comprehensive consolidated supervision. Consequently, 

relationships between the U.S. depository institution and other affiliates may be harder to 

understand and monitor. This risk can be reduced but not eliminated by (1) working with the 

appropriate non-U.S. supervisors to better understand and monitor the activities of the foreign 

affiliates and owners; (2) sharing information, as appropriate, with foreign and domestic banking 

supervisory agencies with supervisory responsibility for other entities within the organization; 

and (3) imposing special conditions or obtaining special commitments or representations related 

to an application or enforcement or other supervisory action, where warranted. 

Parallel-owned banking organizations may raise numerous management and supervisory

risks, including:

• Officers and directors of the U.S. depository institution may be unable or unwilling to 

exercise independent control to ensure that transactions with the foreign parallel bank or 

affiliates are legitimate and comply with applicable laws and regulations. As a result, the 

U.S. depository institution may be the conduit or participant in a transaction that violates 

U.S. law or the laws of a foreign country, or that is designed to prefer a foreign bank or 

nonbank entity in the group, to the detriment of the U.S. depository institution.

• Money laundering concerns may be heightened due to the potential lack of arms-length 

transactions between the U.S. depository institution and the foreign parallel bank. 

Specifically, the flow of funds through wires, pouch activity, and correspondent accounts 

may be subject to less internal scrutiny by the U.S. depository institution than usually is 

warranted. This risk is greatly increased when the foreign parallel bank is located in an 

offshore jurisdiction or other jurisdiction that limits exchange of information through bank 

secrecy laws, especially if the jurisdiction has been designated as a “non-cooperating 

country or territory,” or the jurisdiction or the foreign bank has been found to be of primary 

money-laundering concern under the International Money Laundering Abatement and 

Financial Anti-Terrorism Act of 2001.6

• Securities, custodial, and trust transactions may be preferential to the extent that assets, 

earnings, and losses are artificially allocated among parallel banks. Similarly, low-quality 

assets and problem loans can be shifted among parallel banks to manipulate earnings or 

losses and avoid regulatory scrutiny. Also, if the foreign parallel bank were to begin 

experiencing financial difficulties, the foreign bank or the common owners might pressure 

the U.S. depository institution to provide credit support or liquidity to an affiliate in excess 

of the legal limits of 12 USC 371c, 371c-1.

 

6

 Certain requirements also may apply if a jurisdiction or a foreign bank is found to be of primary money 

laundering concern under the International Money Laundering Abatement and Financial Anti-Terrorism Act of 

2001. Pub. L. No. 107-56, 115 Stat. 272, 296 (2001).
Joint Agency Statement

Parallel-Owned Banking Organizations

Date: April 23, 2002 Page 4 of 6

• The home country of the foreign parallel bank may have insufficient mechanisms or 

authority to monitor changes in ownership or to ensure arms-length intercompany 

transactions between the foreign parallel bank and other members of the group, including 

the U.S. depository institution, or to monitor concentration of loans or transactions with 

third parties that may present safety and soundness concerns to the group. 

• Capital may be generated artificially through the use of international stock purchase loans. 

Such loans can be funded by the U.S. depository institution to the foreign affiliate or to a 

nonaffiliate with the purpose of supporting a loan back to the foreign affiliate and used to 

leverage the U.S. depository institution or vice versa. This concern is heightened for 

parallel-owned banking organizations if the foreign bank is not adequately supervised.

• Political, legal, or economic events in the foreign country may affect the U.S. depository 

institution. Events in the foreign country, such as the intervention and assumption of control 

of the foreign parallel bank by its supervisor, may trigger a rapid inflow or outflow of 

deposits at the U.S. depository institution, thereby affecting liquidity. Foreign events may 

increase reputational risk to the U.S. depository institution. In addition, these events may 

adversely affect the foreign bank owner’s financial resources and decrease the ability of the 

foreign bank owner to provide financial support to the U.S. depository institution. Foreign 

law may change without the U.S. depository institution or the banking agencies becoming 

aware of the effect of legal changes on the parallel-owned banking organization, including 

the U.S. depository institution.

• Parallel-owned banking organizations may seek to avoid legal lending limits or limitations 

imposed by securities or commodities exchanges or clearinghouses on transactions by one 

counterparty thereby unduly increasing credit risk and other risks to the banking 

organizations and others.

To minimize these risks, the banking agencies will coordinate their supervision of a parallelowned banking organization’s U.S. operations. The supervisory approach may include 

unannounced coordinated examinations if more than one regulator has examination authority. 

Such examinations may be conducted if regulators suspect irregular transactions between 

parallel-owned banks, such as the shifting of problem assets between the depository institutions. 

Factors to consider in determining whether to conduct coordinated reviews of an organization’s 

U.S. operations include: intercompany and related transactions; strategy and management of the 

parallel-owned banking organization; political, legal, or economic events in the foreign country; 

and compliance with commitments or representations made or conditions imposed in the 

application process or pursuant to prior supervisory action. 

The banking agencies expect the U.S. depository institution’s board of directors and senior 

management to be cognizant of the risks associated with being part of a parallel-owned banking 

structure, especially with respect to diversion of depository institution resources, conflicts of 

interest, and affiliate transactions. The depository institution’s internal policies and procedures 

should provide guidance on how personnel should treat affiliates. The banking agencies expect 

to have access to such policies as well as the results of any audits of compliance with the 

policies.
Joint Agency Statement

Parallel-Owned Banking Organizations

Date: April 23, 2002 Page 5 of 6

The banking agencies will seek an overview of the entire organization, as well as a better 

understanding of how foreign bank affiliates are supervised. Authorized members of supervisory 

staff will work with foreign supervisors to better understand the activities of the foreign affiliates 

and owners. As appropriate and feasible, and in accordance with applicable law, authorized staff 

members of the banking agencies will share information regarding material developments with 

foreign and domestic supervisory agencies that have supervisory responsibility over relevant 

parts of the parallel-owned banking organization.

APPLICATION PROCESS FOR PROPOSALS INVOLVING PARALLEL-OWNED 

BANKING ORGANIZATIONS

A person or group of persons who are closely associated in their business dealings or otherwise 

acting in concert may establish or acquire control of a foreign bank and subsequently establish or 

acquire control of a U.S. depository institution, where one depository institution is not a 

subsidiary of the other. This establishment or acquisition of a U.S. depository institution would 

be subject to the Change in Bank Control Act, the Bank Holding Company Act, the Federal 

Deposit Insurance Act, or the Savings and Loan Holding Company Act. The banking agencies’ 

policies and procedures for processing applications, including filings under the Change in Bank 

Control Act, the Bank Holding Company Act, the Federal Deposit Insurance Act, or the Savings 

and Loan Holding Company Act may be found in regulations and guidance issued by the 

banking agencies. As with all types of applications, the banking agencies review proposals 

involving parallel-owned banking organizations on a case-by-case basis, including a review of 

the corporate structure of the proposed transaction. Therefore, information required, 

commitments or representations requested, and the imposition of special conditions in a 

regulatory decision may differ for each applicant or notificant. Depending on specific 

circumstances, the banking agencies may place additional restrictions on the U.S. depository 

institution’s ability to engage in transactions with foreign affiliates or may impose other 

restrictions, as applicable.

U.S. depository institutions that learn of the possibility of becoming part of a parallel-owned 

banking organization should promptly advise the appropriate federal banking agency. Experience 

shows that obtaining all of the information necessary to gain a complete understanding of the 

foreign bank, which may require working with the foreign bank supervisor, and an understanding 

of the impact of the proposal on the U.S. depository institution, can be more complicated and 

time-consuming in a potential parallel-owned banking organization situation than is ordinarily 

the case.

ACKNOWLEDGEMENT TO THE APPROPRIATE FEDERAL BANKING AGENCY 

THAT A U.S. DEPOSITORY INSTITUTION HAS BECOME PART OF A PARALLELOWNED BANKING ORGANIZATION

A person or group of persons may first establish or acquire control of the U.S. depository 

institution and then the foreign bank, where one depository institution is not a subsidiary of the 

other, or the U.S. depository institution and the foreign bank are not subsidiaries of the same 

bank holding company or savings and loan holding company. In this instance, a parallel-owned 

banking organization would be formed without the review of the banking agencies in the 

application process. 
Joint Agency Statement

Parallel-Owned Banking Organizations

Date: April 23, 2002 Page 6 of 6

To the extent possible, in order to assure that the U.S. depository institution is properly 

supervised and identified as part of a parallel-owned banking organization, a U.S. depository 

institution should provide an acknowledgement to the appropriate federal banking agency prior 

to becoming part of a parallel-owned banking organization. A U.S. depository institution’s 

management should advise the individuals who control the depository institution to inform 

management before they obtain control of a foreign bank. If providing this acknowledgement in 

advance is not possible, the U.S. depository institution should inform the banking agency 

promptly after learning of the acquisition of control, so that the banking agency may adjust its 

supervisory strategy expeditiously and assist the U.S. depository institution in identifying and 

controlling any risks presented by membership in a parallel-owned banking organizations.
THIS PAGE INTENTIONALLY LEFT BLANK 
Appendix B: Organizational Structure Section 400 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 400B.1 

List of Permissible Savings and Loan Holding 

Company Activities 

Advertising. A savings and loan holding company may engage in 

advertising and other services to procure and retain both savings 

accounts and loans primarily for affiliates and for savings association 

subsidiaries, or for multiple savings and loan holding companies and 

affiliates thereof. 

HOLA Section 

10(c)(2)(F)(ii); 

12 CFR § 584.2(b)(3)(vii) 

Advisory services. Providing financial, investment, or economic 

advisory services, including advising an investment company (as defined 

in section 3 of the Investment Company Act of 1940 (15 USC § 80a-3)). 

BHCA Section 4(k)(4)(C) 

Agency transactional services. Providing to customers as agent 

transactional services with respect to swaps and similar transactions, any 

transaction described in 12 CFR § 225.28(b)(8), any transaction that is 

permissible for a state member bank, and any other transaction involving 

a forward contract, option, futures, option on a futures or similar 

contract (whether traded on an exchange or not) relating to a commodity 

that is traded on an exchange. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(7)(v) 

Appraisals. Performing appraisals of real estate and tangible and 

intangible personal property, including securities. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(2)(i) 

Asset management. Holding, managing, or liquidating assets owned or 

acquired from a savings association subsidiary of such company. 

HOLA Section 

10(c)(2)(C) 

Asset management, servicing and collection activities. Engaging 

under contract with a third party in asset management, servicing, and 

collection (as more fully described in the Federal Reserve Board’s 

regulations) of assets of a type that an insured depository institution may 

originate and own, if the company does not engage in real property 

management or real estate brokerage services as part of these services. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(2)(vi)

Asset pools. Issuing or selling instruments representing interests in 

pools of assets permissible for a bank to hold directly. 

BHCA Section 4(k)(4)(D)
Appendix B: Organizational Structure Section 400 

 

400B.2 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Career counseling. Providing career counseling services to: (i) a 

financial organization (as described in the Federal Reserve Board’s 

regulations) and individuals currently employed by, or recently displaced 

from, a financial organization; (ii) individuals who are seeking 

employment at a financial organization; and (iii) individuals who are 

currently employed in or who seek positions in the finance, accounting, 

and audit departments of any company. 

BHCA Sections 

(4)(k)(4)(F) and 4(c)(8); 

12 CFR § 225.28(b)(9)(iii) 

Certification authority. Acting as a certification authority for digital 

signatures and authenticating the identity of persons conducting financial 

and nonfinancial transactions. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.86(a)(2)(iii) 

Check cashing and wire transmission services. BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.86(a)(2)(v) 

Check guaranty services. Authorizing a subscribing merchant to 

accept personal checks tendered by the merchant’s customers in payment 

for goods and services, and purchasing from the merchant validly 

authorized checks that are subsequently dishonored. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(2)(iii) 

Clerical accounting services. Furnishing or performing clerical 

accounting and internal audit services primarily for its affiliates. 

HOLA Section 

10(c)(2)(F)(ii); 

12 CFR § 584.2-1(b)(2) 

Coin purchases and sales. Purchase and sale of gold coins minted and 

issued by the United States Treasury pursuant to Pub. L. 99-185, 99 Stat. 

1177 (1985), and activities reasonably incident thereto. 

HOLA Section 

10(c)(2)(F)(ii); 

12 CFR § 584.2-1(b)(11) 

Collection agency services. Collecting overdue accounts receivable, 

either retail or commercial. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(2)(iv)

Community development activities. Making equity and debt 

investments in corporations or projects designed primarily to promote 

community welfare, such as the economic rehabilitation and 

development of low-income areas by providing housing, services, or jobs 

for residents. Also, providing advisory and related services for programs 

designed primarily to promote community welfare. 12 CFR § 225.127 

includes additional information regarding this type of activity. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(12) 
Appendix B: Organizational Structure Section 400 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 400B.3 

Courier services. Providing courier services for: (i) checks, commercial 

papers, documents, and written instruments (excluding currency or 

bearer-type negotiable instruments) that are exchanged among banks and 

financial institutions; and (ii) audit and accounting media of a banking or 

financial nature and other business records and documents used in 

processing such media. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(10)(i)

Credit bureau services. Maintaining information related to the credit 

history of consumers and providing the information to a credit grantor 

who is considering a borrower’s application for credit or who has 

extended credit to the borrower. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(2)(v) 

Credit information, appraisals, construction loan inspections, and 

abstracting. A savings and loan holding company may provide these 

services primarily for affiliates and for savings association subsidiaries, or 

for multiple savings and loan holding companies and affiliates thereof. 

HOLA Section 

10(c)(2)(F)(ii); 

12 CFR § 584.2-1(b)(3)(ii)

Credit insurance. Acting as principal, agent, or broker for credit 

insurance (including home mortgage redemption insurance) that is: (i) 

directly related to an extension of credit by the bank holding company or 

any of its subsidiaries; and (ii) limited to ensuring the repayment of the 

outstanding balance due on the extension of credit in the event of the 

death, disability, or involuntary unemployment of the debtor. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(11)(i)

Data processing. A savings and loan holding company may furnish or 

perform data processing services primarily for affiliates and for savings 

association subsidiaries, or for multiple savings and loan holding 

companies and affiliates thereof. 

HOLA Section 

10(c)(2)(F)(ii); 

12 CFR § 584.2-1(b)(3)(i) 

Data processing. Providing data processing, data storage and data 

transmission services, facilities (including data processing, data storage 

and data transmission hardware, software, documentation, or operating 

personnel), databases, advice, and access to such services, facilities, or 

data-bases by any technological means, if (i) the data to be processed, 

stored or furnished are financial, banking or economic; and (ii) the 

hardware provided in connection therewith is offered only in 

conjunction with software designed and marketed for the processing, 

storage and transmission of financial, banking, or economic data, and 

where the general purpose hardware does not constitute more than 30 

percent of the cost of any packaged offering. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(14) 
Appendix B: Organizational Structure Section 400 

 

400B.4 Holding Companies Handbook March 2009 Office of Thrift Supervision 

A company conducting data processing, data storage, and data 

transmission activities may conduct data processing, data storage, and 

data transmission activities not described in the preceding paragraph if 

the total annual revenue derived from those activities does not exceed 49 

percent of the company’s total annual revenues derived from data 

processing, data storage and data transmission activities. 

Debt acquisition. Acquiring debt that is in default at the time of 

acquisition, if the company: (i) divests shares or assets securing debt in 

default that are not permissible investments for bank holding companies, 

within the time period required for divestiture of property acquired in 

satisfaction of a debt previously contracted under Sec. 225.12(b); (ii) 

stands only in the position of a creditor and does not purchase equity of 

obligors of debt in default (other than equity that may be collateral for 

such debt); and (iii) does not acquire debt in default secured by shares of 

a bank or bank holding company. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(2)(vii)

Debt previously contracted. Holding shares in satisfaction of a debt 

previously contracted, as described more fully in the BHC Act. 

BHCA Section 4(c)(2) 

Disease management. The Federal Reserve Board has taken the 

position that engaging in disease management is a complementary 

activity to insurance underwriting and selling health insurance, subject to 

certain restrictions. 

BHCA Section 4(k)(1)(B); 

Federal Reserve Bulletin, 

December 2007, Legal 

Developments: Third 

Quarter, 2007, FRB 

Order dated September 7, 

2007 

Education. Providing educational courses, and instructional materials 

to consumers on individual financial management matters. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(6)(v) 

Employee benefits and plans. Providing consulting services to 

employee benefit, compensation and insurance plans, including designing 

plans, assisting in the implementation of plans, providing administrative 

services to plans, and developing employee communication programs for 

plans. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(9)(ii) 

Export trading companies. Certain acquisitions of shares of any 

company which is an export trading company, as described in more 

detail in section 4(c)(14) of the BHC Act. 

BHCA Section 4(c)(14) 

Fiduciary activities. Holding shares acquired in a fiduciary capacity, as 

more fully described in the BHC Act. 

BHCA Section 4(c)(4) 
Appendix B: Organizational Structure Section 400 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 400B.5 

Fiduciary services. Performing functions or activities that may be 

performed by a trust company (including activities of a fiduciary, agency, 

or custodial nature), in the manner authorized by federal or state law, as 

more fully described in the Federal Reserve Board’s regulations. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR 225.28(b)(5) 

Finder services. Acting as a finder in bringing together one or more 

buyers and sellers of any product or service for transactions that the 

parties themselves negotiate and consummate. See 12 CFR § 

225.86(d)(1) for additional information and examples. 

BHCA Section 4(k)(1)(A); 

12 CFR § 225.86(d)(1) 

Foreign exchange. Engaging as principal in foreign exchange 

transactions. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(8) 

(ii)(A) 

Foreign exchange and commodities. Providing information, 

statistical forecasting, and advice with respect to any transaction in 

foreign exchange, swaps, and similar transactions, commodities, and any 

forward contract, option, future, option on a future, and similar 

instruments. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(6)(iv)

FSLIC-approved activities. Any services or activities approved by 

order of the former Federal Savings and Loan Insurance Corporation 

prior to March 5, 1987, pursuant to its authority under section 

408(c)(2)(F) of the National Housing Act, as in effect at the time. 

HOLA Section 

10(c)(2)(F)(ii); 

12 CFR § 584.2-1(b)(12) 

Futures commission merchant. Acting as a futures commission 

merchant (FCM) for unaffiliated persons in the execution, clearance, or 

execution and clearance of any futures contract and option on a futures 

contract traded on an exchange in the United States or abroad if: (i) the 

activity is conducted through a separately incorporated subsidiary of the 

bank holding company, which may engage in activities other than FCM 

activities (including, but not limited to, permissible advisory and trading 

activities); and (ii) the parent holding company does not provide a 

guarantee or otherwise become liable to the exchange or clearing 

association other than for those trades conducted by the subsidiary for 

its own account or for the account of any affiliate. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(7)(iv)

Industrial banking. Owning, controlling, or operating an industrial 

bank, Morris Plan bank, or industrial loan company, so long as the 

institution is not a bank. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(4)(i) 
Appendix B: Organizational Structure Section 400 

 

400B.6 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Information services. Furnishing general economic information and 

advice, general economic statistical forecasting services, and industry 

studies. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(6)(ii) 

Information dissemination. Providing employment histories to third 

parties for use in making credit decisions and to depository institutions 

and their affiliates for use in the ordinary course of business. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.86(a)(2)(iv) 

Insurance. Insuring, guaranteeing, or indemnifying against loss, harm, 

damage, illness, disability, or death, or providing and issuing annuities, 

and acting as principal, agent, or broker for purposes of the foregoing, in 

any State. 

BHCA Section 4(k)(4)(B) 

Insurance. Supervising on behalf of insurance underwriters the 

activities of retail insurance agents who sell: (i) fidelity insurance and 

property and casualty insurance on the real and personal property used in 

the operations of the bank holding company or its subsidiaries; and (ii) 

group insurance that protects the employees of the bank holding 

company or its subsidiaries. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b) 

(11)(v) 

Insurance agency or escrow business. HOLA Section 

10(c)(2)(B) 

Insurance agency. Acting as agent or broker for insurance directly 

related to an extension of credit by a finance company (as defined in the 

Federal Reserve Board’s regulations) that is a subsidiary of a savings and 

loan holding company, if: (i) the insurance is limited to ensuring 

repayment of the outstanding balance on such extension of credit in the 

event of loss or damage to any property used as collateral for the 

extension of credit; and (ii) the extension of credit is not more than 

$10,000, or $25,000 if it is to finance the purchase of a residential 

manufactured home1

 and the credit is secured by the home; and (iii) the 

applicant commits to notify borrowers in writing that they are not 

required to purchase such insurance from the applicant, such insurance 

does not insure any interest of the borrower in the collateral; and the 

applicant will accept more comprehensive property insurance in place of 

such single-interest insurance. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(11)(ii)

 

1

 These limitations increase at the end of each calendar year, beginning with 1982, by the percentage increase in the Consumer Price 

Index for Urban Wage Earners and Clerical Workers published by the Bureau of Labor Statistics.
Appendix B: Organizational Structure Section 400 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 400B.7 

Insurance agency. Engaging in any insurance agency activity in a place 

where the holding company or a subsidiary of the holding company has a 

lending office and that: (i) has a population not exceeding 5,000 (as 

shown in the preceding decennial census); or (ii) has inadequate 

insurance agency facilities, as determined after notice and opportunity for 

hearing. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b) 

(11)(iii) 

Insurance agency. Engaging in any insurance-agency activity if the 

holding company has total consolidated assets of $50 million or less. A 

holding company performing insurance-agency activities under this 

paragraph may not engage in the sale of life insurance or annuities except 

as provided in 12 CFR § 225.28(b)(11)(i) and (iii), and it may not 

continue to engage in insurance-agency activities pursuant to this 

provision more than 90 days after the end of the quarterly reporting 

period in which total assets of the holding company and its subsidiaries 

exceed $50 million. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b) 

(11)(vi) 

Insurance company investments. Directly or indirectly acquiring or 

controlling, whether as principal, on behalf of 1 or more entities 

(including entities, other than a depository institution or subsidiary of a 

depository institution, that the bank holding company controls) or 

otherwise, shares, assets, or ownership interests (including debt or equity 

securities, partnership interests, trust certificates or other instruments 

representing ownership) of a company or other entity, whether or not 

constituting control of such company or entity, engaged in any activity 

not authorized pursuant to this section if: (i) the shares, assets, or 

ownership interests are not acquired or held by a depository institution 

or a subsidiary of a depository institution; (ii) such shares, assets, or 

ownership interests are acquired and held by an insurance company that 

is predominantly engaged in underwriting life, accident and health, or 

property and casualty insurance (other than credit-related insurance) or 

providing and issuing annuities; (iii) such shares, assets, or ownership 

interests represent an investment made in the ordinary course of 

business of such insurance company in accordance with relevant State 

law governing such investments; and (iv) during the period such shares, 

assets, or ownership interests are held, the bank holding company does 

not routinely manage or operate such company except as may be 

necessary or required to obtain a reasonable return on investment. 

BHCA Section 4(k)(4)(I) 
Appendix B: Organizational Structure Section 400 

 

400B.8 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Insurance underwriting. Underwriting or reinsuring contract of credit 

life or credit health and accident insurance in connection with extensions 

of credit by the savings and loan holding company or any of its 

subsidiaries, or extensions of credit by any savings association or service 

corporation subsidiary thereof, or any other savings and loan holding 

company or subsidiary thereof. 

HOLA Section 

10(c)(2)(F)(ii); 

12 CFR § 584.2-1(b)(9) 

Intermediary activities. Acting as intermediary for the financing of 

commercial or industrial income-producing real estate by arranging for 

the transfer of the title, control, and risk of such a real estate project to 

one or more investors, if the bank holding company and its affiliates do 

not have an interest in, or participate in managing or developing, a real 

estate project for which it arranges equity financing, and do not promote 

or sponsor the development of the property. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(ii) 

Investment Advisor. Serving as investment adviser (as defined in § 

2(a)(20) of the Investment Company Act of 1940, 15 USC § 80a2(a)(20)), to an investment company registered under that act, including 

sponsoring, organizing, and managing a closed-end investment company.

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(6)(i) 

Investment banking related activities. Providing advice in 

connection with mergers, acquisitions, divestitures, investments, joint 

ventures, leveraged buyouts, recapitalizations, capital structurings, 

financing transactions and similar transactions, and conducting financial 

feasibility studies. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(6)(iii) 

Investment company holdings. Holding shares of an investment 

company which is not a bank holding company and which is not engaged 

in any business other than investing in securities, which securities do not 

include more than five percent of the voting shares of any company. 

BHCA Section 4(c)(7) 

Leasing personal or real property. Leasing personal or real property 

or acting as agent, broker, or adviser in leasing such property if: (i) the 

lease is on a nonoperating basis, as more fully described in the Federal 

Reserve Board’s regulations; (ii) the initial term of the lease is at least 90 

days; and (iii) in the case of leases involving real property, other 

conditions are met. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(3) 

Lending and safeguarding. Lending, exchanging, transferring, 

investing for others, or safeguarding money or securities. 

BHCA Section 4(k)(4)(A) 
Appendix B: Organizational Structure Section 400 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 400B.9 

Lending. Originating, purchasing, selling and servicing of loans, and 

participation interests in loans, secured by real estate, including brokerage 

and warehousing of such real estate loans, except that such a company or 

subsidiary may not invest in a loan secured by real estate as to which a 

subsidiary savings association of such company has a security interest. 

HOLA Section 

10(c)(2)(F)(ii); 

12 CFR § 584.2-1(b)(1)(i) 

Lending. Originating, purchasing, selling and servicing of manufactured 

home chattel paper, including brokerage and warehousing of such chattel 

paper. 

HOLA Section 

10(c)(2)(F)(ii); 

12 CFR § 584.2-1(b)(1)(ii)

Lending. Originating, purchasing, selling and servicing of loans, with or 

without security, for the altering, repairing, improving, equipping or 

furnishing of any residential real estate. 

HOLA Section 

10(c)(2)(F)(ii); 

12 CFR § 584.2-1(b) 

(1)(iii) 

Lending. Originating, purchasing, selling and servicing of educational 

loans. 

HOLA Section 

10(c)(2)(F)(ii); 

12 CFR § 584.2-1(b) 

(1)(iv) 

Lending. Originating, purchasing, selling and servicing of consumer 

loans, as defined in 12 CFR § 560.3, provided that no subsidiary savings 

association of such holding company or service corporation of such 

savings association may engage directly or indirectly, in any transaction 

with any affiliate involving the purchase or sale, in whole or in part, of 

any consumer loan. 

HOLA Section 

10(c)(2)(F)(ii); 

12 CFR § 584.2-1(b)(1)(v)

Lending. Making, acquiring, brokering, or servicing loans or other 

extensions of credit (including factoring, issuing letters of credit and 

accepting drafts) for the company’s account or for the account of others.

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(1). 

Liquidation activities. Liquidating assets acquired from such savings 

and loan holding company or its thrift subsidiaries. 

BHCA Section 4(c)(1)(D) 
Appendix B: Organizational Structure Section 400 

 

400B.10 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Management consulting. Providing management consulting advice on 

any matter to unaffiliated depository institutions, including commercial 

banks, savings and loan associations, savings banks, credit unions, 

industrial banks, Morris Plan banks, cooperative banks, industrial loan 

companies, trust companies, and branches or agencies of foreign banks. 2 

(Subject to 12 CFR § 225.28(b)(9)(i)(B) restrictions.) 

BHCA Sections 4(k)(4)(F) 

and 10(c)(8); 

12 CFR § 225.28(b)(9) 

(i)(A)(1) 

Management consulting. Providing management consulting on any 

financial, economic, accounting, or audit matter to any other company.3 

(Subject to 12 CFR § 225.28(b)(9)(i)(B) restrictions.) 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(9) 

(i)(A) (2) 

Management consulting - other. A company conducting management 

consulting activities may provide management consulting services to 

customers not described in the two previous rows, if the total annual 

revenue derived from those management consulting services does not 

exceed 30 percent of the company’s total annual revenue derived from 

management consulting activities. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(9) 

(i)(C) 

Management consulting. Providing management consulting services, 

including to any person with respect to nonfinancial matters, so long as 

the management consulting services are advisory and do not allow the 

financial holding company to control the person to which the services 

are provided. 

BHCA Section 

4(k)(4)(G); 

12 CFR § 225.86(b)(1) 

Management services. Furnishing or performing management services 

for a savings association subsidiary of such company. 

HOLA Section 

10(c)(2)(A) 

Metals trading and related activities. Buying and selling bullion, and 

related activities. Buying, selling and storing bars, rounds, bullion, and 

coins of gold, silver, platinum, palladium, copper, and any other metal 

approved by the Board, for the company’s own account and the account 

of others, and providing incidental services such as arranging for storage, 

safe custody, assaying, and shipment. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(8)(iii) 

 

2 In performing this activity, bank holding companies are not authorized to perform tasks or operations or provide services to client 

institutions either on a daily or continuing basis, except as necessary to instruct the client institution on how to perform such services for 

itself. See also the Board’s interpretation of bank management consulting advice (12 CFR § 225.131). 

3

 Id.
Appendix B: Organizational Structure Section 400 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 400B.11 

Merchant banking/Investment banking. Directly or indirectly 

acquiring or controlling, whether as principal, on behalf of 1 or more 

entities (including entities, other than a depository institution or 

subsidiary of a depository institution, that the bank holding company 

controls), or otherwise, shares, assets, or ownership interests (including 

debt or equity securities, partnership interests, trust certificates, or other 

instruments representing ownership) of a company or other entity, 

whether or not constituting control of such company or entity, engaged 

in any activity not authorized pursuant to this section if: (i) the shares, 

assets, or ownership interests are not acquired or held by a depository 

institution or subsidiary of a depository institution; (ii) such shares, 

assets, or ownership interests are acquired and held by: (A) a securities 

affiliate or an affiliate thereof; or (B) an affiliate of an insurance company 

described in subparagraph (I)(ii) that provides investment advice to an 

insurance company and is registered pursuant to the Investment 

Advisers Act of 1940 (15 USC 80b-1 et seq.), or an affiliate of such 

investment adviser, as part of a bona fide underwriting or merchant or 

investment banking activity, including investment activities engaged in 

for the purpose of appreciation and ultimate resale or disposition of the 

investment; (iii) such shares, assets, or ownership interests are held for a 

period of time to enable the sale or disposition thereof on a reasonable 

basis consistent with the financial viability of the activities described in 

clause (ii); and (iv) during the period such shares, assets, or ownership 

interests are held, the bank holding company does not routinely manage 

or operate such company or entity except as may be necessary or 

required to obtain a reasonable return on investment upon resale or 

disposition. 

BHCA Section 4(k)(4)(H)

Money orders. The issuance and sale at retail of money orders and 

similar consumer-type payment instruments. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(13) 

Mutual funds. Organizing, sponsoring, and managing a mutual fund, 

provided that (i) the fund does not exercise managerial control over the 

entities in which the fund invests; and (ii) the holding company reduces 

its ownership in the fund, if any, to less than 25 percent of the equity of 

the fund within one year of sponsoring the fund or such additional 

period as the permitted. 

BHCA Section 

4(k)(4)(G); 

12 CFR § 225.86(b)(3) 

Mutual fund services. Providing administrative and other services to 

mutual funds. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.86(a)(2)(i) 
Appendix B: Organizational Structure Section 400 

 

400B.12 Holding Companies Handbook March 2009 Office of Thrift Supervision 

National bank activities. Holding shares of the kinds and amounts 

eligible for investment by national banks under the provisions of 12 USC 

§ 24. 

BHCA Section 4(c)(5) 

Notary public services. Notary public services, in connection with 

offering banking services. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.86(a)(2)(vi) 

Options and futures. Engaging as principal in forward contracts, 

options, futures, options on futures, swaps, and similar contracts, 

whether traded on exchanges or not, based on any rate, price, financial 

asset (including gold, silver, platinum, palladium, copper, or any other 

metal approved by the Board), nonfinancial asset, or group of assets, 

other than a bank-ineligible security,4

 if certain conditions are met. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b) 

(8)(ii)(B) (including 

requirements therein) 

Options and futures. Engaging as principal in forward contracts, 

options, futures, options on futures, swaps, and similar contracts, 

whether traded on exchanges or not, based on an index of a rate, a price, 

or the value of any financial asset, nonfinancial asset, or group of assets, 

if the contract requires cash settlement, as described in greater detail in 

the Federal Reserve Board’s regulations. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b) 

(8)(ii)(C) 

Personnel benefit plans. A savings and loan holding company may 

develop and administer personnel benefit programs, including life 

insurance, health insurance, and pension or retirement plans, primarily 

for affiliates and for savings association subsidiaries, or for multiple 

savings and loan holding companies and affiliates thereof. 

HOLA Section 

10(c)(2)(F)(ii); 

12 CFR § 584.2-1(b) 

(3)(iii) 

Pharmacy. The Federal Reserve Board has taken the position that 

engaging in the mail order pharmacy business is a complementary activity 

to insurance underwriting and selling health insurance, subject to certain 

restrictions. 

BHCA Section 4(k)(1)(B); 

See Federal Reserve 

Bulletin, December 2007, 

Legal Developments: 

Third Quarter, 2007, FRB 

Order dated September 7, 

2007 

Postage stamp sales. Sales of postage stamps and postage-paid 

envelopes, in connection with offering banking services, 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.86(a)(2)(vi) 

 

4

 A bank-ineligible security is any security that a state member bank is not permitted to underwrite or deal in under 12 USC §§ 24 and 

335.
Appendix B: Organizational Structure Section 400 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 400B.13 

Printing. Printing and selling MICR-encoded items. Printing and 

selling checks and related documents, including corporate image checks, 

cash tickets, voucher checks, deposit slips, savings withdrawal packages, 

and other forms that require Magnetic Ink Character Recognition 

encoding. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(10)(ii)

Private placement services. Acting as agent for the private placement 

of securities in accordance with the requirements of the Securities Act of 

1933 and the rules of the Securities and Exchange Commission, if the 

company engaged in the activity does not purchase or repurchase for its 

own account the securities being placed, or hold in inventory unsold 

portions of issues of these securities. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(7)(iii) 

Property management. Holding or managing properties used or 

occupied by a savings association subsidiary of such company. 

HOLA Section 

10(c)(2)(D) 

Property management. Holding or operating properties used wholly 

or substantially by any savings association subsidiary of such holding 

company in the operations of such subsidiary or acquired for such future 

use. 

BHCA Section 4(c)(1)(A) 

Purchasing. A savings and loan holding company may purchase office 

supplies, furniture and equipment primarily for affiliates and for savings 

association subsidiaries, or for multiple savings and loan holding 

companies and affiliates thereof. 

HOLA Section 

10(c)(2)(F)(ii); 

12 CFR § 584.2-1(b)(3)(v)

Qualified Stock Issuance. In the case of a savings and loan holding 

company, purchasing, holding, or disposing of stock acquired in 

connection with a qualified stock issuance if the purchase of such stock 

by such savings and loan holding company is approved by the Director 

pursuant to subsection (q)(1)(D) of section 10 of the HOLA. 

HOLA Section 

10(c)(2)(G) 

Real estate acquisition. Acquisition of unimproved real estate lots, 

and acquisition of other unimproved real estate for the purpose of 

prompt development and subdivision, for (i) construction of 

improvements, (ii) resale to others for such construction, or (iii) use as 

mobile home sites. 

HOLA Section 

10(c)(2)(F)(ii); 

12 CFR § 584.2-1(b)(4) 

Real estate development. Development, subdivision and construction 

of improvements on real estate acquired pursuant to sec. 584.2-1(b)(4), 

for sale or rental. 

HOLA Section 

10(c)(2)(F)(ii); 

12 CFR § 584.2-1(b)(5) 
Appendix B: Organizational Structure Section 400 

 

400B.14 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Real estate improvement. Acquisition of improved real estate for 

remodeling, rehabilitation, modernization, renovation, or demolition and 

rebuilding for sale or for rental. 

HOLA Section 

10(c)(2)(F)(ii); 

12 CFR § 584.2-1(b)(7) 

Real estate maintenance and management. Management and 

maintenance of improved real estate. 

HOLA Section 

10(c)(2)(F)(ii); 

12 CFR § 584.2-1(b)(8) 

Real estate rental. Acquisition of improved real estate and mobile 

homes to be held for rental. 

HOLA Section 

10(c)(2)(F)(ii); 

12 CFR § 584.2-1(b)(6) 

Real estate title abstracting. BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.86(a)(2)(vii)

Real estate settlement services. Providing real estate settlement 

services.5 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b) 

(2)(viii) 

Research, studies, and surveys. A savings and loan holding company 

may conduct research studies and surveys primarily for affiliates and for 

savings association subsidiaries, or for multiple savings and loan holding 

companies and affiliates thereof. 

HOLA Section 

10(c)(2)(F)(ii); 

12 CFR § 584.2-1(b) 

(3)(iv) 

Riskless principal transactions. Buying and selling in the secondary 

market all types of securities on the order of customers as a “riskless 

principal” to the extent of engaging in a transaction in which the 

company, after receiving an order to buy (or sell) a security from a 

customer, purchases (or sells) the security for its own account to offset a 

contemporaneous sale to (or purchase from) the customer. This does 

not include selling bank-ineligible securities6

 at the order of a customer 

that is the issuer of the securities, or selling bank-ineligible securities in 

any transaction where the company has a contractual agreement to place 

the securities as agent of the issuer; or acting as a riskless principal in any 

transaction involving a bank-ineligible security for which the company or 

any of its affiliates acts as underwriter (during the period of the 

underwriting or for 30 days thereafter) or dealer. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(7)(ii) 

Safe deposit business. BHCA Section 4(c)(1)(B) 

 

5

 For purposes of this section, real estate settlement services do not include providing title insurance as principal, agent, or broker. 6

 A bank-ineligible security is any security that a State member bank is not permitted to underwrite or deal in under 12 USC §§ 24 and 

335.
Appendix B: Organizational Structure Section 400 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 400B.15 

Savings Bonds. The sale of U.S. savings bonds. BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(13) 

Securities brokerage or underwriting. Underwriting, dealing in, or 

making a market in securities. 

BHCA Section 4(k)(4)(E) 

Securities brokerage. Providing securities brokerage services (including 

securities clearing and/or securities execution services on an exchange), 

whether alone or in combination with investment advisory services, and 

incidental activities (including related securities credit activities and 

custodial services), if the securities brokerage services are restricted to 

buying and selling securities solely as agent for the account of customers 

and do not include securities underwriting or dealing. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(7)(i) 

Securities Exchange. Owning shares of a securities exchange. BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.86(a)(2)(ii) 

Services. Furnishing services to or performing services for such savings 

and loan holding company or its thrift subsidiaries. 

BHCA Section 4(c)(1)(C) 

Share ownership. Holding shares acquired from a subsidiary that has 

been requested by any federal or state authority to dispose of such 

shares, provided that such shares must be disposed within a two-year 

period. 

BHCA Section 4(c)(3) 

Share ownership. Holding shares of any company that do not include 

more than five percent of the outstanding voting shares of such 

company. 

BHCA Section 4(c)(6) 7

Share ownership. Shares held or activities conducted by any company 

organized under the laws of a foreign country the greater part of whose 

business is conducted outside the United States, if the Federal Reserve 

Board by regulation or order determines that, under the circumstances 

and subject to the conditions set forth in the regulation or order, the 

exemption would not be substantially at variance with the purposes of 

the statute and would be in the public interest. The Federal Reserve 

Board has implemented this provision through the qualifying foreign 

banking organization provisions of 12 CFR § 211.23. 

BHCA Section 4(c)(9). 

 

7 Note that OTS’ position under the HOLA is that holdings of less than ten percent of the voting stock of a company do not cause the 

savings and loan holding company to be engaged in the activities of such company.
Appendix B: Organizational Structure Section 400 

 

400B.16 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Share ownership. Shares of, or activities conducted by, any company 

which does no business in the United States except as an incident to its 

international or foreign business, if the Federal Reserve Board, by 

regulation or order determines that, under the circumstances and subject 

to the conditions set forth in the regulation or order, the exemption 

would not be substantially at variance with the purposes of the statute 

and would be in the public interest. See 12 CFR § 211.602. 

BHCA Section 4(c)(13). 

Storage facilities. A savings and loan holding company may develop 

and operate storage facilities for microfilm or other duplicate records 

primarily for affiliates and for savings association subsidiaries, or for 

multiple savings and loan holding companies and affiliates thereof. 

HOLA Section 

10(c)(2)(F)(ii); 

12 CFR § 584.2-1(b) 

(3)(vi) 

Tax planning and preparation. Providing tax planning and tax 

preparation services to any person. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(6)(vi)

Tax preparation services. Preparation of state and Federal tax returns 

for accountholders of or borrowers from (including immediate family 

members of such accountholders or borrowers but not including an 

accountholder or borrower which is a corporation operated for profit) an 

affiliated savings association. 

HOLA Section 

10(c)(2)(F)(ii); 

12 CFR § 584.2-1(b)(10) 

Tickets. Selling public transportation tickets and tokens, in connection 

with offering banking services. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.86(a)(2)(vi) 

Travel agency. Operating a travel agency in connection with financial 

services offered by the financial holding company or others. 

BHCA Section 

4(k)(4)(G); 

12 CFR § 225.86(b)(2) 

Travelers checks. Issuance and sale of traveler’s checks. BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR 225.28(b)(13) 

Trustee. Acting as trustee under deed of trust. HOLA Section 

10(c)(2)(E) 
Appendix B: Organizational Structure Section 400 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 400B.17 

Underwriting and dealing in government obligations and money 

market instruments. Underwriting and dealing in obligations of the 

United States, general obligations of states and their political 

subdivisions, and other obligations that state member banks of the 

Federal Reserve System may be authorized to underwrite and deal in 

under 12 USC §§ 24 and 335, including banker’s acceptances and 

certificates of deposit, under the same limitations as would be applicable 

if the activity were performed by a bank holding company’s subsidiary 

member banks or its subsidiary nonmember banks as if they were 

member banks. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.28(b)(8)(i) 

Vehicle registration services. Vehicle registration services, in 

connection with offering banking services. 

BHCA Sections 4(k)(4)(F) 

and 4(c)(8); 

12 CFR § 225.86(a)(2)(vi) 
THIS PAGE INTENTIONALLY LEFT BLANK 
Appendix C: Organizational Structure Section 400 

 

Office of Thrift Supervision March 2009 Holding Companies Handbook 400C.1 

See Attached Interagency Policy Statement on 

Income Tax Allocation in a 

Holding Company Structure 
Federal Register / Vol. 63, No. 225 / Monday, November 23, 1998 / Notices 64757

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the

Currency

[Docket No. 98–17]

FEDERAL RESERVE SYSTEM

[Docket No. R–1022]

FEDERAL DEPOSIT INSURANCE

CORPORATION

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

[Docket No. 98–93]

Interagency Policy Statement on

Income Tax Allocation in a Holding

Company Structure

AGENCIES: Office of the Comptroller of

the Currency, Treasury; Board of

Governors of the Federal Reserve

System; Federal Deposit Insurance

Corporation; and Office of Thrift

Supervision, Treasury.

ACTION: Notice of interagency policy

statement.

SUMMARY: The Office of the Comptroller

of the Currency (OCC), the Board of

Governors of the Federal Reserve

System (Board), the Federal Deposit

Insurance Corporation (FDIC), and the

Office of Thrift Supervision (OTS)

(collectively, the Agencies) are adopting

a uniform interagency policy statement

regarding intercompany tax allocation

agreements for banking organizations

and savings associations (institutions)

that file an income tax return as

members of a consolidated group. The

intent of this interagency policy

statement is to provide guidance to

institutions regarding the allocation and

payment of taxes among a holding

company and its depository institution

subsidiaries. In general, intercorporate

tax settlements between an institution

and its parent company should be

conducted in a manner that is no less

favorable to the institution than if it

were a separate taxpayer. This policy

statement is the result of the Agencies’

ongoing effort to implement section 303

of the Riegle Community Development

and Regulatory Improvement Act of

1994 (CDRI Act), which requires the

Agencies to work jointly to make

uniform their regulations and guidelines

implementing common statutory or

supervisory policies.

DATES: This interagency policy

statement is effective November 23,

1998.

FOR FURTHER INFORMATION CONTACT:

OCC: Gene Green, Deputy Chief

Accountant, (202/874–4933), or Tom

Rees, Senior Accountant, (202/874–

5411), Office of the Chief Accountant,

Core Policy Division, Office of the

Comptroller of the Currency, 250 E

Street, SW, Washington, DC 20219.

Board: Charles Holm, Manager, (202/

452–3502), or Arthur Lindo,

Supervisory Financial Analyst, (202/

452–2695), Division of Banking

Supervision and Regulation, Board of

Governors of the Federal Reserve

System, 20th and C Streets, NW,

Washington, DC 20551. For the hearing

impaired only, Telecommunication

Device for the Deaf (TDD), Diane Jenkins

(202/452–3544).

FDIC: For supervisory issues, Robert

F. Storch, Chief, (202/898–8906), or

Carol L. Liquori, Examination

Specialist, (202/898–7289), Accounting

Section, Division of Supervision; for

legal issues, Jamey Basham, Counsel,

(202/898–7265), Legal Division, FDIC,

550 17th Street, NW, Washington, DC

20429.

OTS: Timothy J. Stier, Chief

Accountant, (202/906–5699), or

Christine Smith, Capital and

Accounting Policy Analyst, (202/906–

5740), Accounting Policy Division,

Office of Thrift Supervision, 1700 G

Street, NW, Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

Section 303(a)(3) of the of the CDRI

Act directs the Agencies, consistent

with the principles of safety and

soundness, statutory law and policy,

and the public interest, to work jointly

to make uniform regulations and

guidelines implementing common

statutory or supervisory policies.

Section 303(a)(1) of the CDRI Act also

requires the Agencies to review their

regulations and written policies and to

streamline those regulations where

possible.

In 1978, the FDIC, the OCC, and the

Board each published a separate policy

statement regarding the allocation and

payment of income taxes by depository

institutions which are members of a

group filing a consolidated income tax

return. The OTS provides supervisory

guidance on this subject in its Holding

Company Handbook. As part of the

ongoing effort to fulfill the section 303

mandate, the Agencies have reviewed,

both internally and on an interagency

basis, the present policy statements and

the supervisory guidance that has

developed over the years. As a result of

this review, the Agencies identified

minor inconsistencies in the policy

statements and supervisory guidance.

Although largely limited to differences

in language and not to the substance of

the policies and guidelines themselves,

the Agencies determined that it would

be beneficial to adopt a uniform

interagency policy statement regarding

intercorporate tax allocation in a

holding company structure.

II. Policy Statement

This interagency policy statement

reiterates and clarifies the position the

Agencies will take as they carry out

their supervisory responsibilities for

institutions regarding the allocation and

payment of income taxes by institutions

that are members of a group filing a

consolidated return. The interagency

policy statement reaffirms that

intercorporate tax settlements between

an institution and the consolidated

group should result in no less favorable

treatment to the institution than if it had

filed its income tax return as a separate

entity. Accordingly, tax remittances

from a subsidiary institution to its

parent for its current tax expense should

not exceed the amount the institution

would have paid had it filed separately.

The payments by the subsidiary to the

parent generally should not be made

before the subsidiary would have been

obligated to pay the taxing authority had

it filed as a separate entity. Similarly, an

institution incurring a tax loss should

receive a refund from its parent. The

refund should be in an amount no less

than the amount the institution would

have received as a separate entity,

regardless of whether the consolidated

group is receiving a refund. However,

adjustments for statutory tax

considerations which may arise in a

consolidated return are permitted as

long as the adjustments are made on a

basis that is equitable and consistently

applied among the holding company

affiliates. Regardless of the method used

to settle intercorporate income tax

obligations, when depository institution

members prepare regulatory reports,

they must provide for current and

deferred income taxes in amounts that

would be reflected as if the institution

had filed on a separate entity basis.

An institution should not pay its

deferred tax liabilities or the deferred

portion of its applicable income taxes to

its parent since these are not liabilities

required to be paid in the current

reporting period. Similarly, transactions

in which a parent ‘‘forgives’’ any

portion of a subsidiary institution’s

deferred tax liability should not be

reflected in the institution’s regulatory

reports. This is because a parent cannot

relieve its subsidiary of this potential

future obligation to the taxing

authorities, since these authorities can

collect some or all of a group liability
64758 Federal Register / Vol. 63, No. 225 / Monday, November 23, 1998 / Notices

1Throughout this policy statement, the terms

‘‘separate entity’’ and ‘‘separate taxpayer’’ are used

synonymously. When a depository institution has

subsidiaries of its own, the institution’s applicable

income taxes on a separate entity basis include the

taxes of the subsidiaries of the institution that are

included with the institution in the consolidated

group return.

2These restrictions include the Prompt Corrective

Action provisions of section 38(d)(1) of the Federal

Deposit Insurance Act (12 U.S.C. 1831o(d)(1)) and

its implementing regulations: for insured state

nonmember banks, 12 CFR part 325, subpart B; for

national banks, 12 CFR 6.6; for savings associations,

12 CFR part 565; and for state member banks, 12

CFR 208.45.

from any of the group members if tax

payments are not made when due.

Finally, the Agencies recommend that

financial institution members of a

consolidated group have a written,

comprehensive tax allocation agreement

to address intercorporate tax policies

and procedures.

This interagency policy statement

revises and replaces the Board’s ‘‘Policy

Statement on Intercorporate Income Tax

Accounting Transactions of Bank

Holding Companies and State Member

Banks,’’ (43 FR 22782, May 26, 1978);

the OCC’s ‘‘Statement of Policy on

Income Tax Remittance to Holding

Company Affiliates,’’ (Banking Circular

No. 105, May 22, 1978); the FDIC’s

Statement of Policy on ‘‘Income Tax

Remittance by Banks to Holding

Company Affiliates’’ (43 FR 22241, May

24, 1978); and the OTS’s ‘‘OTS TaxSharing Policy,’’ (Section 500, ‘‘Funds

Distribution,’’ OTS Holding Companies

Handbook). This interagency policy

statement does not materially change

any of the guidance previously issued

by any of the Agencies.

The text of the interagency policy

statement follows:

Interagency Policy Statement on

Income Tax Allocation in a Holding

Company Structure

The Federal Deposit Insurance

Corporation, the Board of Governors of

the Federal Reserve System, the Office

of the Comptroller of the Currency, and

the Office of Thrift Supervision (‘‘the

Agencies’’) are issuing this policy

statement to provide guidance to

banking organizations and savings

associations regarding the allocation

and payment of taxes among a holding

company and its subsidiaries. A holding

company and its depository institution

subsidiaries will often file a

consolidated group income tax return.

However, each depository institution is

viewed as, and reports as, a separate

legal and accounting entity for

regulatory purposes. Accordingly, each

depository institution’s applicable

income taxes, reflecting either an

expense or benefit, should be recorded

as if the institution had filed on a

separate entity basis.1 Furthermore, the

amount and timing of payments or

refunds should be no less favorable to

the subsidiary than if it were a separate

taxpayer. Any practice that is not

consistent with this policy statement

may be viewed as an unsafe and

unsound practice prompting either

informal or formal corrective action.

Tax Sharing Agreements

A holding company and its subsidiary

institutions are encouraged to enter into

a written, comprehensive tax allocation

agreement tailored to their specific

circumstances. The agreement should be

approved by the respective boards of

directors. Although each agreement will

be different, tax allocation agreements

usually address certain issues common

to consolidated groups. Therefore, such

an agreement should:

• Require a subsidiary depository

institution to compute its income taxes

(both current and deferred) on a

separate entity basis;

• Discuss the amount and timing of

the institution’s payments for current

tax expense, including estimated tax

payments;

• Discuss reimbursements to an

institution when it has a loss for tax

purposes; and

• Prohibit the payment or other

transfer of deferred taxes by the

institution to another member of the

consolidated group.

Measurement of Current and Deferred

Income Taxes

Generally accepted accounting

principles, instructions for the

preparation of both the Thrift Financial

Report and the Reports of Condition and

Income, and other guidance issued by

the Agencies require depository

institutions to provide for their current

tax liability or benefit. Institutions also

must provide for deferred income taxes

resulting from any temporary

differences and tax carryforwards.

When the depository institution

members of a consolidated group

prepare separate regulatory reports, each

subsidiary institution should record

current and deferred taxes as if it files

its tax returns on a separate entity basis,

regardless of the consolidated group’s

tax paying or refund status. Certain

adjustments for statutory tax

considerations that arise in a

consolidated return, e.g., application of

graduated tax rates, may be made to the

separate entity calculation as long as

they are made on a consistent and

equitable basis among the holding

company affiliates.

In addition, when an organization’s

consolidated income tax obligation

arising from the alternative minimum

tax (AMT) exceeds its regular tax on a

consolidated basis, the excess should be

consistently and equitably allocated

among the members of the consolidated

group. The allocation method should be

based upon the portion of tax

preferences, adjustments, and other

items generated by each group member

which causes the AMT to be applicable

at the consolidated level.

Tax Payments to the Parent Company

Tax payments from a subsidiary

institution to the parent company

should not exceed the amount the

institution has properly recorded as its

current tax expense on a separate entity

basis. Furthermore, such payments,

including estimated tax payments,

generally should not be made before the

institution would have been obligated to

pay the taxing authority had it filed as

a separate entity. Payments made in

advance may be considered extensions

of credit from the subsidiary to the

parent and may be subject to affiliate

transaction rules, i.e., Sections 23A and

23B of the Federal Reserve Act.

A subsidiary institution should not

pay its deferred tax liabilities or the

deferred portion of its applicable

income taxes to the parent. The deferred

tax account is not a tax liability required

to be paid in the current reporting

period. As a result, the payment of

deferred income taxes by an institution

to its holding company is considered a

dividend subject to dividend

restrictions,2 not the extinguishment of

a liability. Furthermore, such payments

may constitute an unsafe and unsound

banking practice.

Tax Refunds From the Parent Company

An institution incurring a loss for tax

purposes should record a current

income tax benefit and receive a refund

from its parent in an amount no less

than the amount the institution would

have been entitled to receive as a

separate entity. The refund should be

made to the institution within a

reasonable period following the date the

institution would have filed its own

return, regardless of whether the

consolidated group is receiving a

refund. If a refund is not made to the

institution within this period, the

institution’s primary federal regulator

may consider the receivable as either an

extension of credit or a dividend from

the subsidiary to the parent. A parent

company may reimburse an institution

more than the refund amount it is due

on a separate entity basis. Provided the
Federal Register / Vol. 63, No. 225 / Monday, November 23, 1998 / Notices 64759

3See 26 CFR 1.1502–77(a).

institution will not later be required to

repay this excess amount to the parent,

the additional funds received should be

reported as a capital contribution.

If the institution, as a separate entity,

would not be entitled to a current

refund because it has no carryback

benefits available on a separate entity

basis, its holding company may still be

able to utilize the institution’s tax loss

to reduce the consolidated group’s

current tax liability. In this situation,

the holding company may reimburse the

institution for the use of the tax loss. If

the reimbursement will be made on a

timely basis, the institution should

reflect the tax benefit of the loss in the

current portion of its applicable income

taxes in the period the loss is incurred.

Otherwise, the institution should not

recognize the tax benefit in the current

portion of its applicable income taxes in

the loss year. Rather, the tax loss

represents a loss carryforward, the

benefit of which is recognized as a

deferred tax asset, net of any valuation

allowance.

Regardless of the treatment of an

institution’s tax loss for regulatory

reporting and supervisory purposes, a

parent company that receives a tax

refund from a taxing authority obtains

these funds as agent for the consolidated

group on behalf of the group members.3

Accordingly, an organization’s tax

allocation agreement or other corporate

policies should not purport to

characterize refunds attributable to a

subsidiary depository institution that

the parent receives from a taxing

authority as the property of the parent.

Income Tax Forgiveness Transactions

A parent company may require a

subsidiary institution to pay it less than

the full amount of the current income

tax liability that the institution

calculated on a separate entity basis.

Provided the parent will not later

require the institution to pay the

remainder of the current tax liability,

the amount of this unremitted liability

should be accounted for as having been

paid with a simultaneous capital

contribution by the parent to the

subsidiary.

In contrast, a parent cannot make a

capital contribution to a subsidiary

institution by ‘‘forgiving’’ some or all of

the subsidiary’s deferred tax liability.

Transactions in which a parent

‘‘forgives’’ any portion of a subsidiary

institution’s deferred tax liability should

not be reflected in the institution’s

regulatory reports. These transactions

lack economic substance because the

parent cannot legally relieve the

subsidiary of a potential future

obligation to the taxing authorities.

Although the subsidiaries have no direct

obligation to remit tax payments to the

taxing authorities, these authorities can

collect some or all of a group liability

from any of the group members if tax

payments are not made when due.

Dated: October 14, 1998.

Julie L. Williams,

Acting Comptroller of the Currency.

By order of the Board of Governors of the

Federal Reserve System, October 29, 1998.

Jennifer J. Johnson,

Secretary of the Board.

By order of the Board of Directors.

Dated at Washington, DC, this 5th day of

November, 1998.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

Dated: October 14, 1998.

By the Office of Thrift Supervision.

Ellen Seidman,

Director.

[FR Doc. 98–31179 Filed 11–20–98; 8:45 am]

BILLING CODE 4810–13–P, 6210–01–P, 6714–01–P,

6720–01–P

DEPARTMENT OF THE TREASURY

Customs Service

Proposed Collection; Comment

Request; Lay Order Period—General

Order Merchandise

ACTION: Notice and request for

comments.

SUMMARY: As part of its continuing effort

to reduce paperwork and respondent

burden, Customs invites the general

public and other Federal agencies to

comment on an information collection

requirement concerning Lay Order

Period—General Order Merchandise.

This request for comment is being made

pursuant to the Paperwork Reduction

Act of 1995 (Pub. L. 104–13; 44 U.S.C.

3505(c)(2)).

DATES: Written comments should be

received on or before January 22, 1999,

to be assured of consideration.

ADDRESS: Direct all written comments to

U.S. Customs Service, Information

Services Group, Attn.: J. Edgar Nichols,

1300 Pennsylvania Avenue, NW, Room

3.2C, Washington, DC 20229.

FOR FURTHER INFORMATION CONTACT:

Requests for additional information

should be directed to U.S. Customs

Service, Attn.: J. Edgar Nichols, 1300

Pennsylvania Avenue NW, Room 3.2C,

Washington, DC 20229, Tel. (202) 927–

1426.

SUPPLEMENTARY INFORMATION: Customs

invites the general public and other

Federal agencies to comment on

proposed and/or continuing information

collections pursuant to the Paperwork

Reduction Act of 1995 (Pub. L. 104–13;

44 U.S.C. 3505(c)(2)). The comments

should address: (1) Whether the

collection of information is necessary

for the proper performance of the

functions of the agency, including

whether the information shall have

practical utility; (b) the accuracy of the

agency’s estimates of the burden of the

collection of information; (c) ways to

enhance the quality, utility, and clarity

of the information to be collected; (d)

ways to minimize the burden including

the use of automated collection

techniques or the use of other forms of

information technology; and (e)

estimates of capital or start-up costs and

costs of operations, maintenance, and

purchase of services to provide

information. The comments that are

submitted will be summarized and

included in the Customs request for

Office of Management and Budget

(OMB) approval. All comments will

become a matter of public record. In this

document Customs is soliciting

comments concerning the following

information collection:

Title: Lay Order Period—General

Order Merchandise Cost Submissions.

OMB Number: 1515–0220.

Form Number: N/A.

Abstract: This collection is required

to ensure that the operator of an arriving

carrier, or transfer agent shall notify a

bonded warehouse proprietor of the

presence of merchandise that has

remained at the place of arrival or

unlading without entry beyond the time

period provided for by regulation.

Current Actions: There are no changes

to the information collection. This

submission is being submitted to extend

the expiration date.

Type of Review: Extension (without

change).

Affected Public: Businesses,

Individuals, Institutions.

Estimated Number of Respondents:

300.

Estimated Time Per Respondent: 15

hours.

Estimated Total Annual Burden

Hours: 7,500.

Estimated Total Annualized Cost to

the Public: N/A.

Dated: November 16, 1998.

J. Edgar Nichols,

Team Leader, Information Services Group.

[FR Doc. 98–31237 Filed 11–20–98; 8:45 am]

BILLING CODE 4820–02–P
Risk Management Section 500 

Office of Thrift Supervision March 2009 Holding Companies Handbook 500.1

Introduction 

You should rely on the conclusions 

you reached regarding the holding 

company enterprise’s risk profile in 

the Organizational Structure section 

as a foundation for assessing these 

elements and analyzing the enterprise’s control environment. 

In the Risk Management component of the holding company examination, you should evaluate the 

ability of the holding company enterprise to identify, measure, monitor, and control risk. The complexity of risk management will vary based on the size and complexity of the holding company’s operations. 

Noncomplex holding companies may have minimal risk management programs or rely on the thrift 

subsidiary’s risk management system. Complex and conglomerate holding companies should adopt 

formal risk management systems commensurate with their risk level. The most complex firms should 

implement enterprise-wide risk management programs. In your assessment of risk management, you 

should consider four elements: 

• Governance/board and senior management 

oversight; 

• Policies, procedures, and limits; 

• Risk monitoring and management information 

systems; and 

• Internal controls. 

You should rely on the conclusions you reached regarding the holding company enterprise’s risk profile 

in the Organizational Structure section as a foundation for assessing these elements and analyzing the 

enterprise’s control environment. You should risk-focus your review on key business lines, legal entities, or strategic plans. The Risk Management component underscores the importance of the control 

environment, considering the complexity of the enterprise and the inherent risk in its activities. Examples of events that can alter the risk profile of a holding company enterprise include: 

• Entering into new activities, markets, or business lines; 

• Failing to implement policies and procedures to manage risks appropriately; 

• Engaging in potentially abusive transactions with insiders or other affiliates; 

• Incurring significant debt; 

• Issuing trust preferred or other hybrid securities without a plan to deploy the proceeds; or 
Section 500 Risk Management 

500.2 Holding Companies Handbook March 2009 Office of Thrift Supervision 

• Growing without adequate capital support. 

Strong risk management is important because risk exposures are dynamic. Even lower-risk activities or 

investments can adversely affect the holding company enterprise when mismanaged. You should ensure 

that management does not deviate from established risk management standards to fulfill short-term objectives. Losses or lower than anticipated returns can result in the holding company exerting undue 

pressure on affiliates, including the thrift, to meet its other obligations. Such pressures can result in inadequate oversight or inappropriate actions with regard to the best interests of the holding company 

enterprise. 

Your evaluation of the four risk management areas will provide a consistent framework for drawing 

conclusions about risk management and the control environment in complex firms. Moreover, a consistent review of these four areas provides a clear structure and basis for rating and discussing the Risk 

Management component. The following table describes the four risk management elements: 

 

RISK MANAGEMENT ELEMENT DESCRIPTION

Governance/Board and 

Senior Management 

Oversight 

This area evaluates the adequacy and effectiveness of board and 

senior management’s understanding and management of risk inherent in the holding company enterprise’s activities, as well as the 

general capabilities of management. It also considers management’s ability to identify, understand, and control the risks within 

the holding company enterprise, to hire competent staff, and to 

respond to changes in risk profile or changes in the holding company’s operating sectors.

Policies, Procedures, and Limits This area evaluates the adequacy of policies, procedures, and limits given the risks inherent in the activities of the consolidated 

enterprise and its stated goals and objectives. OTS’s analysis considers the adequacy of the enterprise’s accounting and risk 

disclosure policies and procedures. 

Risk Monitoring and 

Management Information 

Systems 

This area assesses the adequacy of risk measurement and monitoring, and the adequacy of the holding company’s management 

reports and information systems. Include a review of the assumptions, data, and procedures used to measure risk and the 

consistency of these tools with the level of complexity of the enterprise’s activities.

Internal Controls This area evaluates the adequacy of internal controls and internal 

audit procedures, including the accuracy of financial reporting and 

disclosure and the strength and influence of the internal audit 

team. Include a review of the independence of control areas from 

management and the consistency of the scope coverage of the internal audit team with the complexity of the enterprise. 
Risk Management Section 500 

Office of Thrift Supervision March 2009 Holding Companies Handbook 500.3

In addition to those four elements, reinsurance is a key risk management element for insurance companies. Insurance companies will purchase reinsurance to transfer risk. It provides a means to transfer risk 

for specific lines of business or geographic territories to provide catastrophe protection or to stabilize 

or reduce volatility in underwriting results. Section 930 of the Holding Companies Handbook describes 

the supervision of insurance companies that are thrift holding companies. Please review section 930 for 

additional information on the unique requirements of conducting a holding company examination of an 

insurance company. 

GOVERNANCE/BOARD AND SENIOR MANAGEMENT OVERSIGHT

Reviewing corporate governance is an essential component of the risk management review. Corporate 

governance includes the processes, customs, and standards 

through which directors and managers in an enterprise conduct 

activities. Your review of corporate governance will vary based 

on the size and complexity of the holding company. Noncomplex holding companies will rely heavily on the corporate 

governance standards of the thrift subsidiary, whereas complex 

and conglomerate holding companies must adhere to standards 

that are more detailed. In 2002, the U.S. government passed the Sarbanes-Oxley Act, which mandates a 

range of standards to ensure corporate responsibility, prevent conflicts of interest, and improve financial disclosures in public companies. This law and resulting regulations impose strong standards on the 

conduct of the board and senior management. 

Your review of corporate 

governance will vary based 

on the size and complexity 

of the holding company. 

The board and senior management review is an important aspect of the examination of corporate governance. OTS evaluates the board of directors and senior management of the holding company 

enterprise based on how their actions affect the holding company, its affiliates, and the thrift subsidiary. 

The evaluation considers management and the board’s competence, integrity, and risk sensitivity. Your 

examination of risk management should assess management and the board’s ability and willingness to 

manage risk appropriately. Management and the board of a noncomplex holding company that does 

not engage in any significant activities other than owning the thrift are often identical to that of the 

thrift subsidiary and do not require in-depth review. In these types of structures, you should apply the 

findings of the management review during the thrift examination to your conclusions in the holding 

company examination. 

Board of Directors1

Holding company directors should fulfill their legal and fiduciary responsibilities and bring functional 

expertise to the holding company enterprise. The board must control and govern the affairs of the 

 

1 OTS developed the “Directors’ Responsibilities Guide” and “Directors’ Guide to Management Reports”, which are available on the OTS website 

(www.ots.treas.gov). OTS designed the guides to apply to thrift directors, however they provide a wealth of information, including references to other publications regarding director responsibilities. In addition, Section 310 of the Examination Handbook provides 

information on the oversight role of thrift directors. 
Section 500 Risk Management 

500.4 Holding Companies Handbook March 2009 Office of Thrift Supervision 

holding company by maintaining a working knowledge of inherent risks, risk management standards, 

and key holding company operations. As representatives of the holding company in the business community, directors contribute to the company’s public image and reputation. This can have a direct effect 

on the integrity and viability of the holding company and its affiliates. 

The board of directors or a designated committee of the board has multiple responsibilities, including: 

• Selecting and retaining competent management and reviewing its performance; 

• Monitoring and assessing the enterprise’s activities; 

• Approving overall business strategies; 

• Conducting affairs ethically and avoiding the appearance of conflicts of interest; 

• Approving policies that clearly articulate risk 

tolerances and limits; and 

• Periodically reviewing and reevaluating the 

business plan, strategies, and risk management 

policies and procedures of the holding company enterprise, material subsidiaries, and key 

business lines. 

Your examination of the holding company enterprise’s 

board of directors should include assessing changes in 

board composition, reviewing board minutes, identifying and assessing key board committees, and reviewing board reports to determine if the board obtains timely, accurate, and detailed information to 

fulfill its responsibilities. 

The board must control and govern 

the affairs of the holding company 

by maintaining a working 

knowledge of inherent risks, risk 

management standards, and key 

holding company operations. 

Management 

Holding company management is responsible for implementing the board’s strategies and adhering to 

its risk limits. The ability of senior management to enact the enterprise’s business plan affects the longterm viability of the holding company enterprise and its subsidiaries and affiliates. Because of this, you 

should perform a focused review of management. While the board is responsible for selecting, reviewing, and compensating senior management, senior management is responsible for operating the 

company under the parameters the board establishes. Management should run day-to-day operations, 

ensure the board receives timely and accurate information, and provide advice regarding business 

strategies. You should expand the scope of your review of management when: 

• Unusual turnover of senior management occurs; 

• Management accepts high risks without implementing compensating controls; 
Risk Management Section 500 

Office of Thrift Supervision March 2009 Holding Companies Handbook 500.5

• A major portion of management’s compensation derives from bonuses or stock options that 

encourage excessive risk taking, especially if such incentives are based on short-term performance; 

• There is a concern about the reputation, competence, or credibility of management; 

• There is evidence that management does not adhere to board standards or limits; or 

• A contest for control of the company is likely. 

Key senior management functions include: 

• Providing the board with information and advice for strategic planning; 

• Managing the company’s activities and implementing long-range plans to meet the board’s 

goals; 

• Adhering to, enforcing, and monitoring compliance with policies and operating procedures; 

• Establishing and ensuring effective internal controls, books, records, and systems that maintain 

appropriate risk management standards; 

• Ensuring the enterprise hires and retains staff with sufficient expertise, integrity, and ethics; and 

• Evaluating the enterprise’s performance and analyzing and managing changes in risk exposure. 

You should identify any changes in key managers and their areas of responsibility since the previous examination by reviewing H-(b)11 reports, public filings, or organizational charts. You can also determine 

if management responsibilities have changed through discussions with management. Once you identify 

changes to key officials and their responsibilities, you can consider their qualifications and assess management’s overall effectiveness. 

Corporate Governance and the Thrift Subsidiary 

A weak or ineffective board of directors or management team can fail to identify and address problems 

within the holding company enterprise that can adversely affect the thrift. It is important to assess the 

holding company’s strategies and plans for the thrift subsidiary. You should also review the involvement level of holding company management in thrift operations to ensure it is not detrimental to the 

insured subsidiary. Effective risk management requires active management of any company by its directorate and senior management. You should ensure that the involvement by the parent holding company 

does not impair the thrift’s board and management from fulfilling its responsibilities. 

In many cases, management of the holding company and the thrift overlap or are similar. While there 

are regulatory restrictions (and conditions of approval that OTS imposes at acquisition) that apply to 
Section 500 Risk Management 

500.6 Holding Companies Handbook March 2009 Office of Thrift Supervision 

the composition of the thrift’s board of directors,2 no similar restrictions apply to the holding company’s directorate. Even when the board members or management personnel are similar, their roles and 

responsibilities with respect to the holding company will differ from the thrift. You should identify potential or perceived conflicts of interest for review. Directors, officers, and employees of a thrift owe a 

fiduciary duty to the thrift and must not advance their personal or business interests. Individuals that 

have dual roles at both the thrift and the holding company or other affiliate may find themselves in an 

awkward situation if the interests of the two entities compete. Similarly, since the holding company can 

exert influence over the activities and transactions of the thrift, all directors and officers should avoid 

using this influence to advance their personal interests at the expense of the thrift. 

Some holding companies acquire thrifts as passive investments, while others plan to manage the financial institutions proactively. The materiality of the thrift operations will affect how active holding 

company management is in decisions that affect the thrift. Significant indicators of materiality include 

the asset size and proportion of income the thrift contributes within the enterprise. Strategic plans that 

involve the thrift can also indicate that the thrift is a material entity in the organization even when it 

remains a small proportion of total assets or income. A holding company with a substantial investment 

in a thrift is more likely to exercise significant influence over the thrift operations. Holding companies 

that passively invest may only monitor performance as long as the thrift provides a reasonable rate of 

return for their investment. These same holding companies may also take a more aggressive management posture when thrift performance does not meet expectations. Using your judgment, you should 

assess the materiality of the thrift to the holding company operations and determine if there are any factors leading to above average involvement from the holding company. As a portion of your risk 

management conclusion, you should assess the holding company’s effect on the thrift subsidiary. 

POLICIES, PROCEDURES, AND LIMITS

Holding companies, particularly diversified holding companies, are involved in a wide range of different 

businesses. These companies should maintain enterprise-wide, written policies and procedures that outline their approach to risk management. Holding company management should ensure that policies are 

in place to prevent practices that put the enterprise, including the thrift subsidiary, at unacceptable risk. 

Policies should cover all material internal controls areas and standards for operation. It is acceptable for 

noncomplex holding companies to adopt the policies and limits of the thrift subsidiary. 

Examiners should review policies and procedures to ensure that they are sound, prudent, and commensurate with the risk profile of the company. Consider how they affect the holding company enterprise, 

including the thrift subsidiary. Based on the inherent risks and structure you identified in the Organizational Structure section, assess whether management has adhered to the established policies, 

procedures, and limits of the board of directors. You should assess the effectiveness of the policies in 

managing risk and determine if revisions are necessary based on changes in the enterprise’s risk profile. 

Risk limits are a necessary component of an effective risk management program. You should identify 

board-approved risk limits and ensure that senior management adopts, communicates, and monitors 

 

2 See 12 CFR 563.33. 
Risk Management Section 500 

Office of Thrift Supervision March 2009 Holding Companies Handbook 500.7

operations to ensure compliance with those limits. You should verify that the risk limits are commensurate with the goals and objectives of the enterprise as well as its financial strength and staff expertise. 

Senior management and the board should design their risk management structure to identify and correct violations of approved limits. When you note risk limit violations, you should notify senior 

management and recommend corrective action. 

Board risk limits should be a quantitative method for measuring the enterprise's tolerance for risk exposure. The board can express limits in absolute dollar amounts or relative percentages. In many cases, 

risk limits include prohibitions on specific business activities or investments. Some examples of common risk limits include: 

• Size limits for specific balance sheet portfolios (i.e. loans, securities, derivatives); 

• Interest rate risk exposure limits; 

• Limits on geographic, counterparty, or other concentrations; or 

• Capital adequacy thresholds. 

RISK MONITORING AND MANAGEMENT INFORMATION SYSTEMS 

Routine and effective risk monitoring relies on management and the board identifying the holding 

company enterprise’s material risk exposures. They must then develop tools and information systems to 

monitor and analyze those exposures. Management information systems (MIS) are important throughout an organization. MIS include the policies, procedures, reports, and controls that management and 

the board implement to manage and monitor risk. MIS can include tools that management and the 

board use to make risk management decisions ranging from simple credit decisions to sophisticated 

capital management decisions. 

The sophistication and use of risk monitoring programs and MIS varies based on the size and complexity of the enterprise. In complex holding companies, line managers use MIS in day-to-day operations to 

manage risk and implement business activities. The board and senior management use MIS to manage 

risk, monitor business activities, and make strategic decisions. In noncomplex holding companies, MIS 

are basic or, in many cases, the holding company relies on thrift systems and procedures to support its 

limited activities. Examples of key areas where holding companies rely on MIS include: 

• Monitoring aggregate risk concentration by industry, geography, customer, etc. 

• Analyzing credit risk, including portfolio composition, credit analysis, delinquency trends, etc. 

• Establishing and monitoring the enterprise’s budget and business plan. 

• Monitoring and managing interest rate risk. 
Section 500 Risk Management 

500.8 Holding Companies Handbook March 2009 Office of Thrift Supervision 

• Analyzing capital levels with economic capital models. 

MIS should be sufficient for management to identify, monitor, and manage the risk exposures of the 

holding company enterprise while enabling it to meet its business objectives. Material changes in size, 

scope, or risk level of operations should result in adjustments to MIS, and management should periodically review its systems to ensure they match and support the complexity of operations. It is imperative 

that MIS are accurate and timely. 

Because MIS will vary significantly based on the size and complexity of operations, you must use your 

judgment to determine if the systems are adequate. Based on your assessment of inherent risks from the 

Organizational Structure section, you should identify one or more key business lines or areas of operation for review. You should review the holding company’s monitoring reports and MIS in this area to 

determine if management and the board obtain informative, timely, and accurate information. You 

should review the data, assumptions, and procedures that the enterprise uses to develop the reports to 

ensure they are accurate and consistent. You should also verify that the reports appropriately convey 

the level of risk to their intended audience. For complex, quantitative, or technical issues, adequate MIS 

should summarize the issue in terms that an individual without specialized or technical knowledge can 

understand. Weaknesses in any stage of the development, communication, or use of MIS can result in 

poor business decisions. 

Internal Controls 

Internal controls are a critical element of a thrift holding company’s risk management program. Effective and efficient operations, reliable financial reporting, 

and compliance with relevant laws, regulations, and internal policies are products of a good system of internal 

controls. Internal controls will vary based on the size, 

type, organizational structure, and complexity of the 

company. As a company grows in size and complexity, 

the systems and depth of the staff should also expand 

appropriately. 

Effective and efficient operations, 

reliable financial reporting, and 

compliance with relevant laws, 

regulations, and internal policies 

are products of a good system of 

internal controls. 

Internal controls and accounting systems should include a mechanism to ensure regulatory compliance. 

Procedures should exist to both avoid and correct violations. You should identify areas of weakness in 

internal controls, accounting systems, and records. You should then determine the possible effect of 

such weakness on the holding company enterprise, including the insured thrift. An additional source of 

information is the Management Representation letter to the holding company’s external auditors detailing pending or threatened litigation. A pattern of similar legal actions against a holding company may 

reflect a weakness in internal controls that results in litigation. Such litigation has monetary costs and 

often hurts the enterprise’s reputation as well. 

Internal Audit 

A holding company should develop an internal audit program commensurate with its size and complexity. It should structure the audit program to confirm that the holding company enterprise complies with 
Risk Management Section 500 

Office of Thrift Supervision March 2009 Holding Companies Handbook 500.9

its policies and procedures and that it does not violate any laws, rules, or regulations. You should review 

the audit program to ensure that it assesses the risk in the entire enterprise and focuses appropriate resources on higher-risk areas of review. You should also determine whether there are appropriate 

management information systems to track, monitor, and resolve outstanding audit concerns. A noncomplex holding company will not have an audit department, but should rely on the thrift institution’s 

audit review of its activities, including intercompany transactions and tax sharing agreements. 

The internal audit staff should be independent. It should have or acquire the necessary expertise and resources to audit each business activity of the enterprise. The audit should have a defined schedule that 

incorporates reviews of all material risk areas on a routine basis. The internal audit staff should report 

material findings to the board or its audit committee. Your review should assess the accuracy, adequacy, 

and independence of the audit department’s assessment, planning, auditing, reporting, and monitoring 

functions. 

Holding companies whose subsidiary thrift(s) have consolidated aggregate assets of $500 million or 

greater must obtain an independent audit.3 An independent public accountant that satisfies the qualifications outlined in 12 CFR 562.4(d), including the independence requirements and interpretations of 

the Securities and Exchange Commission, must perform the audit. Examination Handbook Section 

350, External Audit, outlines the specific guidelines for OTS-required audits. 

RATING THE RISK MANAGEMENT COMPONENT 

The Risk Management rating is an assessment of the effectiveness of the holding company’s board and 

senior management; policies, procedures, and limits; risk monitoring and management information systems; and internal controls. Factors in the assessment will include: 

• Technical competence, leadership, appointment of officers, management depth, salary administration, budget and tax planning; 

• Knowledge of relevant laws and regulations; 

• Ability to plan and respond to changing circumstances; 

• Ability of holding company management to monitor and direct subsidiary operations to ensure 

both sound business operation and compliance with holding company policies and procedures; 

• Adequacy of system of internal controls, including the internal audit function; and 

• Dependency, indicated by the ability of the holding company to operate independently of the 

thrift and vice versa. 

 

3 See 12 CFR 562.4(b)(2). 
Section 500 Risk Management 

500.10 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Risk Management Rating 1. A rating of 1 indicates that management effectively identifies and controls all major enterprise risks. Management is fully prepared to address risks emanating from new 

products and changing market conditions. The board and management are forward-looking and active 

participants in managing risk. Management ensures that appropriate policies and limits exist and that 

the board understands, reviews, and approves them. Policies and limits are supported by risk monitoring procedures, reports, and management information systems that provide management and the board 

with the information and analysis necessary to make timely and appropriate decisions in response to 

changing conditions. Risk management practices and the enterprise’s infrastructure are flexible and 

highly responsive to changing industry practices and current regulatory guidance. Staff has sufficient 

expertise and depth to manage the risks assumed. Internal controls and audit procedures are sufficiently 

comprehensive and appropriate to the size and activities of the holding company. There are few noted 

exceptions to the enterprise's established policies and procedures, and none is material. Management effectively and accurately monitors and manages the enterprise consistent with applicable laws, 

regulations, and guidance, and in accordance with internal policies and procedures. Risk management 

processes are fully effective in identifying, monitoring, and controlling risks. 

Risk Management Rating 2. A rating of 2 indicates that the enterprise’s management of risk is 

largely effective, but exhibits some minor weaknesses. Management and the board demonstrate a responsiveness and ability to cope successfully with existing and foreseeable risks in the business plans. 

While the enterprise may have some minor risk management weaknesses, management and the board 

have recognized and are resolving these problems. Overall, board and senior management oversight, 

policies and limits, risk monitoring procedures, reports, and management information systems are satisfactory and effective. Risks are controlled and do not require additional supervisory attention. The 

holding company enterprise’s risk management practices and infrastructure are satisfactory, and management makes appropriate adjustments in response to changing industry practices and current 

regulatory guidance. Staff expertise and depth are generally appropriate to manage the risks assumed. 

Internal controls may display modest weaknesses or deficiencies, but they are correctable in the normal 

course of business. The examiner may have recommendations for improvement, but the weaknesses 

noted should not have a significant effect on the condition of the enterprise. 

Risk Management Rating 3. A rating of 3 signifies that there are moderate deficiencies in risk 

management practices and, therefore, there is a cause for additional supervisory attention. One or more 

of the four elements of sound risk management is not acceptable, which precludes the enterprise from 

fully addressing one or more significant risks to its operations. Certain risk management practices need 

improvement to ensure that management and the board are able to identify, monitor, and control all 

significant risks. In addition, the risk management structure may need improvement in areas of significant business activity, or staff expertise may not be commensurate with the scope and complexity of 

business activities. Management’s response to changing industry practices and regulatory guidance may 

not be sufficient. The internal control system may be lacking in some important aspects, leading to continued control exceptions or failure to adhere to written policies and procedures. The risk management 

weaknesses could have adverse effects if management does not take corrective action. 

Risk Management Rating 4. A rating of 4 represents deficient risk management practices that fail 

to identify, monitor, and control significant risk exposures in material respects. There is a general lack 
Risk Management Section 500 

Office of Thrift Supervision March 2009 Holding Companies Handbook 500.11

of adequate guidance and supervision by management and the board. One or more of the four elements 

of sound risk management is deficient and requires immediate and concerted corrective action by the 

board and management. The enterprise may have serious identified weaknesses that require substantial 

improvement in internal control, accounting procedures, or adherence to laws, regulations, and supervisory guidance. The risk management deficiencies warrant a high degree of supervisory attention 

because, unless properly addressed, they could seriously affect the condition of the holding company 

enterprise. 

Risk Management Rating 5. A rating of 5 indicates a critical absence of effective risk management 

practices in identifying, monitoring, or controlling significant risk exposures. One or more of the four 

elements of sound risk management is wholly deficient, and management and the board have not demonstrated the capability to address these deficiencies. Internal controls are critically weak and could 

seriously jeopardize the continued viability of the enterprise. If not already evident, there is an immediate concern about the reliability of accounting records and regulatory reports and the potential for 

losses if corrective measures are not taken immediately. Deficiencies in the enterprise's risk management procedures and internal controls require immediate and close supervisory attention. 

SUMMARY

An effective risk management program that identifies, assesses, monitors, and manages risk exposure in 

the holding company enterprise is essential. In order for an enterprise to develop and implement an effective program, it requires a strong board of directors that appoints and monitors a qualified senior 

management team. The board must establish reasonable risk tolerances and limits to match the complexity of the organization. The enterprise must develop strong risk monitoring and management 

information systems to verify that activities are within its risk tolerances. The risk management program 

should follow board-approved policies and procedures, and management should implement a robust 

system of internal controls, including an independent audit function. 

While the complexity and structure of the holding company enterprise will affect the resulting risk 

management program, it is important to verify that the risk exposure levels, management and board 

qualifications, control structure, and management information systems are commensurate with the 

business activities. Noncomplex holding companies will depend more on the systems and controls of 

the thrift subsidiary. In your review of those entities, it is important that the activities of the holding 

company enterprise do not pose undue risk to the thrift and that there is clear corporate separation. 

You can often rely on the conclusions you reach about the thrift’s risk management programs and 

management structure to reach your conclusions at the holding company level. Complex and conglomerate holding company enterprises should have robust risk management programs that will require a 

risk-focused review. 
THIS PAGE INTENTIONALLY LEFT BLANK 
Earnings Section 600 

Office of Thrift Supervision March 2009 Holding Companies Handbook 600.1 

Introduction 

The financial stability and health of the companies in a holding company enterprise can have a direct 

impact on the financial condition of the consolidated entity or other affiliates within the enterprise. Senior managers frequently operate holding companies on a consolidated basis with their subsidiaries. The 

integration provides benefits that are key incentives for establishing a holding company structure. However, integrated operations may mean that one entity’s problems become problems for other affiliated 

entities, including the thrift. The purpose of this Section is to assist you in evaluating the financial performance and stability of the holding company enterprise, including the potential effect on the 

subsidiary thrift. 

You will also determine whether the holding company has sufficient sources of funds. A holding company does not have the access to insured deposits, or Federal Home Loan Bank advances, that a thrift 

has. While liquidity driven failures are rare among insured depository institutions, cash flow difficulties 

can be a primary cause for a holding company financial collapse. As a result, it is important to conduct 

liquidity and cash flow ratio analysis for holding company enterprises. 

RISK PROFILE

As a holding company or other affiliate 

confronts declining financial performance, it may do anything to prevent 

failure. 

The risk profile of a holding company enterprise is 

a major factor in OTS’s overall evaluation. The financial condition and earnings performance of the 

companies in a holding company enterprise are key 

factors in assessing the risk profile. As a holding 

company or other affiliate confronts declining 

financial performance, it may do anything to 

prevent failure. Therefore, you must be attentive in situations where the risk profile of the holding 

company enterprise creates an incentive for the thrift or other subsidiaries to engage in riskier activities 

or enter into transactions that are not in their best interest. 

The actual or pending failure of any company in the holding company enterprise may result in significant financial or operational distress for other companies in the enterprise. For example, a thrift that is 

reliant on an affiliate’s customer base or upon an affiliate for operational support may not be able to 

operate on a stand-alone basis. If a holding company pledges the common stock of the thrift as collateral for its debts, a default may result in a change of ownership control. Furthermore, companies could 

suffer reputational risk because of the financial condition or actions of others in the enterprise. 
Section 600 Earnings 

600.2 Holding Companies Handbook March 2009 Office of Thrift Supervision 

For these reasons, you should perform a detailed cash flow and financial analyses to identify emerging 

weaknesses and other situations where abuses might occur. Early detection will allow OTS to take preventive measures to isolate the risk and prevent contagion. 

RATIO ANALYSIS – EARLY DETECTION 

Financial ratios can help you identify a financially troubled company before severe financial and legal 

problems surface. Ratio analysis involves two types of comparisons, trend and peer analysis. Trend 

analysis compares a present ratio with past or projected ratios for the same company. You can use the 

analysis to identify abnormalities that merit further review. The trend becomes more meaningful as the 

period of analysis grows. Peer analysis compares the ratios of one company with another in the same 

industry. It provides a benchmark for analyzing the profitability of a company with its peers. You must 

apply peer analysis judiciously. Holding companies are not a homogeneous group, and it is difficult to 

place a company into a relevant peer group. In addition, peer data may be inconsistent due to individual 

reporting and accounting practices. When using peer or trend analysis, you must carefully interpret the 

data. For example, a company may show an improving trend but still be very weak. Alternatively, a 

company may show better results than its peers, but still be weak because the industry is in poor financial condition. 

Calculate the following to assess financial performance. 

Cash Position: Cash position is the ratio of cash and marketable securities to total assets. As the ratio increases, there is more cash available to pay immediate bills when they are due, and the likelihood of 

failure declines. 

Current Ratio: The current ratio is the proportion of current assets1 to current liabilities2. As this ratio 

increases, the probability of failure declines because the company can convert more assets to cash 

quickly relative to the liability repayments required within one year. 

Operating Cash Flow: As the cash flow from operations (net income plus depreciation) increases, the likelihood of failure declines. There is more internal operating cash flow to meet long-term debt. 

Debt Ratio: The debt ratio is the ratio of total liabilities to total assets. As this ratio increases, the probability of failure increases. A high ratio indicates that the company finances larger portions of assets by 

contractual sources of funds that necessitate fixed charges against income. 

Double Leverage Ratio: Double leverage is the ratio of thrift equity to holding company equity. This ratio 

increases as the holding company invests debt proceeds it obtains in the thrift as equity. The increased 

capital base allows the thrift to increase its borrowings as well. Generally, as the double leverage ratio 

increases, so does the pressure on the thrift to maintain earnings to service both levels of debt. Often, 

the parent relies on dividends from the thrift for its debt service requirements. Section 300 provides 

additional guidance on double leverage and how to measure it. 

 

1 Current Assets = Cash or assets that have the ability to generate cash within one year. 

2 Current Liabilities = Liabilities that require payment within one year. 
Earnings Section 600 

Office of Thrift Supervision March 2009 Holding Companies Handbook 600.3 

Return on Equity3: Return on equity (ROE) is the ratio of net income to investors’ equity. As ROE increases, the likelihood of failure declines. Holding companies will generally evaluate profitability on a 

consolidated basis and will typically express it in terms of ROE. ROE identifies the percentage of earnings management has generated on the capital invested into the business. 

EARNINGS ADEQUACY 

While ratio analysis can help you determine positive or negative financial trends, you must also analyze 

earnings adequacy and profitability. You must consider the following questions: 

• What are the quality and level of earnings? 

• Does the company rely on nonrecurring sources of earnings? 

• How does the volatility of earnings affect pro forma business plan projections? 

• Are projections stress tested? 

As you review the financial condition of a holding company enterprise, you must remain flexible. You 

should tailor the scope of your review to each organizational structure. OTS holding companies range 

from noncomplex entities that control only the thrift subsidiary to complex or conglomerate enterprises. Complex holding company subsidiaries may be uninsured or engage in several diverse activities, 

including securities broker/dealers, insurance underwriters and agents, manufacturing, and retail. 

In noncomplex companies that engage in no significant activities beyond control of the thrift, thrift and 

holding company earnings will be almost identical, and parent-only financial statements are appropriate. 

In these cases, you should review the reasonableness of operating expenses and the dividend practices 

between the thrift and the parent. 

For larger, diversified operations, thrift earnings typically constitute only a small portion of the total and 

your analysis can concentrate on consolidated statements. However, to analyze consolidated profitability levels and trends, you should obtain a consolidating worksheet that discloses and explains 

intercompany accounts eliminations. This will show each entity’s contribution to total earnings. Your 

analysis should focus on earnings trends and stability. You should identify extraordinary gains and 

losses that may mask weaknesses in the company’s ability to maintain consistent profitability. 

In addition to evaluating the level, source, and volatility of earnings, you should analyze: 

• Financial statements 

• Credit ratings 

 

3 As with any income measure, you must look closely at ROE. You should consider the type of assets generating the profits, as well as the 

range of accounting assumptions. External factors are also important, including pressure from Wall Street. Finally, be aware that the ROE 

will increase if the company recently reduced the amount of stock outstanding through a stock buy-back.
Section 600 Earnings 

600.4 Holding Companies Handbook March 2009 Office of Thrift Supervision 

• Stock price 

• Business plans and budgets 

• Intra-group transactions4 

• Cash flow 

Financial Statement Analysis 

The holding company’s financial statements will provide insight into the 

organization’s overall strengths and 

weaknesses, as well as financial demands placed on the thrift or other 

regulated subsidiaries. 

You can use internally and externally prepared financial statements, reports, and minutes to evaluate the 

operations of companies in a holding company enterprise. The holding company’s financial statements 

will provide insight into the organization’s overall strengths and weaknesses, as well as financial demands placed on the thrift or other regulated subsidiaries. You should also review the audit committee 

minutes to identify any financial recordkeeping 

deficiencies the independent or internal auditors 

disclose to the directors. You may also find information in the auditor’s management letter, the 

internal audit reports, or correspondence with 

the independent auditor. 

Financial statements and supporting schedules 

should be complete, consistent, and accurate. 

Holding companies typically retain independent accountants to provide assurance of the accuracy of 

their financial statements. You should carefully scrutinize unaudited financial statements or financial 

statements that receive a qualified audit opinion. Similarly, you should investigate significant changes in 

financial statements or accounting systems. 

Holding companies typically prepare audited statements annually on a fully consolidated basis. You often must rely on internally prepared statements or general ledgers for interim periods. In some cases, 

holding companies may prepare financial statements based on the regulatory accounting principles of 

another industry. Thrifts in a holding company structure report basic holding company financial information on the quarterly Thrift Financial Report. You should verify the accuracy of the information on 

Schedule HC. 

You should focus on the following areas in your review of the holding company’s financial statements: 

Statement of Financial Condition

Examples of steps you should take in your review of the statement of financial condition include: 

• Identify high risk, cyclical or off-balance sheet activities that could adversely affect the company, causing additional pressure on other subsidiaries, including the thrift. Such activities may 

 

4 Refer to Organizational Structure Section 400
Earnings Section 600 

Office of Thrift Supervision March 2009 Holding Companies Handbook 600.5 

include subprime lending, real estate investments or development, asset securitizations, venture 

capital funding, and volatile investment activities including derivatives, futures, and options. 

• Distinguish between assets that provide liquidity and those that do not. For example, goodwill 

and deferred tax assets are not liquid assets that can generate reliable cash flow. A calculation of 

capital that deducts these assets will provide a more realistic view of the capital position of a 

holding company. 

• Determine an investment’s effect on liquidity. For example, leveraged instruments such as futures and options can be volatile and require cash. Commitments to other investments with 

material cash needs include major construction projects and other capital-intensive businesses. 

• Compare intercompany accounts (including investments in subsidiaries and due to or from subsidiaries) with corresponding accounts on the thrift or affiliate financial statements. This step is 

equally important for both stock and mutual holding companies. 

Income Statement 

In addition to reviewing and analyzing the sources and trends of income and expenses, your review of 

the income statements should: 

• Determine whether the business of companies within the holding company enterprise is cyclical. 

• Focus on core earnings or income before extraordinary gains that are not recurring. 

• Pay particular attention to securitization revenue; the accounting rules are complicated and involve some subjectivity because the calculations are assumption-driven. Unreasonable 

assumptions lead to misstatements of securitization gains. 

Credit Ratings 

You should supplement analysis of a holding company’s financial statements by reviewing the credit 

rating of its debt. The principal rating services include Moody’s Investors Services, Standard & Poors, 

and Fitch Investor Service, Inc. The rating provides an assessment of the perceived creditworthiness of 

a debtor for a specific security. A rating is not a recommendation to purchase, sell, or hold a security. 

Once you identify whether the rating services rated the holding company’s bonds, you should determine if the ratings are subject to a downgrade. 

Rating agency default studies have shown that credit ratings are an accurate predictor of defaults; that 

is, low-grade bonds default more frequently than high-grade securities. However, these ratings are fallible. Sudden changes in market conditions can lead to investment grade issuers filing for bankruptcy. 

Also, issuers with a good rating may find that their ratings decline rapidly. Typically, the first indication 

to the public that weaknesses are emerging is a rating downgrade, but ratings changes tend to lag actual 

credit deterioration. Often, the market price of the bond adjusts before the rating agencies react. As a 
Section 600 Earnings 

600.6 Holding Companies Handbook March 2009 Office of Thrift Supervision 

result, you should also review the market price (yield) of a holding company’s debt. Bonds with low 

grades or high yields relative to U.S. Treasury Bonds may pose additional risks. 

Closely evaluate the financial condition of any holding company whose securities’ ratings are below investment grade. The following Summary of Rating Categories identifies the range of letter grades 

used by two of the major rating agencies. An investment grade bond includes the top four categories 

(for example, AAA/Aaa to BBB/Baa). 

Summary of Rating Categories 

Credit Rating MOODY’S 

Aaa Strongest Creditworthiness 

Aa Very Strong Creditworthiness 

A Above-average Creditworthiness 

Baa Average Creditworthiness 

Ba Below-average Creditworthiness 

B Weak Creditworthiness 

Caa Speculative, Very Weak Creditworthiness, May be in Default 

Ca Highly Speculative, 

Extremely Weak Creditworthiness, Often in Default 

C Extremely Speculative, Weakest Creditworthiness, 

Usually in Default 

Credit Rating Standard & Poors 

AAA Extremely Strong 

AA Very Strong 

A Strong 

BBB Adequate 

BB Speculative Characteristics - 

Less Vulnerable 

B Speculative Characteristics - 

More Vulnerable 

CCC Speculative Characteristics - 

Currently Vulnerable 

CC Speculative Characteristics - 

Currently Highly Vulnerable 

C Currently Highly Vulnerable to Nonpayment 

DDD-D In Default, Rating Indicates Likely Salvage 

Identifying low-grade or declining ratings should result in an expansion of the scope of your assessment 

of the holding company’s financial capacity and capital position.
Earnings Section 600 

Office of Thrift Supervision March 2009 Holding Companies Handbook 600.7 

Stock Prices 

Evaluating stock price trends can provide early warning of a holding company’s weakening financial 

condition. Stock prices reflect the perceptions of investors as they evaluate the risk profile and return of 

a company. However, during periods of high market volatility, changes in stock prices may be more reflective of concerns within a particular industry or the overall market, rather than a specific company. 

Key ratios for publicly traded companies include: 

Market Value/Book Value: The ratio of the combined market price of outstanding stock to the 

accounting book value. You can compare the company’s ratio to those of its peers. Higher ratios indicate greater investor confidence in the company’s prospects5. A favorable market 

perception generally allows a company to raise capital at an attractive price. 

Price/Earnings: The ratio of the price of stock to the prior 12-month earnings. Ratios above 

market averages reflect expectations of future growth while ratios below market averages reflect 

uncertainty or less growth. 

A holding company should command a higher Market/Book or P/E ratio if its ROE exceeds its peers. 

In addition, a holding company should command a higher Market/Book or P/E ratio if the ROE exceeds the investors’ required return, which is based on risk. This return is an opportunity cost and is 

sometimes called cost of equity (COE). The market/book ratio should increase as the ROE/COE 

spread increases above one. 

CASH FLOW 

Cash flow is the ability to obtain and allocate cash. Ultimately, a company’s ability to generate cash flow 

will determine whether it will meet its fixed obligations, such as debt service and preferred stock dividends, as well as fund dividends to common stockholders from internal operations. You should 

consider the following questions: 

• To what extent does the holding company rely on dividends from the thrift or other regulated 

subsidiaries to service holding company debt or fulfill other obligations? 

• What sources of liquidity does the holding company have? 

• What are the quality and quantity of such 

sources? You can use the cash flow statement to 

identify and quantify the sources of funds, 

and to what degree the parent relies upon 

those funds to maintain operations. 

The purpose of the cash flow statement is to 

summarize financing and investing activities and 

to identify whether the company generates 

funds from internal or external sources. 

Generally, audited financial statements provide 

 

5 Refer to Monitoring Section 800.
Section 600 Earnings 

600.8 Holding Companies Handbook March 2009 Office of Thrift Supervision 

“parent company only” financial information, which includes a Statement of Cash Flows. You should 

use the cash flow statement for determining more than whether the company maintains positive cash 

flow. It can also identify how the company obtains and allocates its funds. Most importantly, you can 

use the cash flow statement to identify and quantify the sources of funds, and to what degree the parent 

relies upon those funds to maintain operations. 

Subsidiaries provide funds, typically as dividends, management fees, expense reimbursements, and tax 

sharing payments. Ascertain the holding company’s reliance on each subsidiary by considering the: 

• Portion of cash flow from operating and investing activities that the subsidiary supplies; and 

• Amount of interest expense on parent company borrowings that it pays from subsidiary dividends. 

Concentrate on assessing or identifying any operational weaknesses that could result in the holding 

company requiring funding. In situations where the parent is financially distressed, determine whether 

the financial condition results from higher risk activities. 

Cash flow or funding shortfalls can occur as a normal result of doing business. Your concern should be 

in determining whether shortfalls are temporary or indicate a decline in financial health. You should 

also determine what sources are available to the parent to make up for the deficit. A company can raise 

cash by: 

• Liquidating/selling assets, 

• Issuing stock, 

• Increasing borrowings, 

• Requiring repayment of advances to its subsidiaries, and 

• Requiring additional payments of dividends or other cash payments from subsidiaries. 

These are temporary liquidity solutions. You should also analyze the holding company’s ability to meet 

future and long-term cash flow needs. Selling income-generating assets will reduce future earnings, and 

issuing additional debt or equity will increase future funding requirements for debt service or dividend 

payments. While companies commonly use short-term debt to fund deficit cash flow, this practice may 

jeopardize their long-term liquidity and earnings by increasing liabilities and related interest costs without a corresponding increase in earning assets. If you identify and expect systemic funding imbalances 

to persist, you should comment in the examination report. 

To assess the holding company’s ability to meet its contractual obligations from current earnings, you 

should compute the Fixed Charge Coverage Ratio which is defined as the parent only after tax cash income 

plus interest, lease and rental expenses, divided by fixed contractual obligations, as follows: 
Earnings Section 600 

Office of Thrift Supervision March 2009 Holding Companies Handbook 600.9 

Fixed Charge Coverage Ratio:

After tax cash income + Interest, lease, and rental expense

Interest, lease, and rental expense + 

contractual long-term debt retired + 

preferred stock dividend payments 

If this ratio is below one, it is a cause for concern. A low ratio indicates that the company is not generating sufficient internal funds to cover its contractual obligations or dividends to common stockholders. 

Even a ratio that is only slightly greater than one may be a concern if there is a deteriorating trend. In 

many noncomplex holding company structures, the primary source of cash income will be dividends 

the thrift pays to the parent. Any dividend restrictions on the thrift will substantially affect the results of 

this analysis. A holding company that relies on thrift earnings and directs the thrift’s operations to increase earnings can adversely affect the overall safe and sound condition of the thrift. 

Liquidity

Liquidity is a company’s ability to meet its short-term obligations through cash on hand, converting existing assets to cash, or rolling over maturing debt. Generally, the term short-term liquidity applies to 

periods of up to a year. Liquidity problems range in severity. On one hand, temporary liquidity problems may mean that a company is unable to take advantage of an immediate business opportunity. 

Conversely, severe liquidity shortfalls may mean that a company is unable to meet short-term obligations and may have to default on its debt obligations. As a worst case, this could result in bankruptcy. 

A holding company may have loans or debts outstanding to its thrift or non-thrift subsidiaries that affect the holding company’s liquidity profile. A large, negative, short-term position may result if the 

subsidiaries cannot readily repay these loans in the event of a liquidity shortage at the holding company. 

A subsidiary may be unable to repay loans or debt from its parent if it does not have adequate sources 

of alternative liquidity, or if the loan repayment would violate regulatory requirements or covenants between the subsidiary and other lenders. In addition, you should assess whether the holding company is 

using short term sources of funds such as overnight sweep deposits from customers of non-thrift subsidiaries or short term debt such as commercial paper to fund long term assets, dividends, or current 

expenses. 

In your financial analysis, you should review the contractual maturity structure of the holding company’s assets and liabilities. In cases where liquidity concerns are evident or emerging, you should 

develop a maturity matching schedule comparing contractual maturities of assets and liabilities over the 

near term (up to 90 days), short term (91 days to one year), and long term (over one year). You must 

also consider if funding is reliant upon the recovery of advances to subsidiaries, which themselves may 

be illiquid, and whether the company can sell assets and convert them to cash without incurring substantial loss on the sale. 

If your analysis shows a material imbalance of maturing debt instruments compared to reasonably available resources, you should discuss this with management to determine how it intends to handle the 

shortfall. You should also incorporate this into the cash flow analysis and summarize it in the examination report. 
Section 600 Earnings 

600.10 Holding Companies Handbook March 2009 Office of Thrift Supervision 

RATING THE EARNINGS COMPONENT 

The earnings rating reflects the consolidated holding company enterprise’s overall financial performance and the quality of consolidated earnings profitability and liquidity. Your review of this area should 

consider the level, trend, and sources of earnings, as well as the ability of earnings to augment capital 

and provide ongoing support for an enterprise’s activities. 

Within this component, you should also consider the liquidity of the enterprise. This rating reflects the 

consolidated holding company enterprise’s ability to attract and maintain the sources of funds necessary 

to achieve financial efficiency, support operations, and meet obligations. You should evaluate the funding conditions for each of the material legal entities in the holding company structure to determine if 

any weaknesses exist that could affect the funding profile of the consolidated enterprise. The earnings 

rating is based on the following rating definitions: 

Earnings Rating 1. A rating of 1 indicates that the consolidated holding company enterprise’s overall 

financial performance, and quantity and quality of earnings over time, are more than sufficient to make 

full provision for the absorption of losses and/or accretion of capital when asset quality and growth are 

considered. Holding company enterprises with a 1 rating also maintain strong liquidity levels and well 

developed funds management practices. The parent company and subsidiaries have reliable access to 

sufficient sources of funds on favorable terms to meet present and anticipated liquidity needs. 

Earnings Rating 2. A rating of 2 indicates that the consolidated holding company enterprise’s overall 

financial performance, and quantity and quality of the earnings over time, are generally adequate to 

make provision for the absorption of losses and/or accretion of capital when asset quality and growth 

are considered. These enterprises maintain satisfactory liquidity levels and funds management practices. 

The parent company and subsidiaries have access to sufficient sources of funds on acceptable terms to 

meet present and anticipated liquidity needs. Modest weaknesses in funds management practices may be 

evident, but those weaknesses are correctable in the normal course of business. 

Earnings Rating 3. A rating of 3 indicates that the consolidated holding company enterprise’s financial performance and earnings are not fully adequate to make provisions for the absorption of losses 

and the accretion of capital in relation to company growth. The financial performance of enterprises 

rated 3 may be further clouded by static or inconsistent earnings trends, chronically insufficient earnings, or less than satisfactory asset quality. These enterprises’ liquidity levels or funds management 

practices may need improvement. Holding company enterprises rated 3 may lack ready access to funds 

on reasonable terms or may evidence significant weaknesses in funds management practices at the parent company or subsidiary levels. However, these deficiencies are considered correctable in the normal 

course of business. 

Earnings Rating 4. A rating of 4 indicates that the consolidated holding company enterprise’s financial performance and earnings are clearly not sufficient to make full provision for losses and the 

necessary accretion of capital. Enterprises with earnings rated 4 may be characterized by erratic fluctuations in net income, poor earnings (and the likelihood of the development of a further downward 

trend), intermittent losses, chronically depressed earnings, or a substantial drop from previous performance. The liquidity levels or funds management practices of these holding company enterprises may be 
Earnings Section 600 

Office of Thrift Supervision March 2009 Holding Companies Handbook 600.11 

deficient. Holding company enterprises rated 4 may not have or be able to obtain a sufficient volume of 

funds on reasonable terms to meet liquidity needs at the parent company or subsidiary levels. 

Earnings Rating 5. A rating of 5 indicates that the consolidated holding company enterprise has poor 

financial performance and one or more business lines or subsidiaries are experiencing losses. Such 

losses, if not reversed, represent a distinct threat to the enterprise’s solvency through erosion of capital. 

In addition, these holding company enterprises’ liquidity levels or funds management practices are critically deficient and may threaten continued viability. Holding company enterprises rated 5 require 

immediate external financial assistance to meet maturing obligations or other liquidity needs. 

SUMMARY

Financial stability, profitability, and liquidity are a few of the many critical factors to consider in the supervision of a thrift holding company enterprise. You must evaluate these factors in conjunction with 

one other to reach valid conclusions. You can measure financial strengths and weaknesses by conducting ratio analysis, reviewing financial statements, and monitoring market indicators. 

Managers often operate the holding company and its subsidiaries, including the thrift, on a consolidated 

basis. While such integration provides advantages to both the thrift and the holding company, there are 

also potential pitfalls. Weaknesses in earnings or liquidity in one subsidiary can have a material affect on 

the viability of other subsidiaries or the entire holding company enterprise. You should assess earnings 

and liquidity from the perspective of the entire enterprise. You should also identify and assess the affect 

that the earnings and liquidity performance of key subsidiaries have on the enterprise or other subsidiaries. 
THIS PAGE INTENTIONALLY LEFT BLANK 
Holding Company Section 710 

Administrative Program 

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 710.1 

Program Guidance: Examiners should complete only those sections of the program that are 

necessary to evaluate this area and to support the overall examination conclusions. 

EXAMINATION OBJECTIVE

To ensure that the scope of the examination is appropriate to adequately assess the risk exposure and 

complexity of the holding company enterprise. 

PREEXAMINATION PROCEDURES WKP. REF.

1. Determine if there is functional regulation of any entities in the holding company 

structure and identify the functional regulator (Securities and Exchange 

Commission, Commodity Futures Trading Commission, Financial Industry 

Regulatory Authority (FINRA), state insurance agencies, etc.). Also, determine if 

there is foreign regulation of financial entities in the holding company structure. 

If there are functional or foreign regulators involved, you must consider the 

italicized “Functionally or Foreign Regulated” procedures in this program. Also, 

note the functionally and foreign regulated entities and their primary regulators 

when you update the Regulatory Profile on Electronic Continuing Examination 

Folder (ECEF). 

 

2. Forward the Preliminary Examination Response Kit (PERK) to the responsible 

holding company approximately one month before the estimated start date of the 

holding company examination. In most cases, the examination of the holding 

company will correspond to the examination of the “lead” savings association in 

the enterprise. (In certain situations, it may be appropriate to forward the PERK 

to another tier in the complex; however, in most cases, the top tier will be the 

starting point for a holding company examination.) 

Functionally or Foreign Regulated-Review the PERK to determine if you can obtain any of the 

requested information through reports the company submits to functional or foreign regulators. 

After ensuring that the PERK does not request duplicative or publicly available information, 

direct any information requests that apply to a functionally regulated entity or a foreign regulated 

entity to the appropriate functional regulator contact (regional) or international affairs contact 

(headquarters). The functional or foreign regulatory contact should request information 
Holding Company Section 710 

Administrative Program 

WKP. REF.

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

710.2 Holding Companies Handbook March 2009 Office of Thrift Supervision 

approximately six weeks before the examination of the lead association. This will allow the 

regulator sufficient time to submit its response to the regional office or OTS headquarters. 

 

3. Review the subsidiary institution’s most recent Regulatory Profile report on 

ECEF and the Holding Company Overview Report on the OTS Intranet. Verify 

the accuracy of the structure data in the holding company enterprise summary. 

Make any noted corrections to the structural data before opening the new 

examination on the EDS/ROE system. 

 

4. Perform preexamination/scoping analysis. Suggested scoping materials include: 

• OTS Reports including (H-(b)11 Annual/Current Report, H-(b)10 

Registration Statement). 

• Securities and Exchange Commission reports (the company should include 

them with the H-(b)11 reports). 

• Statements of financial condition and operations. 

• Recent audit reports (including the Management Representation letter to the 

external auditor detailing pending and threatened litigation that may have a 

material effect on the holding company). 

• Previous OTS examination report and supporting work papers. 

• Supervisory correspondence. 

• Recent applications, including conditions of approval. 

• Examination reports from other regulatory agencies (domestic or foreign), 

including self-regulatory bodies such as FINRA. 

• Other correspondence and data from functional or foreign regulators. 

• Public sources: credit ratings by major rating agencies, newspaper or 

magazine articles, Reuters/AP Internet reports. 

• Holding company and affiliate web sites. 
Holding Company Section 710 

Administrative Program 

WKP. REF.

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 710.3 

• Holding company board minutes. 

• PERK. 

• Subsidiary thrift’s Regulatory Profile. 

 

5. Re-evaluate the holding company categorization by considering the questions in 

the Risk Classification Checklist to identify higher risk factors. 

 

EXAMINATION PROCEDURES-OVERALL GUIDANCE

(For detailed procedures on component areas, see Sections 720 or 730) 

6. Verify compliance with supervisory directives and enforcement actions. 

• Verify compliance with: 

⎯ Conditions of approval 

⎯ Outstanding enforcement actions 

⎯ Supervisory agreements and directives. 

• Verify correction of violations or exceptions from previous examination. 

Functionally or Foreign Regulated-You should coordinate findings and recommended actions 

with functional or foreign regulators that oversee entities in the holding company enterprise. You 

should coordinate your communication through your regional contact (functional supervisors) or 

the international affairs staff in Washington, DC (foreign supervisors). 

 
Holding Company Section 710 

Administrative Program 

WKP. REF.

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

710.4 Holding Companies Handbook March 2009 Office of Thrift Supervision 

PROCEDURES FOR FINALIZING THE EXAMINATION 

7. Prepare the examination report and upload field final report comments to the 

ROE Center of the EDS/ROE system for manager review and approval. 

 

8. Assign a composite rating to the holding company enterprise and assign 

component ratings for Category II and Category III holding company enterprises. 

Enter the ratings on the Ratings center of the EDS/ROE system. 

 

9. Conduct a meeting with board of directors or senior management to review 

examination findings. 

Functionally or Foreign Regulated - Coordinate with the other regulators on meetings that 

involve their entities. Invite other functional or foreign regulators of the holding company to 

participate when there are material findings.

 

10. Complete all Holding Company Examination Data System (EDS) entries 

(including reportable data, follow-up, and supplemental data) and upload work 

papers to the EDS/ROE system. 

 

11. Update and make corrections as appropriate to OTS databases and reports, 

including the Regulatory Profile on ECEF and the holding company overview on 

the OTS Intranet. 

 
Holding Company Section 710 

Administrative Program 

WKP. REF.

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 710.5 

12. Enter the Actual Completion date into the Main EDS/ROE section. The regional 

or DC office will then finalize and transmit the examination report to the holding 

company. 

Functionally or Foreign Regulated - You should follow the information sharing procedures 

outlined in the agreements OTS has executed with the primary regulators of functionally 

regulated and foreign regulated affiliates. As a rule, OTS will provide copies of the examination 

report and any other confidential information to the functionally regulated entity’s primary 

regulator upon receipt of a written request that demonstrates a justifiable need for the 

information. The same rule applies to the primary regulator of foreign regulated entities. OTS 

will make the decision to share the report of examination or other confidential information on a 

case-by-case basis, only after the interested regulator provides sufficient rationale for requesting the 

information. You should consult with your region’s functional regulation contact or with OTS’s 

international affairs staff before agreeing to or actually releasing any confidential information. 

 

RISK CLASSIFICATION CHECKLIST

In answering these questions, you should interpret the term “holding company” as the entire holding 

company enterprise, including all affiliates within a holding company family. 

Determining Low Risk/Noncomplex Holding Companies With No Significant 

Activities Other Than the Thrift 

Yes No

a) Is the holding company a noncomplex holding company with 

no significant activities other than the thrift? 

If Yes, go to Question b. 

If No, skip to Question e. 
Holding Company Section 710 

Administrative Program 

 Yes No

Exam Date: 

 

Prepared By: 

Reviewed By: 

Docket #: 

710.6 Holding Companies Handbook March 2009 Office of Thrift Supervision 

b) Is the holding company only engaged in investing cash from 

dividends or proceeds from stock sales? 

If Yes, go to Question c. 

If No, skip to Question e. 

c) Does the holding company have only minimal debt that it can 

easily service with its resources? 

If Yes, go to Question d. 

 If No, skip to Question e. 

d) In its cash management, does the holding company invest 

solely in U.S. government securities or other liquid 

nonleveraged cash instruments such as bankers acceptances or 

high grade commercial debt, or does it invest in high risk, 

highly leveraged instruments like options or futures that could 

lead to significant cash flow needs? 

⎯ Liquid interest bearing instruments 

⎯ Highly leveraged instruments 

If you answered “Yes” to questions a, b, and c, and the answer to 

question d is liquid interest bearing instruments you will probably 

need to go no further. In most cases, the holding company you are 

reviewing is a low risk, noncomplex holding company with no 

significant activities other than the thrift. However, you should 

consider the nature of the investments held by the holding 

company as even highly rated mortgage securities may present 

liquidity or other risks. 
Holding Company Section 710 

Administrative Program 

 Yes No

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 710.7 

You do not need to complete the remainder of this checklist. 

Refer to the Abbreviated Holding Company Examination 

Program, Section 720. 

If the answer is highly leveraged interest bearing instruments, 

please continue. These holding companies present at least a 

moderate risk. The remaining questions will help you determine 

the nature of those risks. A “Yes” answer to any of the following 

questions could indicate that the holding company is complex and 

may present a higher degree of risk. You should weigh the 

importance of each question based on the holding company’s 

specific circumstances. 

Financial Condition 

e) Does the holding company lack a consistent source of reliable 

cash flow and stable earnings from operations other than 

proceeds from the thrift? 

If Yes, review Earnings section of Program 730 

f) Is the holding company significantly leveraged, either with 

high debt levels, other hybrid instruments with debt-like 

features, or highly volatile investments, such as futures, 

options, interest only strips, or residuals? 

If Yes, review Capital and Earnings sections of Program 730 

g) Does the holding company have major investments that can 

rapidly require significant cash expenditures, such as futures, 

short options, or financing construction? 

If Yes, review Capital and Earnings sections of Program 730 
Holding Company Section 710 

Administrative Program 

 Yes No

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

710.8 Holding Companies Handbook March 2009 Office of Thrift Supervision 

h) Is the holding company engaged in a cyclical industry or one 

that is distressed or clearly experiencing adverse trends? 

If Yes, review Capital section of Program 730 

i) Does the holding company have a history of volatile operating 

earnings? 

If Yes, review Earnings section of Program 730 

j) Has the holding company or any of its affiliates recently had a 

downgrade in debt ratings by a major debt rating agency, such 

as Moody’s, Standard and Poor’s, Fitch Ratings, or A.M. Best? 

If Yes, review Capital section of Program 730 

Financial Independence of the Thrift Subsidiary 

k) Is the thrift dependent on the holding company for access to 

the capital markets? 

If Yes, review Capital section of Program 730 

l) Is the thrift unlikely to survive the financial collapse of the 

holding company or a major affiliate? 

If Yes, review Risk Management section of Program 730 
Holding Company Section 710 

Administrative Program 

 Yes No

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 710.9 

Operational Independence of the Thrift Subsidiary 

m) Do the thrift’s management and Board of Directors 

consistently act in a manner beholden to the holding 

company? 

If Yes, review Risk Management section of Program 730 

n) Are the thrift’s operational systems dependent upon the 

holding company or any of its affiliates? 

If Yes, review Risk Management section of Program 730 

o) Is the thrift basically a “shell” with no or few full time 

employees dedicated only to the thrift’s well-being, as opposed 

to having a distinct management team devoted to the thrift? 

If Yes, review Risk Management section of Program 730 

p) Are the thrift’s audit functions consolidated within the holding 

company, as opposed to having a separate, distinct audit 

department? 

If Yes, review Risk Management section of Program 730 

q) Does the holding company or any of its affiliates perform 

most, if not all, key functions of the thrift, such as risk 

management, underwriting, investment advice, trading, and 

other banking or lending functions? 

If Yes, review Risk Management section of Program 730 
Holding Company Section 710 

Administrative Program 

 Yes No

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

710.10 Holding Companies Handbook March 2009 Office of Thrift Supervision 

r) Is the compensation of thrift employees, either directly or 

indirectly through stock options, tied to the performance of 

the holding company? 

If Yes, review Risk Management section of Program 730, and review 

Examination Handbook Section 330. 

⎯ Are there significant or abusive intercompany or insider 

transactions such as loans, guarantees, asset 

purchases/sales, or service contracts? 

If Yes, review Organizational Structure section of Program 730, and 

review Examination Handbook Section 380. 

Reputation Risk 

s) Is the thrift’s public identity linked with the holding company, 

such as a similar name and marketing strategies? 

If Yes, review Organizational Structure section of Program 730 

t) Is there significant cross-selling of proprietary products, like 

trusts, insurance policies, mutual funds, etc.? 

If Yes, review Organizational Structure section of Program 730 

u) Is the thrift limited purpose in that it serves only to facilitate 

the sale of services and products of the holding company, for 

example trusts or mutual funds, as opposed to being a full 

service community association? 

If Yes, review Organizational Structure section of Program 730
Holding Company Section 710 

Administrative Program 

 Yes No

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 710.11 

v) Do virtually all the thrift’s assets or liabilities come, directly or 

indirectly, from the holding company or any of its affiliates, as 

opposed to a widely diverse community deposit base with 

independent franchise value? 

If Yes, review Organizational Structure section of Program 730 

Management Experience 

w) Is the holding company inexperienced in running a federally 

insured entity, as opposed to a history of managing banks and 

thrifts? 

If Yes, review Risk Management section of Program 730 

x) Is the thrift a de novo, as opposed to a thrift with existing 

management that has a proven track record? 

If Yes, review Risk Management section of Program 730 

y) Is the holding company relatively new, as opposed to a well 

established business with many years of successful operations?

If Yes, review Risk Management section of Program 730 

Complexity of Operations 

z) Does the holding company conduct business or have operating 

entities in foreign markets or countries? 

If Yes, review Organizational Structure section of Program 730 
Holding Company Section 710 

Administrative Program 

 Yes No

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

710.12 Holding Companies Handbook March 2009 Office of Thrift Supervision 

aa) Does the holding company engage in multiple forms of 

financial services (i.e., banking, insurance, securities brokerage, 

etc.)? 

If Yes, review Organizational Structure section of Program 730 

bb) Does the holding company engage in commercial or other 

nonfinancial activities? (The Gramm-Leach-Bliley Act (GLBA) 

of 1999, restricted the creation of new thrift holding companies 

that engage in commercial or other nonfinancial activities. 

GLBA grandfathered most holding companies in existence at 

the time.) 

If Yes, review Organizational Structure section of Program 730 

cc) Does the holding company engage in businesses, such as 

insurance or manufacturing, with significantly different auditing 

and accounting practices? 

If Yes, review Capital and Earnings sections of Program 730 
Holding Company Section 710 

Administrative Program 

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

710.13 Holding Companies Handbook March 2009 Office of Thrift Supervision 

HOLDING COMPANY CLASSIFICATION 

After completing the checklist, select the appropriate holding company categorization below. There is 

no rule that indicates how many “Yes” answers are necessary to classify a holding company between a 

Category I, a Category II, and a Category III. Use your judgments of the current and prospective risk 

exposures and complexity of operations to reach your conclusions. You should also consider consumer 

issues in your analysis, including what level of exposure there is to the deposit insurance fund, the level 

of consumer assets at risk, etc. 

In general, if the thrift has substantial insured deposits from outside the holding company, but is 

predominately beholden to the holding company for operational support, you should consider it 

Category II and focus heavily on the relevant CORE procedures. Even if the thrift has its own distinct 

existence, staff, and systems, a “Yes” answer to questions “e” through “j” could lead to determining 

that the holding company is complex, since the holding company’s financial condition means there is a 

greater incentive to try to boost earnings or cash flow via the thrift. 

For a financially troubled institution, you should consider a Category II classification even when the 

thrift has independent management, systems, and identity. Similarly, you should not classify any 

holding company with a 3, 4, or 5 composite rating as a Category I. Although OTS can successfully 

insulate insured institutions from the bankruptcy of its parent, it is a difficult and time consuming 

process. Regional staff must be on alert whenever a holding company experiences a material financial 

downturn. 

If you conclude that the firm is not a Category I, you must determine whether the level of complexity 

and risk warrants a Category II or a Category III classification. OTS reserves Category III classifications 

for complex, conglomerate holding company enterprises. To classify a holding company as a Category 

III, the company must conduct business internationally and engage in more than one type of financial 

service (banking, insurance, securities, etc.) or multiple financial and nonfinancial activities. You must 

consult with regional management and with senior management in Washington, DC before changing a 

firm’s classification to or from a Category III. Senior management in Washington, DC will make the 

final determination based upon the input of regional management. 
Holding Company Section 710 

Administrative Program 

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

710.14 Holding Companies Handbook March 2009 Office of Thrift Supervision 

(Please Check One) 

The Holding Company is Noncomplex and not High Risk - Category I 

The Holding Company is Complex or Higher Risk – Category II 

The Holding Company is a Financial Conglomerate and High Risk - 

Category III 

*Note: Senior management in Washington, DC must approve this classification. 

Summarize the basis for your conclusion in your work papers. 

EXAMINER’S SUMMARY, RECOMMENDATIONS, AND COMMENTS
Abbreviated Holding Company Section 720 

Examination Program 

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 720.1 

Program Guidance: You should only use this Abbreviated Holding Company Examination 

Program to examine low risk or noncomplex holding company enterprises. This program should not 

be used to examine high risk or complex holding companies (Category II) or Conglomerate (Category 

III) holding companies. When using this program, you should also consider the unique characteristics 

of the specialized holding company structures discussed in Sections 910-940. You should consult with 

the examiner-in-charge and complete the sections of the program that are necessary to evaluate each 

CORE examination area and to support the overall examination conclusions. You may consult the full 

CORE Holding Company Examination Program (Section 730) for more detailed steps for each 

procedure. 

C – CAPITAL

EXAMINATION OBJECTIVES

Determine the holding company enterprise’s financial resources relative to its risk profile. 

Evaluate the holding company enterprise’s capital structure and level of debt. 

Assess capital allocation and planning processes, including oversight and capital management. 

EXAMINATION PROCEDURES WKP. REF.

1. Assess the holding company’s ability to service its outstanding debt and the 

degree it relies on the thrift or other subsidiaries to upstream funds to service the 

debt. Determine whether double leveraging is occurring, and to what extent. 

 

2. Assess the holding company’s consolidated capital structure. Consider the 

quantity and composition of capital. Does the holding company enterprise have 

enough capital to meet its subsidiaries’ regulatory requirements as well as protect 

the enterprise from risky activities or adverse events? Does capital provide a 

cushion to absorb unanticipated losses and to support the level and composition 

of borrowing? 

 
Abbreviated Holding Company Section 720 

Examination Program 

 WKP. REF.

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 720.2 

3. Does the holding company enterprise have sufficient capital to support its 

business plans and strategies, and/or the ability to enter capital markets to raise 

additional capital as necessary? 

 

4. Consider the effect of the company’s dividend practices on its capital condition. 

 

5. Evaluate the holding company’s capital allocation and planning process in the 

context of its complexity. Determine whether capital management and oversight 

practices relate capital to risk, anticipate capital needs, and outline strategies to 

maintain sufficient capitalization as appropriate. 

 

6. For affiliates that are regulated by another state or federal agency, determine if 

there are any agreements or conditions imposed that would require the holding 

company to devote financial resources (such as capital contributions) to that 

entity. If such an agreement exists, determine the extent to which it could 

ultimately have an adverse impact on the enterprise, including the subsidiary 

thrift. 

 
Abbreviated Holding Company Section 720 

Examination Program 

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 720.3 

O – ORGANIZATIONAL STRUCTURE

EXAMINATION OBJECTIVES 

Analyze ownership and control. 

Determine if there is evidence that the holding company structure is designed to circumvent OTS 

policies. 

Identify activities of the holding company and its noninsured subsidiaries to determine permissibility. 

(Refer to Section 400, pages 400.7-400.9 and Section 400, Appendix B.) 

Identify and assess the inherent risks in the holding company enterprise’s activities. 

EXAMINATION PROCEDURES WKP. REF.

1. Analyze changes in the holding company’s organizational structure since 

acquisition or the previous examination. Obtain or prepare an organizational 

chart that identifies all holding company tiers and affiliates. 

 

2. Determine whether any individual or entity – directly, indirectly, or by acting in 

concert – has acquired control. 

 

3. Identify and evaluate the inherent risks in the holding company enterprise and 

determine whether the company engages in any impermissible activities. 

 
Abbreviated Holding Company Section 720 

Examination Program 

 WKP. REF.

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 720.4 

4. Determine the extent to which the holding company integrates the operations of 

the thrift or other affiliates within the holding company enterprise. Assess the 

risks posed by integrated systems, common risk management practices, central 

decision making, joint marketing and delivery systems, and linked market 

reputation. Evaluate whether the thrift can insulate itself from adverse events 

within the holding company structure and operate on a stand-alone basis. 

 

5. Identify and analyze material asset, liability, and off-balance sheet concentrations. 

 

6. Identify and analyze any tax-sharing agreements and policies, tax payments paid 

by the thrift to the holding company, and the income tax accounting and 

settlement practices where the thrift does not file a separate tax return. 

 

7. Identify and assess significant intra-group transactions. Assess the direct and 

indirect impact on the thrift and any other material subsidiaries of any significant 

transactions including asset purchases/sales, contracts for services, loans, or 

guarantees. If the transactions involve the thrift, ensure that it properly identifies 

them in its books and records. For thrift transactions, ensure they comply with 

the affiliate transaction regulations (12 CFR 563.41 and 563.42). 

 
Abbreviated Holding Company Section 720 

Examination Program 

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 720.5 

R – RISK MANAGEMENT

EXAMINATION OBJECTIVES

Assess whether the board of directors and management identifies, understands, and controls the risks 

within the holding company enterprise. 

EXAMINATION PROCEDURES WKP. REF.

1. Assess the influence of the holding company’s board of directors and 

management. Consider the independence of the boards of directors of the thrift, 

holding company, and other affiliates. Do any relationships create the appearance 

of a conflict of interest or usurpation of corporate opportunity? 

 

2. Assess the adequacy of the board and management’s written policies, procedures, 

and limits. Evaluate changes and determine how they affect the risk-profile and 

financial condition of the company. 

 

3. Determine if the holding company has adequate and accurate risk measurement 

and monitoring reports and systems as compared to similar holding companies of 

the same level of complexity. 

 

4. Assess the adequacy of internal controls, books, records, and systems (relative to 

the holding company’s complexity) to ensure that the holding company enterprise 

adequately manages risk. 

 

5. Verify compliance with statutory and regulatory requirements. 

 
Abbreviated Holding Company Section 720 

Examination Program 

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 720.6 

E – EARNINGS AND LIQUIDITY

EXAMINATION OBJECTIVES

Assess the holding company enterprise’s overall financial performance, including earnings, profitability, 

liquidity and sources of funds. 

Determine if the holding company’s earnings and cash flow trends may lead it to require the thrift or 

other subsidiaries to provide funds through dividends or other means. 

EXAMINATION PROCEDURES WKP. REF.

1. Review the holding company’s financial statements, consolidated audit, 

management representation letter, and Securities and Exchange Commission 

filings. Identify financial trends, discussions of significant accounting practices, 

and any identified material weaknesses in the most recent independent audit 

report and the prior examination reports of OTS or other regulators. Determine 

the relative strength of subsidiaries to holding company profitability and balance 

sheet strength. 

 

2. Evaluate the holding company enterprise’s overall financial performance, quantity 

and quality of earnings, 

 

3. Evaluate the holding company enterprise’s liquidity levels and funds management 

practices. 

 

4. Identify any changes to the bond ratings of the holding company or significant 

affiliates. Assess the causes for any changes. 

 
Abbreviated Holding Company Section 720 

Examination Program 

 WKP. REF.

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 720.7 

EXAMINER’S SUMMARY, RECOMMENDATIONS, AND COMMENTS
THIS PAGE INTENTIONALLY LEFT BLANK 
CORE Holding Company Section 730 

Examination Program 

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 730.1 

Program Guidance: You should use this CORE Holding Company Program to examine higher 

risk or complex holding company enterprises. Also, consider the unique characteristics of the 

specialized holding company structures discussed in Section 900. You may also use this Program to 

supplement the Abbreviated Holding Company Examination Program (Section 720). You should 

consult with the examiner-in-charge and complete the sections of the program that are necessary to 

evaluate each CORE examination area and to support the overall examination conclusions. 

C – CAPITAL

EXAMINATION OBJECTIVES

Determine the holding company enterprise’s financial resources relative to its risk profile. 

Evaluate the holding company enterprise’s capital structure and level of debt. 

Assess capital allocation and planning processes, including oversight and capital management. 

EXAMINATION PROCEDURES WKP. REF.

1. Assess the holding company’s ability to service its outstanding debt and the 

degree it relies on the thrift or other subsidiaries to upstream funds to service the 

debt. Determine whether double leveraging is occurring, and to what extent. 

• Determine if the level of consolidated debt is increasing and if interest 

expense is a significant portion of recurring income. 

• Calculate the ratio of consolidated holding company debt to 

consolidated tangible capital. (For holding companies with significant 

nonthrift operations, particularly in industries with large investments in fixed 

assets, calculate the debt-to-total asset ratio. ) 

• Calculate the holding company’s leverage ratio. 

• Compute the debt-to-equity ratio on a market value and book value basis to 

assess the market perception of the company. 

• Consider if the holding company is investing in leveraged instruments such 

as futures and options that can require volatile cash needs. 
CORE Holding Company Section 730 

Examination Program 

WKP. REF.

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 730.2 

• Determine to what degree the holding company has retained recourse 

(explicit or implicit) related to off-balance sheet funding activities such as 

asset securitizations. 

• Consider whether the holding company is committed to investments with 

material cash needs or capital intensive business activities. 

 

2. Assess the holding company’s consolidated capital structure. Consider the 

quantity and composition of capital. Does the holding company enterprise have 

enough capital to meet its subsidiaries’ regulatory requirements as well as protect 

the enterprise from risky activities or adverse events? Does capital provide a 

cushion to absorb unanticipated losses and to support the level and composition 

of borrowing? 

 

3. Consider the overall risk profile you identify in the Organizational Structure 

review and assess all risk factors, including credit, market, operational, and legal 

risks in your analysis of capital adequacy. 

• Determine if the holding company enterprise’s capital position has 

deteriorated since the last examination. If so, cite the reasons. 

• Analyze whether the holding company has significantly restructured its asset/liability portfolio or made significant acquisitions or divestitures. 

• Review the composition of consolidated capital. How would capital 

adequacy change if you applied thrift capital conventions, bank holding 

company capital conventions, or the capital conventions of other functional 

or foreign regulators? 

• Consider the extent to which the holding company uses debt-like 

instruments such as trust preferred stock for financing. Determine if 

management developed a sound plan for investing the proceeds of any such 

financing activities. Determine how interest or dividend obligations are 

financed; specifically, if the holding company relies on the thrift or another 

subsidiary, in whole or in part, to service such obligations? 
CORE Holding Company Section 730 

Examination Program 

WKP. REF.

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 730.3 

• Review the holding company’s capital plans. Consider the effect of future 

transactions and major acquisitions on capital. Assess the holding company’s 

access to capital markets. 

 

4. In cases where capital is inadequate, discuss with management any plans to access 

the capital markets or otherwise augment capital. 

 

5. Does the holding company enterprise have sufficient capital to support its 

business plans and strategies, and/or the ability to enter capital markets to raise 

additional capital as necessary? 

 

6. Consider the effect of the company’s dividend practices on its capital condition. 

• Identify situations where the company or thrift must borrow funds or sell 

assets to maintain dividend payments. 

• Calculate the holding company’s dividend payout to earnings ratio and 

determine if it is consistent with the business plan. 

• Compare the dividend payout ratios, net income, and asset size of significant 

affiliates to assess relative contributions. 

 

7. Evaluate the holding company’s capital allocation and planning process in the 

context of its complexity. Determine whether capital management and oversight 

practices relate capital to risk, anticipate capital needs, and outline strategies to 

maintain sufficient capitalization. 

 
CORE Holding Company Section 730 

Examination Program 

WKP. REF.

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 730.4 

8.

 

For affiliates that are regulated by another state or federal agency, determine if 

there are any agreements or conditions imposed that would require the holding 

company to devote financial resources (such as capital contributions) to that 

entity. If such an agreement exists, determine the extent to which it could 

ultimately have an adverse impact on the enterprise, including the subsidiary 

thrift. 

 
CORE Holding Company Section 730 

Examination Program 

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 730.5 

O – ORGANIZATIONAL STRUCTURE

EXAMINATION OBJECTIVES 

Analyze ownership and control. 

Determine if there is evidence that the holding company structure is designed to circumvent OTS 

policies. 

Identify activities of the holding company and its noninsured subsidiaries to determine permissibility. 

Identify and assess the inherent risks in the holding company enterprise’s activities 

EXAMINATION PROCEDURES WKP. REF.

1. Analyze changes in the holding company enterprise since acquisition or the 

previous examination. 

 

2. Compare the current organization chart with one at the time of acquisition or the 

previous examination. 

• Identify all tiers of the holding company. Ensure that the OTS holding 

company database accurately reflects the current structure. 

• Determine if the holding company has acquired, formed, divested, or 

transferred any subsidiaries or significant portion of its consolidated assets. 

 

3. Determine whether any individual or entity – directly, indirectly, or by acting in 

concert – has acquired control (as defined in 12 CFR Part 574). 

• Review a list of all significant shareholders to determine the number of 

shares owned and percentage of outstanding stock held. (Significant 

stockholders include any person or entity that owns ten percent or more of 

stock either individually or acting in concert. ) 
CORE Holding Company Section 730 

Examination Program 

WKP. REF.

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 730.6 

• Determine whether any changes in ownership (10 percent or more of voting 

stock) have occurred since acquisition or previous examination. 

• Determine whether the holding company repurchased a significant amount 

of its stock or if any new issuances of capital stock, capital notes, or 

subordinated debentures occurred. 

 

4. Consider exemptions contained in Section 10(a) of the Home Owners’ Loan Act 

and 12 CFR Section 574.3. 

 

5. Identify and evaluate the inherent risks in the holding company enterprise and 

determine whether the company engages in any impermissible activities. 

• Evaluate the risk that the activities of the holding company or other affiliates 

pose to the thrift or the entire enterprise. 

• Ensure that the holding company is not engaged in any acts or acquisitions 

prohibited by 12 CFR 584.4 or 584.9 regarding ownership interests in 

nonaffiliated companies or control of mutual thrifts, respectively. 

 

6. Determine the extent to which the holding company integrates the operations of 

the thrift or other affiliates within the holding company enterprise. Assess the 

risks posed by integrated systems, common risk management practices, central 

decision making, joint marketing and delivery systems, and linked market 

reputation. Evaluate whether the thrift can insulate itself from adverse events 

within the holding company structure and operate on a stand-alone basis. 

• Assess the risk posed by integrated systems, common risk management 

practices, central decision making, joint marketing and delivery systems, 

linked market reputation, and common controls. 

 
CORE Holding Company Section 730 

Examination Program 

WKP. REF.

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 730.7 

• Assess the reputation risk posed by the linking the public identity of the 

holding company with affiliates, including the thrift. In particular, review the 

Management Representation letter, or an attached attorney’s letter, to the 

external auditor detailing pending or threatened litigation that could harm the 

holding company, and pose reputational risks for the thrift or other affiliates. 

• Evaluate whether the thrift can insulate itself from adverse events within the 

holding company structure and operate on a stand-alone basis. Ensure that it 

maintains a separate corporate identity. 

 

7. Identify and analyze material asset, liability, and off-balance sheet concentrations. 

Include a summary of material concentrations in the report of examination. 

 

8. Identify and analyze any tax-sharing agreements and policies, tax payments paid 

by the thrift to the holding company, and the income tax accounting and 

settlement practices where the thrift does not file a separate tax return. 

• Determine whether the agreement conforms to the OTS policy, particularly 

with regard to timing, amount, refunds, and treatment of deferred taxes. 

• Determine whether the agreement governs the current practices of the 

consolidated group. 

• Determine that taxes the parent company collects from the thrift are not in 

excess of the amount that the thrift would pay if it filed a separate return. 

• Determine that the thrift’s tax payments do not significantly precede the time 

that a consolidated estimated tax liability would be due and payable by the 

holding company to the taxing authorities. 

• Determine that the amount and timing of payment of taxes and receipt of 

refunds by the thrift is no less favorable to the thrift than if it had filed 

separate returns or made separate estimated payments to the taxing authority. 

• Determine that the thrift maintains deferred tax accounts on its own books 

and does not transfer them to the books of the holding company. 
CORE Holding Company Section 730 

Examination Program 

WKP. REF.

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 730.8 

• Determine if the Internal Revenue Service (IRS) or other taxing authorities 

have assessed any additional tax payments on the consolidated group. 

• Determine that the holding company has allocated any such additional 

assessments in accordance with the tax-sharing agreement. 

• If there is a conflict between the tax sharing policies of OTS and the policies 

of another regulatory agency, contact regional management. 

• Analyze the income tax accounting and settlement practices where the thrift 

does not file a separate tax return. 

• Review consolidating schedules supporting financial reporting and determine 

the reasonableness of income tax expense (benefit) to the thrift compared 

with other members of the group. Timing differences between book income 

and taxable income may affect the analysis. 

• Determine if any IRS examinations are ongoing and whether there may be 

any material additional tax obligations as a result. 

• Determine if there are outstanding refunds from amended or net operating 

loss carrybacks that should be allocated to the thrift, or filings of 

questionable recoverability (from the holding company) that could result in 

chargebacks to the thrift. 

 

9. Identify and assess significant intra-group transactions. Assess the direct and 

indirect impact on the thrift and any other material subsidiaries of any significant 

transactions including asset purchases/sales, contracts for services, loans, or 

guarantees. If the transactions involve the thrift, ensure that it properly identifies 

them in its books and records. For thrift transactions, ensure they comply with 

the affiliate transaction regulation (12 CFR 563.41). 

 
CORE Holding Company Section 730 

Examination Program 

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 730.9 

R – RISK MANAGEMENT

EXAMINATION OBJECTIVES

Assess whether the board of directors and management identifies, understands, and controls the risks 

within the holding company enterprise. 

EXAMINATION PROCEDURES WKP. REF.

1. Assess the influence of the holding company’s board of directors and 

management. Consider the independence of the boards of directors of the thrift, 

holding company, and other affiliates. Do any relationships create the appearance 

of a conflict of interest or usurpation of corporate opportunity? 

• Determine the effect of accounting changes to the financial recordkeeping 

and reporting processes. Identify any material restatements and determine if 

they are the result of improper controls. 

• Review the audit committee minutes and any correspondence between the 

holding company and the independent auditor to identify financial 

recordkeeping deficiencies disclosed to the directors. 

• Identify any recommendations, criticisms, or comments related to financial 

recordkeeping and reporting in the most recent independent audit report and 

prior examination reports of OTS and any other regulatory agency. 

 

2. Assess the adequacy of the board and management’s written policies, procedures, 

and limits. Evaluate changes and determine how they affect the risk-profile and 

financial condition of the company. 

• Verify that the policies and procedures are sufficient to manage the 

enterprise’s level of risk and sufficiently address each of the material risk 

areas you identify in your review of Organizational Structure. 

• Ensure that the enterprise has sufficient policies and procedures for 

identifying, managing, and reporting risk concentrations. 
CORE Holding Company Section 730 

Examination Program 

WKP. REF.

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 730.10 

• Determine if the board’s risk limits are reasonable and match the risk 

appetite of the enterprise. Also verify that the enterprise complies with the 

risk limits. 

 

3. Determine if the holding company has adequate and accurate risk measurement 

and monitoring reports and systems. 

 

4. Assess the adequacy of internal controls, books, records, and systems to ensure 

that the holding company enterprise adequately manages risk. 

• Determine whether the financial statements, reports, and systems are 

complete, consistent, and accurate. Resolve any discrepancies. 

Functionally or Foreign Regulated-Determine if any discrepancies are due to different forms 

of regulatory accounting practices. 

• Identify who performs the external audit of the holding company, whether 

there has been a change in auditing firms, and the reason for such change. 

• Identify who performs the internal audit work for the holding company and 

determine whether the internal audit function is adequate and meets 

independence requirements. 

• Determine the effect of accounting changes to the financial recordkeeping 

and reporting processes. Identify any material restatements and determine if 

they are the result of improper controls. 

• Review the audit committee minutes and any correspondence between the 

holding company and the independent auditor to identify financial 

recordkeeping deficiencies disclosed to the directors. 

• Identify any recommendations, criticisms, or comments related to financial 

recordkeeping and reporting in the most recent independent audit report and 

prior examination reports of OTS and any other regulatory agency. 

 
CORE Holding Company Section 730 

Examination Program 

WKP. REF.

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 730.11 

5. Verify compliance with statutory and regulatory requirements. 

• Ensure that the holding company enterprise tracks and resolves outstanding 

examination and audit concerns. In particular, identify any corrective actions 

or formal enforcement actions and ensure their satisfactory resolution. 

• Review the findings of functional and foreign regulators for material entities 

within the enterprise. Identify any patterns of violations that are material to 

the enterprise. 

 
CORE Holding Company Section 730 

Examination Program 

WKP. REF.

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 730.12 

E – EARNINGS AND LIQUIDITY

EXAMINATION OBJECTIVES

Assess the holding company enterprise’s overall financial performance, including earnings, profitability, 

liquidity and sources of funds. 

Determine if the holding company’s earnings and cash flow trends may lead it to require the thrift or 

other subsidiaries to provide funds through dividends or other means. 

EXAMINATION PROCEDURES WKP. REF.

1. Review the holding company’s financial statements, consolidated audit, 

management representation letter, and Securities and Exchange Commission 

filings. Identify financial trends, discussions of significant accounting practices, 

and any identified material weaknesses in the most recent independent audit 

report and the prior examination reports of OTS or other regulators. Determine 

the relative strength of subsidiaries to holding company profitability and balance 

sheet strength. 

• Calculate the following ratios to identify financial trends: cash position, 

current ratio, operating cash flow, debt ratio, and return on equity. 

• Using trend and peer analysis, evaluate the earnings of the company’s 

nonthrift operations/subsidiaries over the prior three years and determine 

the causes for weak or deteriorating performance. 

• Evaluate the quality of earnings. Determine whether the sources of earnings 

of pre-tax income are recurring. 

• Assess whether the holding company is in a highly cyclical business. 

 

2. Evaluate the holding company enterprise’s overall financial performance, quantity 

and quality of earnings. 

 
CORE Holding Company Section 730 

Examination Program 

WKP. REF.

Exam Date: 

Prepared By: 

Reviewed By: 

Docket #: 

Office of Thrift Supervision March 2009 Holding Companies Handbook 730.13 

3. Evaluate the holding company enterprise’s liquidity levels and funds management 

practices. 

 

4. Use external information to evaluate the holding company’s financial condition. 

• Identify any changes to the bond ratings of the holding company or 

significant affiliates. Assess the causes for any changes. 

• Determine stock price. Compute the market value to book value ratio and 

price/earnings ratio. Compare results to the company’s peers. 

 

EXAMINER’S SUMMARY, RECOMMENDATIONS, AND COMMENTS
THIS PAGE INTENTIONALLY LEFT BLANK 
Monitoring Section 800 

Office of Thrift Supervision March 2009 Holding Companies Handbook 800.1 

Introduction 

OTS conducts routine off-site monitoring of holding company enterprises. The primary purpose of 

off-site monitoring is to identify developing material concerns or risks that may adversely affect the enterprise or its subsidiaries, including the thrift. The monitoring process will also help: 

• Identify holding company enterprises that need to be examined ahead of schedule. 

• Identify specific areas to review at the next examination. 

• Assess compliance with supervisory directives to correct previous examination concerns. 

• Evaluate whether the holding company adheres to conditions of approval and business plans. 

• Determine whether it is necessary to modify a holding company enterprise’s rating or risk classification category. 

• Assemble data, information, and analysis to support examinations. 

Monitoring will help identify and address potential problems, without being intrusive in the day-to-day 

operations of the holding company enterprise. When concerns arise, you should communicate with the 

holding company between examinations. 

An ongoing dialogue with the management of the holding company is necessary. Ongoing communication enhances supervisory efforts and provides information about significant transactions or any 

changes in strategic direction. Such communication is particularly important for holding company enterprises involved in highly cyclical or rapidly evolving industries. 

Periodic face-to-face meetings with management are appropriate for holding company enterprises categorized as high risk or complex (Category II). Periodic meetings will provide up-to-date information 

about major business initiatives. 

PRIORITIZING AND SCOPING MONITORING REVIEWS 

You have broad discretion in determining the priority and scope of each monitoring review. Monitoring 

reviews should be risk-focused. Because your monitoring review covers the entire holding company enterprise, you 

should review and incorporate key observations from thrift monitoring reports and other available information sources for 

key subsidiaries to ensure a thorough assessment and review of risk. 
Section 800 Monitoring 

800.2 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Prioritizing Monitoring Reviews 

In prioritizing the monitoring of the holding companies in your caseload, you should consider: 

• The holding company’s relationship with its subsidiaries, including the thrift, and any potential 

burden that it places on those subsidiaries (for example dividends, tax or expense payments). 

• Any significant deterioration in the financial condition or performance of the holding company 

enterprise. 

• The inherent risk in the holding company enterprise. 

• The holding company enterprise’s risk classification category. 

• The holding company enterprise’s composite rating and CORE component ratings, when available. 

• Examination ratings assigned or concerns noted with regard to the subsidiary thrift or other 

regulated subsidiaries. 

• The asset size of both the holding company and the subsidiary thrift. 

• Any significant events such as a proposed merger or acquisition. 

For noncomplex holding company enterprises that have no debt or significant activities other than control of the thrift subsidiary, your monitoring activities should focus on the thrift 

condition/performance and any intercompany transactions or payments. For complex companies and 

noncomplex holding companies with outstanding debt, your review must address any significant deterioration in the financial condition or performance. The following ratios may assist you in prioritizing 

your monitoring reviews by giving an indication of the level of diversification and leverage. 

Level of Diversification:

Holding Company Assets

Thrift Assets 

This ratio will be higher for holding companies that have more holdings in nonthrift operations or investments. A ratio of 100 percent indicates that the holding company has no assets other than the thrift, 

whereas a ratio of 200 percent would indicate that the thrift’s assets represent one half of the holding 

company’s consolidated assets. Higher ratios indicate greater diversification from thrift assets and, perhaps, a more complex holding company structure. 

Holding Company Net Income

Thrift Net Income 
Monitoring Section 800 

Office of Thrift Supervision March 2009 Holding Companies Handbook 800.3 

A ratio of 100 percent indicates that the holding company may have no source of income other than 

the thrift. A ratio greater than 100 percent indicates that the holding company has income from 

nonthrift sources (the higher the ratio, the more income from nonthrift sources). Conversely, a ratio of 

less than 100 percent indicates that the holding company’s nonthrift operations are experiencing net 

losses (the lower the ratio, the greater the level of nonthrift losses). 

Capital Evaluation:

Total Capital Ratio

Holding Company Total Capital

Holding Company Total Assets 

This ratio will provide an indication of the overall leverage within the enterprise. A negative or low total 

capital ratio often indicates that the holding company enterprise has limited capital resources. You 

should consider the composition of total capital when evaluating the adequacy of holding company 

capital. Holding company enterprises that have significant balances of intangible assets or other volatile 

assets relative to capital may not have the same capital stability as those with a comparable total capital 

ratio and little or no intangible assets. Intangible assets can include goodwill, core deposit intangibles, 

mortgage servicing rights, and other intangible assets. You should consider the characteristics of these 

assets, particularly where the assets generate predictable cash flows that the holding company enterprise 

can rely on to fund operations. 

Tangible Capital Ratio

Holding Company Total Capital – Holding Company Intangible Assets

Holding Company Total Assets – Holding Company Intangible Assets 

This ratio provides you with another measure of the leverage in the consolidated organization. A low or 

negative tangible capital ratio may indicate that the holding company has limited capital resources; however, some intangible assets generate cash flows that could support operational funding. For example, 

generally accepted accounting principles (GAAP) characterizes mortgage-servicing assets as intangible 

assets; therefore, you should consider the impact of this component on entities with significant mortgage banking operations. 

Do not confuse the tangible capital ratio with the regulatory capital requirements the Federal Reserve 

Board imposes on bank holding companies. OTS evaluates the adequacy of a holding company enterprise’s capital on a case-by-case basis, and tangible capital is one consideration (see Section 300). 

You should also consider that deferred policy acquisition costs (DPAC) are currently reported on TFR 

line HC510 with intangible assets. You should closely evaluate the composition of HC510 to understand the strength of the holding company capital structure. 
Section 800 Monitoring 

800.4 Holding Companies Handbook March 2009 Office of Thrift Supervision 

Intangible Assets/DPAC Ratio:

Intangible Assets and DPAC

Total Capital 

This ratio helps evaluate the composition of total capital. When the amount of intangible assets or 

DPAC represent a large percentage of total capital, you should evaluate the attributes of these assets to 

determine whether the assets provide financial benefits to support operations. 

Double Leverage Ratio

Thrift $ Equity

Holding Company $ Equity 

This ratio can provide you with an indication of double leverage in the holding company enterprise; 

however, the ratio is not effective in identifying double leverage in holding company enterprises that 

have other nonthrift subsidiaries. A higher double leverage ratio could indicate more significant holding 

company reliance on debt to fund its equity investments in the thrift. Generally, the more double leverage in the consolidated organization, the larger the holding company’s cash flow demands will be to 

service interest payments and debt retirements. In a noncomplex holding company, high double leverage may cause the holding company to seek significant capital distributions or other cash payments 

from the thrift. 

Dividend Payout Ratio

Thrift Cash Dividends to Holding Company 

Thrift Net Income 

Dividends a thrift pays to the holding company may diminish the thrift’s ability to augment capital and 

support its risk profile. Thrifts that have higher dividend payout ratios may be less capable of supporting their risk profile from internally generated funds. You should closely evaluate the organization’s 

capital management practices in situations where the thrift distributes a significant share of its net income to the holding company, particularly when the thrift net income represents the major source of 

the holding company’s consolidated net income. 

Scope of Monitoring Reviews 

The scope of your monitoring review should obtain an understanding of the following three areas: 

• An overview of the holding company enterprise, including its organizational structure, primary 

activities, and business plans. 

• The holding company enterprise’s relationship with material subsidiaries, especially its dependence on the thrift or the thrift’s dependence on the holding company. 
Monitoring Section 800 

Office of Thrift Supervision March 2009 Holding Companies Handbook 800.5 

• The holding company enterprise’s financial condition and performance. 

Several information sources can help you monitor these three areas. These informational sources include: 

• Thrift Financial Report (TFR) Holding Company Schedule (Schedule HC), other TFR schedules, and relevant peer or trend ratios; 

• Company or competitor press releases; 

• Filings with the Securities and Exchange Commission (SEC); 

• Equity and debt market or company analysis; 

• Stock price or market data; 

• Shareholder reports; 

• H (b)–11 Annual/Current Report; 

• Annual audit reports; 

• Holding company examination reports; 

• Subsidiary examination report(s); 

• Input from both the thrift and holding company examiners-in-charge; 

• Application approval orders and conditions; 

• Pending application materials; 

• Consumer complaints; 

• Data supplied by other regulators, including examination reports; 

• Thrift, holding company, and other affiliate websites; and 

• Industry websites. 

As you conduct your routine monitoring, you should, at a minimum: 

• Analyze the quarterly Schedule HC and ratio reports available on OTS national systems. 
Section 800 Monitoring 

800.6 Holding Companies Handbook March 2009 Office of Thrift Supervision 

• Review periodic reports such as the Annual/Current H-(b)11 Reports, annual audit reports, 

SEC filings, as well as information provided by other regulators involved in the holding company enterprise. 

• Review industry or publicly available information, including equity and credit analysis. 

• Monitor compliance with major application approval conditions. 

Analyzing Schedule HC and Internally Generated Reports. The subsidiary thrift files Schedule 

HC quarterly. For most holding company enterprises, OTS designates one holding company for which 

the thrift should provide this financial information. In some cases, where more than one distinct ownership path exists, there may be more than one designated filer. In addition, staff may designate 

additional filers if the information is necessary for supervisory purposes. As you analyze this information, you should test the accuracy of the financial data. Even when a thrift provides information on a 

consolidated basis for the designated filer, they may not include upper tier holding companies in the 

data. Therefore, you may want to coordinate your review of Schedule HC with your review of the holding company’s comprehensive audited financial statements. These statements are usually attached to the 

Annual/Current H-(b)11 Report. 

The collection of Schedule HC data provides an indication of the holding company’s financial condition and trends. The holding company data and ratios generated from Schedule HC are most effective 

for holding companies with limited activities beyond the thrift investment. The ratios produced from 

Schedule HC for more diversified holding company structures are often less effective at providing clear 

indications of risk. For diversified holding company enterprises, your monitoring efforts should focus 

on analyzing SEC filings, other comprehensive financials provided in the H-(b)11 filing, or other publicly available financial information or analysis. 

As you analyze Schedule HC, you should review the Evaluating Capital on a Case-By-Case Basis discussion in Section 300, Capital and the Ratio Analysis discussion in Section 600, Earnings. These 

discussions describe ratios that help analyze and spot trends regarding the holding company enterprise’s 

capital adequacy, leveraging, earnings, liquidity, cash flow, and reliance on subsidiary dividends. They 

can also help evaluate financial aspects of the holding company enterprise’s relationship with the thrift. 

Please note: The results of the ratio calculations outlined in Sections 300 and 600 should not lead you 

automatically to assume there is a problem. Results of the calculations that indicate a potential problem 

should result in additional scrutiny of the activities of the holding company enterprise to determine 

whether risks exist. 

Periodic Reports. OTS requires holding companies to file defined periodic reports. The instructions 

for form H-b(11) Annual/Current Report outline OTS’s requirements for periodic reports. Holding 

companies must file this report within 90 days of their fiscal year end. In addition, they must file quarterly updates within 45 days of the end of each quarter during which there has been a material change in 

any of the information reported. If no changes have occurred, the holding company must file a statement certifying there were no changes. 
Monitoring Section 800 

Office of Thrift Supervision March 2009 Holding Companies Handbook 800.7 

The H-(b)11 instructions require holding companies to provide audited financial statements and copies 

of SEC filings as well as identify other materially important events 

Industry/Publicly-Available Information. For large and complex companies, we cannot rely exclusively upon our own systems. Therefore, your off-site monitoring must also make effective use of 

market information, including analyst reports, press reports, and stock price and volume movements. 

These types of public information will help you identify issues to discuss with management. See: 

• www.fitchratings.com (FITCH IBCA, DUFF & PHELPS) 

• www.ambest.com (AM BEST)(for holding company enterprises with insurance as their primary 

business) 

• www.moodys.com (MOODY’S INVESTORS SERVICE) 

• www.standardpoor.com (STANDARD & POOR’S). The “News and Commentary” section includes information on industries including Financial Institutions and Insurance. In addition, the 

“Credit Ratings Actions” section includes ratings news. 

In enterprises that have another primary regulator, you should leverage the other regulator’s information and resources. In particular, you should review any examination reports and any financial reports 

that the enterprise submitted. For further information on reviewing enterprises with functionally regulated entities, see the functional regulation discussion in Section 200, Administration. 

Monitoring of Major Application Approval Conditions. OTS approves applications subject to 

the applicant thrifts and/or holding companies agreeing to maintain compliance with application approval conditions. Major applications include those applications that substantially increase the risk 

profile of the thrift or holding company; involve novel or complex transactions; or propose a significant shift in business strategy. OTS considers all complex holding company and de novo applications as 

major applications. 

Each OTS Region is responsible for monitoring and documenting a thrift or holding company’s compliance with: 

• All written application approval conditions. 

• Any other written representations made to OTS either in the application or during the application process that were important considerations in the approval of the application, but were not 

memorialized in a condition. These include issues requiring follow-up. 

• Business plan projections. This includes performing a quarterly review of the thrift or holding 

company’s adherence to the financial projections the region accepted. This review should assess 

both the volume and type of business activities to evaluate the riskiness of actual versus proposed operations. 
Section 800 Monitoring 

800.8 Holding Companies Handbook March 2009 Office of Thrift Supervision 

If the thrift or holding company is not in material compliance with a significant approval condition or 

application issue, or if there are material variances from its business plan projections, you must identify 

these areas of noncompliance and route them through your supervisor to the attention of the Regional 

Director. Supervisory corrective action will be implemented based upon regional evaluation of the severity of the noncompliance. 

Generally, the monitoring requirements for major applications sunset three years from the later of: (i) 

the date of approval of the application; (ii) the date of commencement of operations for de novos; or, 

(iii) the date of the Regional Director’s approval of any major revision of the business plan. 

MONITORING DOCUMENTATION

You should document your quarterly monitoring findings for any areas where you identify significant 

financial deterioration or supervisory concerns. You should present your review comments in a simple, 

exception-based, format. For each area of significant deterioration or concern, you should: 

Explain the cause and impact of the deterioration or concern; and 

• Detail any planned corrective actions or necessary supervisory follow-up. 

If your analysis does not reveal any significant deterioration in the financial condition or performance 

of the holding company enterprise, and does not reveal any new information that would cause supervisory concern or supervisory action, a single sentence indicating such findings will suffice. 
SECTION: HOLA 10(l)s Section 910

INTRODUCTION

Office of Thrift Supervision January 2003 Holding Companies Handbook 910.1

Section 10(l) of the Home Owners’ Loan Act 

(HOLA), permits a state savings bank (or a cooperative bank) to elect to be treated as a savings 

association for purposes of regulating its holding 

company. The only requirement that a state savings bank or cooperative bank must satisfy in 

order to make this election is that it must be a 

qualified thrift lender.1 By making such an election, the holding company is regulated by OTS as 

a savings and loan holding company for purposes 

of Section 10 of HOLA, rather than as a bank 

holding company. 

Insured subsidiary state savings banks are primarily regulated by the FDIC and the state. However, 

being deemed a “savings association” for purposes of Section 10 of HOLA results in not only 

OTS regulation of the holding company, but also 

OTS regulation of certain requirements that apply 

directly to the insured subsidiary institution. For 

example, Section 10(d) subjects the insured subsidiary institution to transactions with affiliate 

restrictions (as implemented by OTS at 12 CFR 

Sections 563.41 and 563.42). In addition, Section 

10(f) (as implemented by 12 CFR 563.140, Subpart E) requires the subsidiary insured institution 

to file advance notices of dividend declarations 

with the OTS. 

OTS will need to coordinate with both the chartering authority(state) and insurer(FDIC). 

OTS PHILOSPHY IN REGULATING 10(l) 

HOLDING COMPANIES

Although it is clear that OTS has the authority to 

examine 10(l) holding companies, this can present 

a challenge because OTS does not directly super-

 

1

 A company that controls a state savings bank or cooperative 

bank seeking to take the 10(l) election that is not already a 

registered savings and loan holding company must also file 

an H-(e) Acquisition Application and receive OTS approval 

to become a savings and loan holding company. As part of 

that application process, the OTS reviews the financial and 

managerial resources, as well as the future prospects, of the 

proposed holding company and the insured subsidiary institution.

vise the insured subsidiary institution. Our holding company examination approach is designed to 

assess the holding company enterprise’s effect on 

the insured institution. This examination process 

may initially seem awkward, but has proven effective when closely coordinated with the FDIC 

and State examination of the subsidiary savings 

bank. By comparison, the Federal Reserve Banks 

also examine bank holding companies that own 

national banks, state nonmember banks, or savings associations that they do not regulate 

directly. 

In order to accomplish the examination objectives, you will have to work closely with the 

depository institution regulators to assess the effect of the holding company’s operations on the 

insured subsidiary institution. It is generally best

to conduct the holding company examination in 

conjunction with the examination of the insured 

subsidiary institution. Whether you conduct the 

examination concurrently or not, you must establish and maintain open communication channels 

with the other regulators. The importance of such 

communication, from scheduling to examination 

findings, will be made clear in this Section.

SCHEDULING AND SCOPING THE 10(l) 

EXAMINATION

Because our databases do not contain information 

on the insured subsidiary institution, the default 

holding company examination due date is based 

on an annual cycle. This due date should serve as 

only a general guide and reminder to coordinate 

the scheduling and scope of the holding company 

examination with the examination of the insured 

subsidiary institution. 

In setting the scope, you should contact the insured subsidiary institution’s regulators and 

inquire whether they have any special concerns 

with the holding company relationship. You 

should address any such concerns in the course of

your examination of the holding company. As a 

means to familiarize yourself with the subsidiary 

insured institution, you should also:
SECTION: HOLA 10(l)s Section 910

910.2 Holding Companies Handbook January 2003 Office of Thrift Supervision

• Obtain and review the latest examination reports of the subsidiary.

• Review financial information available on the 

FDIC website.

• Obtain financial statements and monitoring 

reports used by holding company management to oversee their investment in the 

insured subsidiary institution.

As you review the books and records of the holding company, you should not only review the 

areas of concern specifically noted by the regulators, but also watch for red flags that would raise 

concerns if the subsidiary were directly regulated 

by OTS. This includes high risk activities engaged in by the holding company or other 

affiliates that could adversely affect the insured 

institution. You should bring all concerns that 

may affect the insured subsidiary institution to the 

attention of the state and federal regulators.

As with any other holding company examination, 

you should start with the Administrative Program 

Section 710 to identify the holding company’s 

risk classification. You then use the Abbreviated 

Holding Company Examination Program Section 

720 for low risk holding company enterprises 

(Category I), recognizing that you may need to 

consult the CORE Holding Company Examination Program Section 730 to address specific 

areas of risk. You should use the CORE Holding 

Company Examination Program Section 730 for 

all higher risk or complex holding companies 

(Category II).

You should review all four of the CORE technical 

areas of a holding company examination: Capital, 

Organizational Structure, Relationship and Earnings. 

Capital

As discussed in Section 300, OTS does not uniformly impose either consolidated or 

unconsolidated numerical regulatory capital requirements on holding companies. An institution 

may view this as a benefit of OTS regulation, and, 

therefore, may elect 10(l) status to avoid standardized application of a numerical capital 

requirement on its holding company. 

OTS expects all thrift holding companies to have 

a prudent level of capital based on their risk profile. This holds true for 10(l) holding companies. 

You should evaluate the 10(l) holding company's 

capital position to determine its effect on the insured subsidiary institution. As part of that 

analysis, you should determine whether or not the 

10(l) holding company's capital position has deteriorated since the last examination, and whether 

or not significant asset/liability restructuring, acquisitions, or divestitures have occurred that may 

negatively affect the financial or managerial relationship between the institution and the holding 

company. 

As also noted in Section 300, capital provides a 

secondary source of financial protection for the 

holding company if earnings and cash flow prove 

insufficient. During the examination, you should 

fully evaluate the capital of the holding company; 

especially for companies that are experiencing 

cash flow problems, or weak earnings capacity, or 

rely on the institution for working capital since 

this may result in the institution being pressured 

to upstream funds. A 10(l) holding company that 

has capital does not necessarily have sufficient 

cash flow to meet contractual obligations when 

they are due.

In the report of examination, you should discuss 

dividends and stock repurchases that occurred 

during the review period, as well as those that are 

planned. Further, you need to state to what extent, if at all, the holding company is reliant on 

insured institution funds to support the parent’s 

dividend payments or stock repurchases. 

You also need to closely analyze the level of debt 

at the holding company. You should investigate 

how the holding company has historically serviced its debt, and what factors caused the 

holding company to increase its debt level. Does 

it assume additional debt to provide for the payment of dividends? Does it rely on the insured 

subsidiary institution to upstream funds? You 

should contact the depository institution’s regulators concerning significant levels or increases in 
SECTION: HOLA 10(l)s Section 910

Office of Thrift Supervision January 2003 Holding Companies Handbook 910.3

debt at the holding company level that may negatively affect the insured subsidiary institution. 

You must also evaluate whether double leveraging is occurring and what risks it may pose. 

Double leverage exists when funds obtained by 

the holding company from debt proceeds are invested into the institution subsidiary as equity. 

Increasing the capital base of the institution allows it to increase its borrowings/leverage as 

well, thereby compounding the original holding 

company debt and resulting in higher consolidated debt/ leverage. In this situation, the 

institution’s earnings must be sufficient to service 

both levels of debt and typically the parent will 

rely upon dividends from the insured subsidiary 

institution to provide the funding for its debt service requirements. If the institution is unable to 

maintain earnings to support future dividend 

payments, the holding company will be unable to 

pay its debt obligations as well. In this regard, it 

is important to assess the financial strength of the 

insured subsidiary institution, as well as the holding company, to ensure that debt requirements can 

be met.

Organizational Structure

In this Section, you will focus on the structure and 

activities of the holding company. You will also 

look at the issue of control of the holding company in order to determine if there have been 

changes in the ownership structure and what regulatory processes apply. Then you need to analyze 

the various activities in which a holding company 

may be involved. As discussed thoroughly in 

Section 400, there is a correlation between how a 

holding company is structured and the kind of activities in which it may engage.

Many of the 10(l) holding companies that we 

regulate are holding companies of federal savings 

associations that converted to state savings banks. 

These entities were familiar with OTS holding 

company regulation, or otherwise perceive advantages to being treated as a savings and loan 

holding company, and, thus, elected 10(l) status. 

Some holding companies may elect 10(l) status 

after such a conversion as a means to be able to 

engage in broader activities. Such holding companies may qualify as exempt if they continue to 

control a savings association that they controlled 

on May 4, 1999, and that institution is a qualified 

thrift lender (QTL). Further, an insured institution must be a qualified thrift lender to elect and 

maintain 10(l) status. Accordingly, you must verify the institution’s QTL status at each 

examination. 

Once the holding company structure and activities 

are determined, the review will then focus on 

what risks, if any, exist that may affect the insured subsidiary institution. However, consistent 

with the current regulatory approach, this assessment should not be limited to current risks that 

may be evident, but also to prospective risks. You 

need to determine whether there are elements regarding the structure or business interests that 

hold potential risks for the institution. 

Relationship

This Section addresses the effectiveness of the 

holding company’s board and executive management, as well as issues associated with the 

interdependence of the insured subsidiary institution. You should analyze the degree of influence 

the holding company has over the institution and 

how this influence affects the institution’s operations.

Specifically, identify the principal decision makers of the holding company. Are these individuals 

also directly involved in managing the affairs of 

the insured institution? Does the holding company have policies and procedures in place to 

ensure that the insured institution has a separate 

corporate identity, and conflicts of interest are 

avoided? Does the board of directors provide 

adequate oversight of the affairs of the holding 

company and its subsidiaries? How actively involved is the holding company in the management 

of the institution? Does the organizational structure of the holding company foster 

interdependency risk that could hurt the institution if the holding company becomes financially 

distressed? You should communicate any significant concerns about the management of the 
SECTION: HOLA 10(l)s Section 910

910.4 Holding Companies Handbook January 2003 Office of Thrift Supervision

holding company, especially potential conflicts of 

interest, to the insured subsidiary’s regulators.

Assess the risks posed by integrated systems, 

common risk management practices, central decision making, joint marketing and delivery 

systems, linked market reputation, size of the institution in relation to the holding company, and 

common controls.

Moreover, it is important that the principles of an 

arm’s length transaction be applied to all transactions between the insured institution and its 

affiliates. This approach provides protection for 

all the interests involved. In addition, payments 

should be made within a reasonable time of the 

rendering of the services. During the examination, you must determine that present practices are 

consistent with internal policy. Once you establish that the fee structure is reasonable and 

consistently followed, then determine if the insured subsidiary institution is actually receiving 

the services for which it is charged. This can 

usually be ascertained by discussing the services 

with the EIC of the insured subsidiary institution.

The affiliate transaction regulations apply to the 

insured subsidiary institution. Therefore, the insured subsidiary’s regulators will in all likelihood 

review this area. 2 Nevertheless, while you are 

conducting your examination of the holding company, possible transaction with affiliate issues 

may arise. Keep in mind that all covered transactions of the insured subsidiary institution must 

comply with the affiliate regulations contained in 

Federal Reserve Act Sections 23A and 23B and 

the additional prohibitions contained in section 

11(a)(1) of the HOLA.3 

Covered transactions with a single affiliate, may 

not exceed 10 percent of a bank’s capital and surplus, and transactions with all affiliates may not 

 

2

 In addition, OTS may also review these transactions under

statutory authority set forth at Section 10(d) of HOLA (as 

implemented by 12 CFR 563.41 and 563.42).

3

 Section 11(a)(1) of the HOLA prohibits loans to affiliates 

engaged in nonbank holding company activities. It also prohibits purchases and investments in securities issued by 

affiliates.

exceed 20 percent of the bank’s capital and surplus. In addition, all transactions must be 

conducted on market terms. To ensure that the insured institution appropriately reports all 

transactions, you should advise the other regulators of any transactions that you identify in your 

review of the books and records of the holding 

company and other affiliates. This would also include loans or other extensions of credit to 

insiders of the holding company subject to Regulation O. 

In general, you should help facilitate the other 

regulators’ review of this area and verify aspects 

of affiliate transaction as they are recorded on the 

holding company’s books and records. Furthermore, you should review transactions between 

affiliates that are outside the scope of the affiliate 

regulations but, nonetheless, may indirectly impact the subsidiary institution. For example, an 

unsecured loan made by the holding company to 

another affiliate or insider. While these transactions are not covered by the affiliate regulations, 

they do have the potential to deplete the holding 

company’s financial resources and indirectly affect the subsidiary institution.

As you review the relationship of a 10(l) holding 

company with its insured subsidiary institution, 

you must remind yourself that although OTS is 

only the primary regulator for the holding company, you cannot ignore the insured subsidiary 

institution. As reiterated throughout this Handbook, the OTS approach to regulating holding 

companies considers both the financial condition 

and operations of the holding company and the 

impact of the holding company on the insured institution. 

You may encounter transactions or restructurings 

within the enterprise that do not appear, independently, to be in the best interest of the holding 

company. Keep in mind that situations do occur 

where it is appropriate for risky assets or risky 

lines of business to be transferred from the insured institution or a subsidiary of the insured 

institution to the holding company. While ultimately we may prefer, from a supervisory 

perspective, that the assets be sold to a third party 

or the risky activity discontinued altogether, 
SECTION: HOLA 10(l)s Section 910

Office of Thrift Supervision January 2003 Holding Companies Handbook 910.5

sometimes there may be sound business reasons 

for these transactions. 

Therefore, just because a transaction is not in the 

best interests of the holding company, or does not 

improve its consolidated financial condition, does 

not automatically mean you should criticize it. 

Some transactions may, in fact, be structured to 

safeguard the insured institution. Just because 

OTS is not the primary regulator for the insured 

institution does not mean that we do not consider 

its best interests as we would if OTS regulated all 

entities within the structure. 

Earnings

The key areas to review in the Earnings component of the examination are the holding 

company’s cash flow, profitability, and exposure 

to highly leveraged investments such as futures 

contracts. Once again, you should advise the insured subsidiary’s regulators of any excessive 

debt or liquidity concerns that may affect the insured subsidiary institution. 

Additionally you should review the funds the 

holding company receives from the institution. 

This includes dividend payments, fees for services rendered, and payments made under tax 

sharing arrangements. You should advise the 

EICs of the other regulators of the funds that the 

holding company reports that it receives from the 

insured subsidiary institution. In addition, you 

should ensure that the insured institution filed the 

appropriate dividend notifications with the OTS.4

COMMUNICATING WITH THE PRIMARY 

REGULATOR OF THE INSTITUTION

As reiterated throughout this Section, it is important that you coordinate examinations and 

communicate with the other regulators of the 

10(l)’s insured subsidiary institution. Open communication sets the stage for information exchange and serves two vital purposes:

 

4

 As a “savings association” controlled by a “savings and 

loan holding company,” the insured institution is subject to 

Section 10(f) of HOLA (as implemented by 12 CFR 

563.140).

1) It ensures that we have the opportunity to obtain the primary regulator’s perspective and 

supervisory concerns with respect to the insured institution or its relationship with the 

holding company.

2) It promotes sharing of our supervisory concerns and examination findings and 

conclusions.

While the examination report is the appropriate 

vehicle to communicate conclusions to the holding company, it may not necessarily cover 

everything that you should communicate with the 

other regulators. Your communication with the 

insured subsidiary’s regulators will usually be 

done during concurrent holding company and insured subsidiary institution examinations. 

Communication efforts should begin, however, 

with the scheduling of the examinations and continue through finalizing your conclusions with 

regard to the 10(l)’s impact on the insured subsidiary institution. 

For ease of reference, the following list summarizes some of the key points you should 

communicate:

• The timing, scheduling and preliminary scope 

of the holding company examination. The 

examination should be scheduled, to the extent possible, concurrently with the 

examinations of the lead subsidiary institution 

by the other regulators.

• The adequacy of the holding company’s consolidated capital, and any trends or 

deterioration since the last examination.

• Significant cash flow or liquidity concerns.

• Any significant restructurings, acquisitions, 

or divestitures that may affect the institution.

• Any dividends or stock repurchases that the 

holding company depends on institution funds 

to support or are otherwise significant.

• Significant levels or increases in consolidated 

debt or double leverage, considering how re-
SECTION: HOLA 10(l)s Section 910

910.6 Holding Companies Handbook January 2003 Office of Thrift Supervision

liant the holding company is on the insured 

subsidiary institution to service such debt.

• How the insured subsidiary institution fits 

within the corporate structure, and how the 

holding company’s goals and objectives or 

strategic plans may affect the insured subsidiary institution.

• Any activities conducted within the holding 

company structure that are high risk or could 

otherwise adversely affect the insured subsidiary institution.

• Any concerns about the management of the 

holding company, especially potential conflicts of interest.

• Transactions between the holding company or 

other affiliates and the insured subsidiary institution, as well as transactions between 

affiliates that may indirectly impact the subsidiary institution. Include funds the holding 

company receives from the institution (for example, dividends, fees for services rendered, 

or payments made under tax sharing arrangements).

Upon completion of your review, you will need to 

consult with the other regulators to enable you to 

rate the holding company based on its effect on 

the insured subsidiary institution. You should 

complete the holding company examination report 

and outline any areas of concern that you and the 

other regulators conclude are significant. If corrective action is necessary, you should work 

closely with the other regulators to formulate a 

joint strategy. It may be appropriate to address 

concerns at either the insured subsidiary institution or the holding company, or both 

simultaneously. Coordinated enforcement actions 

generally ensure that the full attention of both the 

holding company and the insured subsidiary institution are devoted to taking the necessary 

corrective action. 

You need to be aware that while OTS examination authority is clear, our ability to conduct 

formal investigations is limited to violations of 

Section 10 of HOLA. The other regulators of the 

insured subsidiary institution should take the lead 

on enforcement or other corrective action required 

of the insured subsidiary institution itself or with 

regard to its relationship with the holding company. OTS should take the lead on enforcement 

or corrective actions relating to violations of Section 10 of HOLA and concerns at the holding 

company.
SECTION: Mutual Holding Companies Section 920

INTRODUCTION

Office of Thrift Supervision January 2003 Holding Companies Handbook 920.1

This Section will help you recognize the unique 

issues presented by a mutual holding company 

(MHC) structure. An MHC structure is fundamentally different from a traditional savings and 

loan holding company structure. An MHC structure combines the elements of a mutual thrift, 

which is owned and controlled by its depositors 

and, in some cases by its borrowers, with elements of a stock thrift and holding company. 

An MHC is the result of a conversion of a mutual 

institution to become a stock institution. The 

MHC becomes the corporate repository of the 

mutual members’ economic and legal interests. It 

must own a controlling interest in the newly created stock institution, but it may sell up to 49.9% 

of the institution’s voting stock, as well as any 

nonvoting stock, as a means to raise capital. Even 

when there is no issuance of stock to the public, 

there is still stock that has been issued to form the 

structure.

Not all MHC structures will look the same. In all 

cases, the thrift becomes a stock institution. 

Some structures will include a mid-tier stock 

holding company between the stock thrift and the 

MHC. 1 Other structures will include only the 

stock thrift that is directly owned by the MHC.

By creating the MHC structure in 1987, Congress 

provided an alternative to a full conversion from a 

mutual to stock form.2 It provides a means for the 

members to continue to influence and control the 

operations of the institution, while also providing 

a means to raise capital. Mutual institutions that 

traditionally had little choice but to accumulate 

capital through retained earnings can use the 

 

1

 A mid-tier stock holding company exists between the parent 

MHC and the thrift. The majority of shares in the mid-tier 

stock holding company must be issued to the MHC, and the 

mid-tier stock holding company must own 100 percent of the 

shares of the subsidiary thrift.

2 An MHC may subsequently decide it wants to pursue a full 

conversion. This later action also requires OTS approval, 

and is referred to as a second step conversion. 

MHC structure to sell minority stock interests. 3 

The MHC structure can also be used as a vehicle 

to engage in activities under the holding company 

umbrella.

The guidance in this Section will help you assess 

the risks that the MHC structure poses. You must 

consider the combined risk profile, financial 

health and stability of the consolidated enterprise, 

the influence of minority shareholders and the degree of interdependence between the thrift, a midtier stock holding company (if one exists), and the 

MHC. You should base your examination conclusions on the current and prospective effect the 

structure has on the subsidiary thrift.

EXAMINATION COMPONENTS

The MHC form of organization may affect your 

examination steps. In addition to the standard examination procedures used for a stock holding 

company, you should evaluate the following 

unique areas of concern presented by an MHC.

Capital

As noted in Section 300, OTS does not have a 

standardized capital requirement that applies to 

all holding companies. Instead, capital is evaluated on a case-by-case basis determining the 

amount of capital necessary to support the risks 

within the structure. 

Dividend Waivers

To allow more capital to remain at the thrift, 

thereby increasing the capital position of the 

thrift, an MHC may waive its right to receive a 

dividend. Needless to say, this has an impact not 

only on the thrift, but also on the level of capital 

at the MHC available to support its other activities. Prior notice must be provided to OTS. 

 

3 While mutual institutions may receive pledged deposits and 

issue mutual capital certificates and subordinated debentures, 

they rarely use these options.
SECTION: Mutual Holding Companies Section 920

920.2 Holding Companies Handbook January 2003 Office of Thrift Supervision

Dividend waivers must not be detrimental to the 

safety and soundness of the subsidiary thrift. 

Dividend waivers also require a board resolution 

that the waiver by the MHC is consistent with the 

directors’ fiduciary duty to the mutual members. 

The waiver of dividends by the MHC allows for 

any dividend declared by the thrift to be distributed only to the minority shareholders. The 

potential for a conflict of interest exists when directors and officers are deciding whether or not to 

waive dividends. If the directors and officers also 

hold stock, the financial decisions they make may 

personally benefit them. You should determine if 

the waiver has unduly enriched the minority 

shareholders at the expense of the MHC members.

The waiver of dividends may also result in atypical per share results. Earnings per share 

calculations are made using all outstanding 

shares, both those held by the MHC and the minority shareholders. On the other hand, dividends 

per share calculations are typically made using 

only the number of shares that will receive dividend payments. If the MHC waives its right to a 

dividend, this will result in a calculation using 

only the number of outstanding minority shares. 

For example, assume net income of $20 million, 

dividends of $9 million on the 4 million shares 

owned by the minority shareholders, and dividends waived on the 6 million shares owned by 

the MHC. Earnings per share are $2.00 ($20 million /10 million shares). Dividends per share are 

$2.25 ($9 million /4 million shares). From these 

ratios, it might appear that dividends exceeded net 

income ($2.25 per share vs. $2.00 per share), 

when in fact dividends were only 45% of net income ($9 million/$20 million).

Organizational Structure

As discussed in Section 400, many thrift holding 

companies operate without activity restrictions. 

However, all MHCs and their subsidiaries are 

subject to activity restrictions.

4

 An MHC may 

engage in the same activities as a stock holding 

 

4

12 CFR § 1467a(o)(5).

company subject to activity restrictions5. The 

permissible activities for holding companies subject to activity restrictions are outlined in Section 

400. 

Relationship

A unique aspect of the MHC structure is the ownership of the MHC by the members. This group 

may exhibit little interest in the activities that occur and may not realize their potential for 

involvement in the organization. The structure 

may operate with a small group of individuals exercising exclusive control over the entities within 

the structure.

Board Responsibilities

The existence of an MHC, and possibly a mid-tier 

stock holding company, adds complexity to the 

structure.

The boards of directors of the thrift, mid-tier 

holding company (if one exists) and MHC may be 

comprised of the same, or mostly the same members. However, you should ensure that the boards 

of directors of each entity in the structure operate 

independently. The boards of each organization 

have distinct responsibilities. Each entity must 

maintain a separate corporate identity and interrelationships among the companies should not be 

detrimental to the institution. MHCs and mid-tier 

boards may meet less frequently than thrift boards 

because they are typically shell entities. You 

should evaluate how effectively each Board operates in executing its duties and responsibilities. 

The interests of one entity in the structure should 

not be sacrificed for the benefit of another entity 

in the structure.

You should review board minutes to determine if 

adequate discussion and analysis of issues occurs 

at each level in the structure.

 

5

12 CFR § 575.11.
SECTION: Mutual Holding Companies Section 920

Office of Thrift Supervision January 2003 Holding Companies Handbook 920.3

Minority Shareholders

The addition of minority shareholders into a traditional mutual environment may result in change 

for the thrift. Minority shareholders, particularly 

those elected to the board of directors, may bring 

a fresh perspective from experiences in other organizations or industries. This additional 

perspective may help the organization to identify 

new ideas and enhance the thrift’s potential for 

long-term growth. Minority shareholders may 

also create friction within the organization. A focus on dividends may result in unreasonable 

demands for increased earnings or dividends that 

may weaken the capital position of the subsidiary 

thrift. 

Minority shareholders may call for activities that 

increase shareholder value through the sale or 

merger of the thrift with another institution. This 

may result in the board and management focusing 

on trying to appease shareholders rather than focusing on activities in the long-term best interest 

of the structure.

An option available to MHC’s is a second step 

conversion. This enables the entity to convert to a 

stock structure. OTS requires a majority vote of 

minority shareholders to approve any second step 

conversion.

Earnings

The Earnings section of this handbook provides a 

number of useful ratios for analyzing the financial 

statements of each entity in the MHC structure.

Pure mutual organizations may have the goals of 

customer service as a priority over profit maximization. The shift to an MHC structure, with the 

resulting influence of shareholders, may create 

pressure for increased earnings.

Financial Statement Analysis

Financial statement analysis in an MHC structure 

will include evaluations of statements of each entity in the structure. Intercompany transactions 

should be evaluated closely. Your examination 

should determine that transactions that occur are 

properly authorized, recorded and reported, and 

assess the direct or indirect impact on the thrift. 

Transactions that may appear appropriate when 

only one entity is reviewed, may appear questionable when both sides of the transaction are 

reviewed together.

There should be a tax allocation agreement between the MHC, mid-tier and thrift. The 

allocation should ensure that the thrift does not 

assume a larger tax burden than it would if it filed 

independently.

The allocation of revenues and expenses between 

the savings association, affiliates, and holding 

companies should be based on a documented 

method that is systematic, rational, and consistent 

with sound principles of corporate governance. In 

the absence of an appropriate allocation, reported 

earnings could be significantly different from that 

which would have been the case had there not 

been the intercompany relationships. You should 

question the allocation if it does not track with the 

earnings activities of, or the economic benefits 

derived by, the separate entities. For example, the 

allocation of all legal costs incurred by, and for 

the benefit of, the savings association to an MHC, 

which has no significant operations of its own, is 

generally not appropriate. As a result, earnings of 

the MHC would be understated, while earnings of 

the savings association would be overstated. 

Where minority shareholders are present in the 

structure, they would benefit, to the detriment of 

the MHC. This is because the MHC would effectively bear more than its pro rata share (based on 

ownership) of the savings association’s legal 

costs.

SUMMARY

The MHC structure expands the options available 

to mutual savings associations. The structure allows the organization to maintain many of the 

features of a mutual while providing access to 

capital markets.

Consistent with the general holding company philosophy and supervisory approach, the 

examination of an MHC structure should consider 

the direct and indirect impact on the thrift institu-
SECTION: Mutual Holding Companies Section 920

920.4 Holding Companies Handbook January 2003 Office of Thrift Supervision

tion. Furthermore, since the MHC is the repository of the mutual members’ economic and legal 

interests, you should insure that the directors and 

officers of the MHC are properly fulfilling their 

fiduciary responsibilities. 

REFERENCES

United States Code (12 USC)

§1467a(o) Mutual Holding Companies

Code of Federal Regulations (12 CFR)

Part 575 Mutual Holding Companies
SECTION: Insurance Holding Companies Section 930

INTRODUCTION

Office of Thrift Supervision January 2003 Holding Companies Handbook 930.1

Although commonly thought of as one industry, 

the insurance industry actually consists of several 

distinct industries. Each distinct industry is based 

on the type of insurance written, for example, 

property/casualty, life/health, health maintenance 

organizations, title, and disability1. Each functions in its own way, has distinct financial 

attributes and operates differently. OTSchartered thrifts are owned by a variety of these 

different types of insurance entities.

The insurance industry is comprised of several 

different types of businesses:

• Insurance companies, also called insurance 

underwriters – those that take on insurance 

risk by underwriting and issuing policies to 

customers.

• Reinsurers – insurance companies that insure 

portions of the business underwritten by other 

insurance companies.

• Agents – sales staff, either employees or independent contractors that sell on behalf of 

the companies they represent.

• Brokers – sales staff that is independent of insurance companies, they bring together 

insurance buyers and sellers. They work on 

behalf of the buyer.

State insurance departments regulate each type of 

insurance business listed above in a different way 

and to a different extent2.

As with any holding company, you need to start 

with the administrative program and then move 

onto the CORE program (or abbreviated program 

if applicable).

 

1

 Information about insurance industries is presented in Appendix A.

2

 Regulation by state insurance departments is discussed in 

Appendix B.

PROGRAM GUIDANCE

Capital

Information presented in Capital Section 300 is 

just as relevant to insurance entities as to other 

types of organizations. However, you should 

consider the information presented below before 

drawing firm conclusions about a holding company enterprise that is engaged in insurance 

activities within the structure.

Capital Sufficiency

Capital levels for insurance companies are typically relatively high. This is due to strong 

investment performance during the 1990’s and 

significant investment regulation3. In addition, 

due to the risk of catastrophes and the long-term 

nature of life insurance policies, higher capital 

levels are typically held. Recent events may result in a reduction of capital for certain 

companies. However, the industry overall is expected to remain strong.

Risk-based capital (RBC) is the major tool used 

by insurance regulators to evaluate the adequacy 

of an insurance company’s capital level on a 

statutory accounting basis.

Insurance companies are part of a highly regulated industry. This level of regulation may result 

in restrictions against providing capital to the 

thrift. Evaluate the existence and/or adequacy of 

holding company capital in support of the thrift. 

This evaluation of consolidated capital should exclude the capital related to regulated insurance 

companies and any other regulated entities such 

as state banks. The remaining amount of capital 

should then be evaluated for its adequacy in support of the subsidiary thrift.

An evaluation of capital would also include a determination of any existing capital restrictions by 

 

3

 Capital regulation of the insurance industry is discussed further in Appendix A.
SECTION: Insurance Holding Companies Section 930

930.2 Holding Companies Handbook January 2003 Office of Thrift Supervision

another regulator. For affiliates that are regulated 

by another state or federal agency, determine if 

there are any agreements or conditions imposed 

that would require the holding company to devote 

financial resources (including capital contributions) to that entity. If such agreements or 

conditions exist, determine the extent to which 

they could ultimately have an adverse effect on 

the subsidiary thrift.

RBC is calculated at the individual insurance 

company, rather than enterprise level. Distinct 

RBC formulas are available for property/casualty, 

life and health maintenance organization companies.

The calculation involves applying risk factors to 

various asset, premium and reserve items. The 

factors are higher for items with greater underlying risk and lower for items with lower 

underlying risk.

As noted above, state insurance regulators measure an insurance company’s capital by its riskbased capital ratio. The ratio is total adjusted 

capital divided by authorized control level riskbased capital. Results of 200 percent or above 

typically indicate little concern. Results below 

200 percent may result in insurance department 

actions.

OTS’ approach to holding company supervision 

provides for the evaluation of capital on a caseby-case basis. Holding companies that underwrite 

insurance will prepare Statutory Accounting 

Statements either in addition to, or instead of 

GAAP statements. In those instances, SAP capital can be used as a measure of capital similar to 

tangible capital.

Risks

Capital Section 300 of the Handbook discusses 

various types of risk that organizations must address. The insurance industry also must deal with 

Underwriting Risk.

Insurance is a unique product in that the ultimate 

cost is sometimes not known until long after the 

product is sold. Underwriting risk is the risk that 

premiums will be inadequate to cover the cost of 

claims that occur during the policy periods. Insurance prices are established based on estimates 

of expected claim costs as well as estimates of the 

costs to issue and administer the policy. The estimates and assumptions used to develop policy 

pricing may prove to ultimately be inaccurate. 

This inaccuracy may result from poor assumptions, changing legal environments, increased 

longevity, higher than expected weather catastrophes and research breakthroughs as to the causes 

of disease4. The total cost of the policy may not 

be known until many years after the coverage has 

been provided. Factors that were unknown at the 

time the policy was issued may result in increased 

claims and claims costs.

Liquidity risk is typically less likely to be of concern in an insurance organization due to the 

extensive structure of investment regulation. Often 75 percent or more of an insurance company’s 

assets are concentrated in the investment portfolio. Insurance investments are heavily weighted 

in bonds rather than stock.

Insurance company investments are typically 

structured to focus on providing for adequate diversification, liquidity and quality. The primary 

objective of an insurer’s investment strategy is to 

preserve capital. Insurers invest largely in longterm bonds with fixed interest rates and predictable cash flows.

Life insurance companies present a unique aspect 

in evaluating capital. Variable life insurance and 

variable annuities are accounted for through the 

use of separate accounts. Policies accounted for 

in this way require no supporting capital. Capital 

calculations for companies with separate accounts 

 

4

 Medical research may find the cause of a disease relates to a 

product thereby creating insurance claims outside of health 

insurance. For instance, several serious lung conditions have 

been traced to asbestos exposure resulting in large volumes 

of claims to manufacturers of asbestos. Lead paint has been 

linked to mental and physical impairment in children resulting in claims against paint manufacturers and landlords.
SECTION: Insurance Holding Companies Section 930

Office of Thrift Supervision January 2003 Holding Companies Handbook 930.3

should be made excluding the amount recorded in 

that category5.

Debt

Due to the strong capital levels and large investment portfolios most insurance organizations 

carry little debt. Procedures presented in Capital 

Section 300 related to debt may not be needed 

when evaluating many insurance holding companies.

Most insurance companies have negotiated terms 

for substantial letters of credit. These agreements 

are in place, available to activate in the event of a 

catastrophe. This type of agreement is not drawn 

on for operating funds or to finance growth, rather 

only for those infrequent, major events that require large amounts of immediate cash. The 

existence of these prenegotiated agreements provides the company the ability to obtain cash 

quickly without liquidating portions of the investment portfolio. The agreements help to 

minimize the impact that the sale of investments 

in a poor investment market would have on a 

company’s operating results.

Dividend Policies

State insurance regulation typically includes restrictions on dividends from the underwriting 

company to the parent holding company. Dividends that do not require prior insurance 

department approval are limited to the current 

years earnings and ten percent of surplus as of the 

beginning of the year. Dividends in excess of that 

must receive prior insurance department approval.

As part of evaluating the financial condition of 

the holding company, the examiner should determine the impact reduced earnings (limiting 

dividends) would have on the cash flow needs of 

the holding company.

 

5

 Information about Separate Accounts is included in Appendix A.

Accounting Methods

You may find that companies that underwrite insurance may not have their financial statements 

prepared in accordance with Generally Accepted 

Accounting Principles (GAAP). Instead, companies that underwrite insurance must file their 

financial statements with state insurance 

departments using what is referred to as statutory 

accounting principles (SAP). Publicly traded insurance underwriting companies must file GAAP 

statements with the Securities and Exchange 

Commission in addition to the SAP statements 

filed with the state insurance departments. Mutual or closely held companies typically only 

prepare SAP statements.

When reviewing financial statements, you should 

determine if the company prepares both SAP and 

GAAP statements or if only SAP statements are 

prepared.

If the holding company itself is not engaged in insurance underwriting activities and only controls 

or has investments in insurance companies, financial statements would be prepared using GAAP, 

SAP would not be used.

Ratio results calculated using SAP numbers 

would appear less favorable than those prepared 

using GAAP numbers. You should not automatically evaluate this more conservative result 

harsher than a GAAP result.

Companies that underwrite insurance often have 

diverse affiliates and subsidiaries within the structure; therefore, the statements at the ultimate 

parent may be complex. Because of this complexity it is not practical to simply benchmark results. 

Rather, a thorough understanding of the company 

and its various components will provide a comfort 

level that examination procedures are adequate.

Organizational Structure and Relationship

As noted above, OTS has approved applications 

for thrift charters for several different types of insurance companies. The thrift has been used by 

these organizations as a means to fill product line 

gaps and cross sell related products to existing in-
SECTION: Insurance Holding Companies Section 930

930.4 Holding Companies Handbook January 2003 Office of Thrift Supervision

surance clients. The types of products and services they offer reflect the overall organizations 

broader marketing strategy.

Several life insurance companies were granted 

thrift charters to provide trust services to consumers. The companies, whose insurance operations 

focus on life insurance and retirement and estate 

planning, use the thrift to provide trust services 

that complement these activities. Life insurance 

policies can be used to fund trusts. Retirement 

funds may be direct deposited into checking accounts. Certificates of deposit may be 

incorporated into asset diversification plans for 

retirement or estate planning purposes.

Several property/casualty insurance companies 

have applied for, and received full service retail 

charters. The products they offer, including home 

mortgages and auto loans, complement the auto 

and homeowners lines of insurance offered.

As the companies gain experience with the thrift 

and gain proficiency with the ability to cross sell 

thrift services to existing insurance clients, some 

have requested expanded authority. Several have 

acquired other thrifts or received approval to expand their authority to full service from trust only.

Approval of business plans for insurance industry 

thrifts often include restrictions or requirements. 

In many instances the insurance company plans 

for insurance agents to market thrift products. 

Agents’ roles are largely marketing and information only; they are restricted from accepting 

deposits. In order to assure that this message is 

communicated effectively, agent training materials often require prior review by OTS before 

release. 

Opportunities arise to cross sell thrift products to 

insurance clients. Likewise, opportunities exist to 

cross sell insurance products to thrift customers. 

Several existing thrifts have chosen to enter the 

insurance arena either through the creation or 

purchase of insurance agencies, marketing agreements with agents, or the creation of reinsurance 

companies.

Gramm-Leach-Bliley addressed concerns related 

to the sales of insurance products in a banking 

environment. The requirements of this law have 

been incorporated into OTS regulation through 12 

CFR Chapter V Part 536 – Consumer Protection 

in Sales of Insurance.

The rule addresses anti-tying and disclosures to 

reduce customer confusion. A main focus of the 

rule is to make clear that the Federal Deposit Insurance Corporation does not insure insurance 

products sold on behalf of a bank or thrift. Compliance examiners review thrift activities for 

adherence to the rule.

Earnings

As recommended in the Earnings Section, you 

will consider ratings given by Moody’s or Standards and Poor’s. You should also review the 

ratings of A. M. Best for companies that underwrite insurance

6

.

Although it is commonly thought that insurance 

companies make a profit only due to the difference between premium revenue and claim 

expenses, that if often not the case. 

Insurance companies make a profit through their 

success at managing the funds available for investment. Insurance companies receive money 

from customers for premiums and management 

fees. The company has the funds available for investment, sometimes for many years, before 

claims are paid to policyholders and beneficiaries.

Ratio Analysis

Some of the ratios suggested in the Earnings Section use information from the cash flow 

statement. Typically, the cash flow statement is 

less informative for insurance companies than for 

other types of industries. The investment portfolio dominates assets and the management of it 

results in a significant volume of activity reported 

in the financing section of the cash flow statement. This leads to results that although typical 

for insurance may appear odd.

 

6

 Information about A. M. Best is included in Appendix C.
SECTION: Insurance Holding Companies Section 930

Office of Thrift Supervision January 2003 Holding Companies Handbook 930.5

The current ratio cannot be used for most insurance organizations. The balance sheets for these 

entities are not usually segregated into current and 

long-term assets. 

Operating cash flow is also of less importance for 

insurance companies again because of the significant impact of investing activities reflected in the 

financing section of the cash flow statement.

As mentioned previously many insurance entities 

have little to no debt resulting in either highly favorable or no result for the debt ratio.

Because of the high capital levels of many insurance companies, return on equity results are often 

lower for this industry than for other industries. 

Often investment analysts, due to their lack of understanding of the industry and their focus on 

maximizing return on equity for investors, shy 

away from these companies. Instead you should 

view the high capital level as a strength rather 

than a weakness.

Deferred Acquisition Costs

Deferred policy acquisition costs (DPAC) are referred to in the Earnings Section as an asset that 

does not generate cash. DPAC is comprised of 

the costs necessary to sell and issue a policy such 

as agent commissions and underwriters salaries 

and benefits. These expenses are paid early in the 

policy term. Under the GAAP matching concept 

items are expensed in the same period that the 

corresponding revenue is earned. DPAC is a prepaid expense (asset) that is amortized over the 

estimated life of the policy. 

Property/casualty companies typically issue 6 

month or 12 month policies. DPAC is expensed 

over the policy life. Given the short-term nature 

of property/casualty policies, DPAC does not 

typically represent a large portion of assets on the 

balance sheet.

Life insurance companies issue policies that are 

expected to remain in force for many years. 

DPAC is expensed over this estimated longer life 

of the policy and therefore is typically a larger 

percentage of assets.

SUMMARY

The insurance industry is comprised of a variety 

of different types of organizations. An understanding of these businesses and how they differ 

from thrifts will help you in determining the 

scope and methodology for conducting a holding 

company examination.
Appendix A: Industry Background Section 930A

LIFE INSURANCE

Office of Thrift Supervision January 2003 Holding Companies Handbook 930A.1

The major distinguishing feature of the life insurance industry is its inherent long-term nature. 

The perspective of the long-term, collecting premium for many years and then paying a death 

benefit, impacts the approach to investing, revenue and expense recognition and regulation. The 

long-term nature of coverage combined with the 

increased risk of death as people age is distinct 

from the risks of other types of insurance.

Traditionally the life insurance industry focused 

on fixed life insurance products and fixed annuities. Products like term life and whole life are 

typical fixed products.

Over the past two decades, life insurance companies have focused on diversifying their revenue 

base by developing and selling retirement planning and asset management focused products. 

The inherent long-term nature of retirement planning and funding is a natural match for the 

industry.

The increase in stock market prices during the 

1990’s led to a significant shift in product sales 

from fixed life insurance and fixed annuities to 

variable life insurance and variable annuities. 

This shift has a material financial impact for the 

insurer. (Instability in the stock market that began 

during 2000 has resulted in a significant slowdown in sales of variable products and a renewed 

demand for fixed products.)

The insurer retains investment and interest rate 

risk for fixed products. Most variable products 

shift the substantial portion of investment and interest rate risk to the policyholder. Most variable 

products include rate guarantees set at very low 

levels.

In many ways, transferring risk benefits the company. However, during periods of high 

investment returns, the company’s investment returns are less than for fixed products, where 

excess earnings are retained by the company.

Variable products also generate income differently than fixed products. Fixed products 

generate revenue through both insurance premiums and the portion of investment return that is 

above the fixed rate credited to the product. 

Variable products generate revenue through fees 

for insurance coverage and asset management fees 

for the portfolio of investments underlying the 

product. The shift to variable products can create 

a more stable revenue flow based on fee income 

rather than investment returns.

Typical Balance Sheet

The shift to variable products from fixed products 

has ramifications for financial statement presentation.

The largest asset category on the balance sheet for 

the typical life insurance company is cash and investments. Funds collected by insurers through 

the sales of fixed products fund the investment 

portfolio.

The majority of the general investment portfolio 

(about 70 percent) is invested in high quality 

bonds. About ten percent of the portfolio is typically invested in mortgage loans. The balance is 

split among common stock, real estate, cash and 

policy loans. States have strict investment laws 

limiting the percentages, and risk exposures of 

company investments.

Deferred policy acquisition costs consist of the 

expenses necessary to sell and issue a policy such 

as agent commissions and underwriters’ salaries 

and benefits. These expenses are paid early in the 

policy term. Under the GAAP matching concept 

items are expensed in the same period the corresponding revenue is earned. Since these costs are 

paid early in the policy term a prepaid asset is recorded. The asset is expensed over the expected 

length of time the policy will be in force. Most 

types of life insurance policies remain in force for 

many years. Therefore, the prepaid expense (asset) is amortized over the actuarially estimated 

life, which may be many years. As a result DPAC 
Appendix A: Industry Background Section 930A

930A.2 Holding Companies Handbook January 2003 Office of Thrift Supervision

is often a material item on the balance sheet of 

life insurance companies.

Variable products, indexed products and some 

modified guaranteed products are accounted for 

through the use of ‘separate accounts’. Separate 

accounts are separate line items in both the assets 

and liabilities sections of the balance sheet. The 

amounts should be comparable.

Separate accounts represent segregated portfolios 

of assets owned by a life insurance company. The 

accounts are segregated because investment experience is credited directly to the participating 

policies covered.

The corresponding liability recorded on the balance sheet represents the ownership interest in 

these funds by policyholders and beneficiaries.

Separate accounts are segregated from the balance 

of the investment portfolio because the assets and 

related investment gains and losses are insulated 

from the company’s creditors and liquidation 

claims.

Due to customer interest in various sectors of the 

stock market, separate account investments are 

diverse. They are often of a higher level of risk 

than those in the general investment portfolio. 

State law allows separate account assets to be invested without the strict limitations imposed on 

the general investment account. Customers 

choose the types of investments that will be held 

based on their risk appetite. Separate account offerings can look similar to those of mutual funds. 

For example, separate accounts investments may 

be focused towards common stock or bonds, 

‘high-tech’, small cap, international, growth or income focused investments.

Typically, cash, invested assets, separate accounts 

and deferred policy acquisition costs will account 

for the majority of total assets. The remaining 

amounts are spread among a variety of accounts 

depending on the types of business in which the 

company is involved.

The majority of liabilities are spread among a variety of accounts that represent reserves for 

current or expected future claims. These reserves 

are actuarially determined based upon estimates 

of mortality, morbidity and longevity. Reserves 

for life insurance policies begin to be accumulated once the policy is sold, and increase each 

year. As mentioned previously, separate accounts 

have both an asset and a corresponding liability.

A life insurance company’s counterpart to retained earnings is called surplus. At the time of 

publication the industry is strongly capitalized 

with surplus supporting about seven percent of total assets.

Risk-Based Capital (RBC) Requirements

As noted in Section 930, state insurance regulators measure an insurance company’s capital by 

its risk-based capital ratio. The ratio is total adjusted capital divided by authorized control level 

risk-based capital.

The life and health insurance risk-based capital 

formula considers the four major risk categories 

of:

• Asset risk – the risk that an insurer’s assets 

will default or decline in value.

• Insurance risk – the risk related to improper 

underwriting assumptions

• Interest rate risk – the risk of changing interest rates on assets and liabilities

• Business risk – other risks not included in the 

other three categories.

Risk-based capital results for life and health insurers are evaluated at various levels:

• 250% and above – adequate, no further action 

required.

• 200-249% – trend test level, a trend test is 

conducted to determine if an adverse trend 

exists. An adverse result requires the insurer 

to file an RBC corrective plan with the state. 

A favorable trend result requires no further 

action.
Appendix A: Industry Background Section 930A

Office of Thrift Supervision January 2003 Holding Companies Handbook 930A.3

• 150-199% – Company action level, a corrective plan is required.

• 100-149% – Regulatory action level, appropriate examination procedures are required 

with corrective actions implemented.

• 70-99% – Authorized control level, a commissioner may take action against the 

company.

• Below 70% – Mandatory control level, the 

commissioner must seize the company unless 

there is a reasonable expectation that the condition will be resolved within 90 days.

Typical Income Statement

Under statutory accounting a life insurance company income statement is called a summary of 

operations. Given the more conservative nature 

of statutory accounting revenue tends to be recognized at the later of earned or received and 

expenses at the earlier of accrued or paid.

The statements shows various expensed amounts 

related to policy reserves. These are amounts recorded at actuarially determined periods 

throughout the life of the policy, not at the time of 

policy payment.

The life insurance industry does not have a counterpart to the combined ratio. However, for 

traditional fixed life insurance products and fixed 

annuities, the concept is similar although the time 

period may be even longer. 

For fixed return products, the life insurance company receives the premium and invests the funds 

until policy benefits are paid to beneficiaries 

many years later. The company’s success is 

measured by its ability to generate higher investment returns than the return guaranteed under the 

product.

The model is different for variable return life insurance and annuity products. Insurance 

companies charge a fee for the life insurance coverage provided by the product and in addition, 

charge a fee for the management of the underlying 

investment portfolio. This management fee 

makes up for the loss of the excess investment return earned on fixed products.

PROPERTY/CASUALTY INSURANCE

Property/casualty insurance companies are in the 

business of accepting the transfer of risk of financial loss from policyholders. Customers transfer 

the risk of loss, or decrease in value of automobiles, homes and other property as well as the risk 

of financial loss due to damages done to others 

(casualty losses).

A major factor impacting property/casualty companies is their exposure to catastrophe losses. 

Catastrophes are a single event that results in insured losses (to the industry) of $25 million or 

more. Most are weather related but they can result from other manmade events as well.

Although catastrophes are normal, expected 

events, they cannot be eliminated, controlled or 

accurately predicted with any large degree of reliability. For example, no one knows how many 

hurricanes, of what intensity and geographic 

course will occur in a season.

The exposure to catastrophe losses has significant 

repercussions in the way companies select, underwrite and price policies. It also impacts the 

degree of reinsurance needed to manage the business and the investment goals in managing the 

portfolio.

Catastrophes are easily understood to impact 

property insurance. Damage to homes, cars and 

commercial buildings by major weather events are 

often seen on the evening news. However, catastrophes also impact casualty insurance. For 

example, a hurricane that reaches an area during 

business hours may result in injuries to employees 

covered by workers’ compensation insurance, 

customers of businesses covered by general liability insurance, and the general public injured by 

flying property and debris also covered by various 

types of liability insurance (both personal and 

business insurance).
Appendix A: Industry Background Section 930A

930A.4 Holding Companies Handbook January 2003 Office of Thrift Supervision

Another major factor affecting property/casualty 

insurance is the short-tail or long-tail nature of the 

various types of insurance business. Short-tail 

lines of business are those where claims are paid 

within a short period of time after the loss occurs. 

Minor auto accidents that do not result in injuries 

are an example of this. Property insurance coverage is typically short-tail business.

Long-tail lines of business are those that take 

many years to resolve. Many casualty lines of 

business are long-tail lines of business. Medical 

malpractice insurance for pediatricians is a longtail line of insurance. Laws allow claims to be 

brought by parents. However, the laws also allow 

the child to bring their own actions upon becoming an adult. The time between notice of a 

potential claim and final resolution may span decades in this type of insurance.

The potential time spans in resolving claims has 

serious ramifications in the company’s investment 

strategy both in terms of risk and durations.

One of the ways in which property/casualty insurance differs from life insurance is in the duration 

of the policy.

Most property/casualty policies are written for a 

term of one year. Some companies still issue personal automobile insurance policies for 6 months. 

Life insurance policies are expected to span many 

years. This difference in term impacts financial 

statements.

Just as with life insurance companies, property/casualty companies are in the business of 

collecting premiums and fees, investing the funds 

and paying claims to policyholders and claimants.

For a claim to be covered by the policy it must 

occur during the policy period, regardless of when 

the insurance company is notified. The loss to the 

policyholder must also be from a cause of loss 

covered by the policy. It must also not have occurred as a result of an act of the policyholder 

intending to cause a loss.

Although a policy may be in force for 12 months, 

losses that occurred during the policy may be paid 

out over many years. For example, a person injured in an automobile accident may require 

medical treatment for many years. If a covered 

loss occurred during the policy term, expenses 

will be paid, many years later, up to the policy 

limit, even though the policy has long expired.

Typical Balance Sheet

As with life insurance companies, the largest asset 

category for property/casualty insurance companies is cash and investments. However, because 

property/casualty companies do not have separate 

accounts business a larger portion of total assets 

is in this category. Typically this category accounts for about 88 percent of total assets. Bonds 

are the largest portions of the portfolio. Typically 

bonds are about 65 percent of the total portfolio. 

Bonds are valued at amortized cost.

Common stock is the second largest component of 

the portfolio accounting for approximately about 

one quarter of the typical insurers investment 

portfolio.

The remaining 12 percent of total assets are 

spread among a variety of accounts including 

amounts due from agents for payment of policies 

and amounts due from reinsurers.

Property/casualty companies have built substantial amounts of retained earnings over the years. 

Property/casualty companies call retained earnings, capital stock and other amounts 

policyholders’ surplus. Low catastrophe losses 

during the last half of the 1990’s, strong investment results and judicious use of reinsurance have 

increased the level of surplus by the end of the 

decade. Recent events may result in decreased 

surplus for certain affected companies. The industry is expected to remain well capitalized.

The largest portion of liabilities is in accounts related to claim reserves. These accounts include 

reserves for the payment of claims as well as 

those for payment of expenses incurred in investigating and administering claims. Claim related 

reserves have decreased as a percent of assets 

over recent years not due to changes in loss patterns but due to strengthened surplus.
Appendix A: Industry Background Section 930A

Office of Thrift Supervision January 2003 Holding Companies Handbook 930A.5

Risk-Based Capital Requirements

As noted in Section 930, state insurance regulators measure an insurance company’s capital by 

its risk-based capital ratio. The ratio is total adjusted capital divided by authorized control level 

risk-based capital.

The property/casualty risk-based capital formula 

considers the four major risk categories of:

• Investment risk – the risk that an insurer’s assets will default or decline in value.

• Credit risk – the risk of default by agents, reinsurers and other types of creditors.

• Underwriting risk – considers the risk of adverse reserve development as well as the risk 

of inadequate rates.

• Off-balance sheet risk – the risks of excessive 

growth and contingent liabilities.

Risk-based capital results for property/casualty 

companies are evaluated based upon:

• 200% and above – Adequate level, no further 

action.

• 150-199% – Company action level, a corrective action plan is required.

• 100-149% – Regulatory action level, appropriate examination procedures and corrective 

action plan are required.

• 70-99% – Authorized control level, a commissioner may take action against the 

company.

• Below 70% – Mandatory control level, the 

commissioner must seize the company unless 

there is a reasonable expectation that the condition will be resolved within 90 days.

Typical Income Statement

A property/casualty company’s financial success 

at underwriting insurance policies is measured 

through the combined ratio. This ratio measures 

the proportion of earned premium remaining after 

claim costs are incurred and the proportion of 

written premium remaining after the expenses of 

selling and issuing the policy. The industry typically has a combined ratio result slightly above 

100. A combined ratio of 100 means that claims 

and expenses equal premium. In other words, underwriting results are at breakeven.

TITLE INSURANCE

Title insurance guarantees a clear title to real 

property. The policy is issued at the time of 

transfer or sale. Title insurance is a product that 

seeks to eliminate the risk of loss before the 

transaction by identifying any liens or judgments 

that would prohibit the transfer of a clear title. 

This differs from other types of insurance that reimburse for incurring a loss.

Title insurers, by researching the property history, 

identify potential problems thereby allowing a 

property purchaser to change the purchase decision or resolve the problem prior to purchase. It 

that way they seek to prevent claims from occurring. This differs from other types of insurance. 

For instance, a typical homeowners insurance policy does not prevent a fire from occurring, rather 

it reduces the potential financial impact to the 

homeowner should a fire occur.

Title insurance companies have a different business model than other types of insurance. Most 

insurers collect premium and incur the majority of 

their expenses (claims and claim adjustment) after 

the policy is effective. Title insurers historically 

have extremely low loss ratios (typically well below 20 percent) but incur the bulk of expenses 

prior to the effective date of the policy. Title insurers are in the business of risk elimination, not 

loss payment.

The effective date of the policy is typically the 

date of purchase. Prior to that time the title insurer engages in extensive and detailed 

investigation of the ownership history, filed liens 

and encumbrances on the property. The intent is 

to assure passage of a clear title. The difference 

in the business model results in some differences 
Appendix A: Industry Background Section 930A

930A.6 Holding Companies Handbook January 2003 Office of Thrift Supervision

in the types of items shown on the company’s 

financial statements.

Typical Balance Sheet

The balance sheet reflects an asset “Title plants 

and other indexes” which reflects the accumulated 

value of all the properties researched over the 

years. The title plant is an asset whose value is 

based upon the ability to reuse that information 

and update it the next time the property is sold or 

transferred.

A title insurer will typically show the title plant as 

the third largest asset behind cash and investments. This long-term asset is not depreciated 

because the knowledge is not expected to decline 

in value over time.

Title insurance companies are not subject to riskbased capital requirements. Instead, each state 

requires that a minimum dollar amount of capital 

be held.

Typical Income Statement

Because title insurers focus on preventing claims, 

expenses related to payments under the policy 

terms are not the largest expense. Rather, administrative expenses to research titles, maintain the 

title plant and issue title policies account for the 

majority of expenses.

Claims do occur however, in spite of best efforts 

to prevent them. About 20 percent of premiums 

earned are eventually paid out in claims.

Title insurer profits can be more erratic than for 

other types of insurance. Title insurance is directly tied to the strength of the housing market. 

Increasing mortgage rates or recessions can slow 

home sales resulting in fewer title insurance policies being sold. Decreasing mortgages rates or 

economic recoveries can increase home sales and 

refinancing resulting in significant increases in title policies sold.

PRIVATE MORTGAGE INSURANCE

Lenders require private mortgage insurance (PMI) 

when the mortgage loan is for more than 80 percent of the appraised value of the home. The 

borrower pays for PMI but the lender is the policy 

beneficiary. Most borrowers obtain PMI coverage from the company offered by the lender 

although they have the option of obtaining it 

elsewhere.

Traditionally, the institution received a fee for 

each PMI client successfully referred to the PMI 

carrier. Over the last several years, thrift holding 

companies have established reinsurance subsidiaries to underwrite PMI reinsurance. The 

subsidiary typically provides PMI reinsurance 

only for a PMI carrier offered by the lender and 

for loans it originates.

Institutions and their holding companies have expanded their involvement into reinsurance for 

several reasons. Reinsurance premiums increase 

revenue. Lending also becomes more effective as 

the revenue generated from each loan increases. 

PMI also diversifies the sources of revenue generated within the structure by generating fee income 

rather than interest. 

PMI companies have marketed this approach to 

institutions for several reasons. The participation 

of the institution in the risk of default is thought 

to strengthen the institutions risk selection process. The institution also shares in the risk of loss 

by providing reinsurer to the carrier.

PMI reinsurance is typically structured in one of 

two ways. The reinsurer may provide participating coverage of a certain percentage of each 

claim. A participating program results in the institution being financially responsible for a 

predetermined percentage of each claim.

More commonly, the reinsurer provides a set portion of excess coverage. Excess coverage is 

described in terms of ‘layers’ that stack on top of 

each other. Under excess coverage, the PMI carrier accepts the initial layer up to a predetermined 

dollar amount or percentage of covered loans. 

After that limit has been reached, the next layer of 
Appendix A: Industry Background Section 930A

Office of Thrift Supervision January 2003 Holding Companies Handbook 930A.7

coverage is activated. Claims in this layer are 

those usually covered by the reinsurer. Typically, 

the reinsured layer has both a floor and ceiling. 

The floor is the initial amount that must be paid 

by the PMI carrier before the reinsurance assumes 

any claims. The ceiling is the maximum amount 

covered by the reinsurance. Typically, after the 

ceiling has been met, the PMI carrier pays any 

additional claims.

Although the possibility of claims must exist for 

the program to be considered reinsurance, the expectation is for claims to rarely reach the layer of 

reinsurance coverage.

The PMI industry estimates claims rates at two 

percent to six percent of covered loan amounts. 

Actual results depend on economic factors and 

lending criteria. Reinsurance agreements are 

typically structured to begin at a percentage of 

loss greater than what would normally be expected from underlying loans.

INSURANCE AGENCIES AND BROKERS

Either agents or brokers can sell insurance. 

Agents work on behalf of the insurance companies they represent. They may be employees of 

the insurance company or they may be independent business people who choose to represent the 

insurance company.

Independent agents work on behalf of insurance 

companies but are independent businesses. They 

typically represent many different companies. 

Their competitive advantage is their ability to offer customers an array of products from various 

companies to meet their insurance needs. The insurance companies that they represent pay them 

commissions. Most companies also supplement 

agent compensation with bonuses based on 

growth and profitability.

Captive agents work on behalf of a single insurance company but are independent businesses. 

To the public they may appear to be employees of 

the insurance company. Their competitive advantage typically rests in the strong brand name and

market presence of the insurance company they 

represent. Insurance companies that market 

through captive agents typically support the 

agents through strong training programs, advertising support and administrative programs. Captive 

agents are paid commissions often supplemented 

by growth and profitability bonuses.

Agents who are employees work for a single insurance company. They may work in a locations 

separate from the company offices. They are often paid a small base salary supplemented by 

commissions. Office administration, advertising, 

marketing, sales volumes and types are usually 

strictly controlled by the company.

Brokers represent customers rather than insurance 

companies. Their role is to bring together the 

buyer with appropriate insurance companies, analyze coverage needs and make recommendations. 

They are independent businesses. They are paid 

through commission. Some insurance companies 

do not pay growth and profitability bonuses to 

brokers, others do.

Agents and brokers must be licensed by each state 

in which they sell insurance. Most states require 

continuing education in order to renew licenses.

Historically, licensing requirements varied widely 

from state to state. Gramm-Leach-Bliley proposed the creation of the National Association of 

Registered Agents and Brokers (NARAB). Under 

this law NARAB would come into effect to create 

uniformity in agent and broker licensing unless a 

majority of the states enacted conforming legislation by November 12, 2002. A majority of states 

have passed laws that provide for reciprocity, a 

first step towards consistency.

Agents and brokers do not use SAP. Agents and 

brokers that are privately held may create cash 

basis or tax basis financial statements. 

Agents and brokers are not required to file financial statements with the department of insurance. 

The department has the authority to request them 

at any time.

Sales of insurance products by thrifts, or on behalf of thrifts to consumers are regulated by 12 
Appendix A: Industry Background Section 930A

930A.8 Holding Companies Handbook January 2003 Office of Thrift Supervision

CFR Chapter V Part 536 Consumer Protection of 

Sales of Insurance. The rule became effective 

October 1, 2001. It implements requirements of 

Gramm-Leach-Bliley.

REINSURANCE

Reinsurance is insurance for insurance companies. Property/casualty companies use 

reinsurance more extensively than life insurance 

companies. An insurance company that sells its 

products to the public may also be a reinsurer for 

other insurance companies. There are also companies that only sell reinsurance.

Reinsurers are regulated less rigorously than insurance companies that deal with the public. 

Both parties in a reinsurance transaction are assumed to be knowledgeable in insurance and are 

therefore better prepared to protect their interests.

Reinsurance can be issued either for one policy 

(facultative) or for a group of many similar policies (treaty). Facultative reinsurance is used for 

large, complex, individualized policies. For instance, a large casino, horse racetrack and hotel 

complex with one owner would be more appropriately handled through facultative reinsurance.

Treaty reinsurance is typically used for types of 

business where many similar policies are issued. 

For instance, treaty reinsurance is very common 

for private passenger automobile insurance, 

homeowners insurance and small business insurance.

Insurance companies use reinsurance for several 

reasons. Property/casualty companies can use reinsurance to spread risk related to geographic 

concentrations. Companies with heavy concentrations of policyholders in locations exposed to 

weather catastrophes may choose to reinsure a potion of the business to reduce the risk of loss.

The purchase of reinsurance results in the receipt 

of a commission for producing the business. Reinsurance commissions flow into revenue thereby 

reimbursing a portion of the expenses incurred to 

generate sales. As discussed previously, under 

SAP, policy acquisition costs are immediately expensed. Reinsurance commissions offset a 

portion of these expenses.

Reinsurance can also be used to stabilize underwriting results by moving a portion of the risk to 

another insurer. Companies often reinsure particularly high-risk accounts, whether large, 

complex property/casualty accounts or large life 

insurance policies. Reinsuring the risk reduces 

the amount of the claim that will be incurred 

when an insured event occurs.

Companies also can obtain reinsurance when they 

would like to exit a line of business. A substantial reinsurance program can minimize the 

exposure of the company to the results of that 

business segment.

SUMMARY

Although part of the financial services industry, 

insurance operates differently than thrifts in many 

ways. A basic understanding of the industry can 

help you to identify potential problem areas and 

more effectively plan examination steps for insurance holding companies.
Appendix B: State Regulation Section 930B

INTRODUCTION

Office of Thrift Supervision March 2002 Holding Companies Handbook 930B.1

Insurance regulation is conducted at an individual 

state level. Each insurance company has a domiciliary or home state. This is the state in which the 

company has its corporate charter. This state is 

the primary regulator of the company.

The mission of state insurance departments is to 

protect consumers and maintain a healthy industry. 

This mission is accomplished through a focus on 

financial solvency of companies and market conduct activities. (The term ‘market conduct’ is 

comparable to the OTS term ‘compliance’.)

Insurance departments have authority to conduct 

examinations of any insurance company doing 

business in the state regardless of where the company is domiciled. Often states work together to 

conduct examinations of multi-state companies.

State insurance department reports are public information in many states. OTS has entered into 

information sharing agreements with many states 

to obtain access to examination reports. Your regional functional regulation coordinator can assist 

you in obtaining these reports.

Insurance department examination reports (both financial and market conduct) should be requested 

from the domiciliary state. You should evaluate 

these reports to determine any potential impact on 

the holding company or thrift.

STATE STRUCTURE

Companies must be licensed in each state in which 

they want to sell their products. Most large companies are licensed in each of the lower 48 states 

and the District of Columbia and often Alaska and 

Hawaii. (Because Alaska and Hawaii present 

unique geographic challenges some companies 

choose not to do business there.) Each state in 

which a company is licensed also has authority to 

regulate the company for activities within that 

state.

Most insurance holding companies own multiple 

insurance companies. They may all be domiciled 

in the same state or they may each be domiciled in 

a different state. In addition, each company may 

be licensed to do business in a variety of states.

In addition to chartering (domiciliary state) and licensing, states regulate other insurance activities 

as well. Policy forms, endorsements1, riders2 and 

rates (property/casualty insurance) are subject to 

regulation as well.

DEPARTMENT STRUCTURE

Most state insurance departments operate as a 

separate department within state government. In 

some states, regulation of all financial services has 

been centralized in one department. In those states 

the same department or agency regulates insurance, banking and securities with separate sections 

specializing in each. The departments in Vermont 

and New Jersey are two states that operate this 

way.

State insurance departments vary in size from less 

than 30 to over 1,000 employees. As a result, 

functions are handled differently from state to 

state. However, there are several common functions that are performed by all departments:

• Financial condition examinations

• Market conduct examinations

• Financial analysis

• Company licensing and admissions

• Consumer affairs

• Enforcement

 

1

Endorsements are forms used to change a standard property/casualty policy to reflect the needs of the policyholder.

2 Riders are forms used to change a standard life insurance 

policy to reflect the needs of the policyholder.
Appendix B: State Regulation Section 930B

930B.2 Holding Companies Handbook March 2002 Office of Thrift Supervision

• Policy and forms analysis

• Rate filings

• Agent licensing

• Legal

In some smaller states, the same people may perform several functions, such as financial condition 

examinations and financial analysis. In other, larger states, employee responsibilities are more 

specialized.

Insurance companies receive the most structured 

and intensive regulation. In addition to financial 

and market conduct activity, policy forms, rates 

and advertising are subject to regulatory oversight.

Pure reinsurers receive significantly less oversight 

because they do not deal with the general public. 

These companies deal only with other insurance 

companies. Both the reinsurer and its insurance 

company customer are considered to be knowledgeable and less in need of protection.

Due to the large number of agents and brokers, 

regulation is handled in a different way. All states 

require licensing after successful completion of an 

examination. Most states also require continuing 

education in order to renew licenses.

Although state insurance departments have the authority to conduct financial and market conduct 

exams of agents at any time, they do not happen on 

a regular schedule. Most regulation for this group 

centers on the investigation of consumer complaints. A high frequency of serious complaints or 

severity of a given complaint may result in either a 

financial or market conduct examination.

Financial examinations occur every three to five 

years depending on state law. Most states do not 

have a specific requirement for the frequency of 

market conduct examinations. In small states, 

market conduct examinations are done through 

complaint investigation.

Insurance regulation historically varied greatly 

from state to state. During the last decade efforts 

have been made to strengthen and standardize insurance regulation and procedures from state to 

state. The passage of Gramm-Leach-Bliley in 

1999 increased states efforts in these areas.

State insurance departments are funded in a variety 

of ways. Insurance department sources of revenues are premium taxes, audit fees, filing fees and 

licensing fees. In some states, the department receives revenues with the balance in excess of the 

budget forwarded to the state general fund. In 

other states, the state treasury receives insurance 

department revenue, with the department receiving 

its fund allocation. In general, less than ten percent of the revenue collected by the department is 

spent on insurance regulation.

GUARANTY FUNDS

Unlike thrifts, insurance companies failures are not 

covered by any government funded (either federal 

or state) insurance program.

Insurance companies failures are paid for by the 

other insurance companies selling business in the 

state. The mechanism to collect the funds and 

handle insolvencies is the state guaranty fund. 

Separate funds exist in each state, one each for 

property/casualty and life/health insurance. 

Guaranty funds step in to make up state mandated 

shortfalls that may occur in company failures. 

Typically, policyholders are notified of the date 

coverage will terminate and their need to find coverage elsewhere. Claims are paid in full, up to a 

certain dollar amount, depending on the state and 

type of policy. Most states have maximum 

amounts per policy that are covered by the funds.

Guaranty funds are not prefunded. Once a state 

places a company into receivership the guaranty 

fund steps in. The fund works with the court appointed receiver to determine an estimated 

shortfall.

Insurance companies who write the same types of 

insurance in the state are subject to assessment for 

the failure. Each company is billed in relation to 

the amount of business it writes in the state. For 

instance, if an auto insurer is taken into receiver-
Appendix B: State Regulation Section 930B

Office of Thrift Supervision March 2002 Holding Companies Handbook 930B.3

ship, the insurance company writing the most 

automobile insurance in the state will be assessed 

the largest amount. Receiverships can take many 

years to resolve.

The Federal Insurance Deposit Corporation 

(FDIC) advertises the insurance it provides to depositors. State guaranty funds do not. In many 

states agents are prohibited from discussing the existence of guaranty funds during the sales process. 

State regulators do not want to encourage consumers to rely on the existence of the fund instead of 

making informed purchase decisions.

NATIONAL ASSOCIATION OF INSURANCE 

COMMISSIONERS (NAIC)

The NAIC, formed in 1871 is a voluntary organization of the chief insurance regulatory officials of 

the 50 states, the District of Columbia, American 

Samoa, Guam, Puerto Rico and the Virgin Islands. 

The purpose of the NAIC is to assist state insurance regulators in their mission of adequately 

regulating the insurance industry. The organization focuses on issues that protect consumers and 

help maintain the financial stability of the insurance industry.

The NAIC is comprised of insurance commissioners and their staff as well as a paid staff of NAIC 

employees. The organization develops model laws, 

financial analysis tools, statutory accounting principles, market conduct regulations and examination 

programs and practices.

The NAIC conducts its work through an elaborate 

system of committees, working groups and task 

forces. Groups can be disbanded once objectives 

are accomplished and new groups are created as 

issues arise in the industry. At any point in time 

the NAIC has over 150 different groups in place.

The groups conduct their work through conference 

calls and meetings. The NAIC meets formally on a 

quarterly basis to report on its progress and 

agenda. Most meetings are open to the public.

NAIC MODEL LAWS

The development of model laws is a key contribution of the NAIC. A model law is a draft bill that 

may be submitted to state legislature. States may 

modify model laws to meet their specific needs. 

Model laws typically include input from many 

states providing the benefit of diverse practices and 

real world experiences. States have the option of 

whether or not to use the model laws. State legislatures must pass the law in order to make it 

effective in the state.

NAIC DATABASE

The NAIC maintains the largest database of insurer financial information in the world. 

Companies required to file statutory financial 

statements by the state are usually also required to 

file the statements with the NAIC. The information becomes part of a database that is used as a 

basis for examination preparation and financial 

analysis.

NAIC SOLVENCY AND MARKET CONDUCT 

PRODUCTS

The NAIC also provides the states with standard 

financial examination, market conduct, financial 

analysis and other programs and handbooks, all 

supported by automated tools and training programs.

Smaller insurance departments are able to use the 

NAIC manuals and automated tools as a complete 

system for examinations and analysis. Larger departments often modify the products to meet 

specific state requirements and staffing needs.

In addition, NAIC staff is available to consult on 

unusual or complex topics that arise during the 

course of regulatory activities.

ACCREDITATION PROGRAM

In 1990, the NAIC implemented the Accreditation 

Program. This program includes the baseline 
Appendix B: State Regulation Section 930B

930B.4 Holding Companies Handbook March 2002 Office of Thrift Supervision

standards for solvency regulation by state insurance departments. The goal of the program is to 

improve the quality of regulation. The program 

includes a mandatory full on-site examination and 

re-accreditation of the department every five years 

with interim annual reviews to assure compliance 

with standards. Departments with inadequate 

regulations or procedures may lose accreditation. 

A map showing the current accreditation status of 

each state is available on the NAIC website 

(www.naic.org).

Accreditation standards require that insurance departments have adequate statutory and 

administrative authority to regulate an insurer’s 

corporate and financial affairs. The program also 

evaluates the adequacy of staff, both in quantity 

and quality. In addition, the administrative, organizational and personnel practices are reviewed to 

determine that the department has the organizational ability to be effective.

Accreditation standards include required financial 

examination procedures and practices, personnel 

standards and the adoption of certain model laws 

by the state legislature.

STATUTORY ACCOUNTING PRINCIPLES

Statutory Accounting Principles (SAP) are the accounting rules and methods required by state 

insurance departments for insurance companies. 

SAP differs greatly from Generally Accepted Accounting Principles (GAAP).

Differences Between SAP and GAAP

SAP is balance sheet oriented with the emphasis on 

valuation of assets and liabilities on a liquidation 

basis. This is quite different than GAAP that has 

an income statement focus and assumes a going 

concern and the matching of income with related 

expense.

SAP is less concerned with matching income and 

expense time periods and instead recognizes expenses more aggressively and income more 

conservatively.

SAP is intentionally more conservative than 

GAAP. It values assets at amounts that could be 

realized quickly and liabilities at amounts required 

to satisfy them as though they were immediately 

due and payable. Because of this sense of immediacy, SAP statements do not use the traditional 

current and long-term categories often seen on 

GAAP statements.

An asset under SAP is only an asset if it has been 

specifically identified in SAP as an asset. Any 

GAAP asset that is not recognized by SAP is considered a nonadmitted asset. Because total GAAP 

assets are reduced by the value of nonadmitted assets to reach SAP assets, policyholders’ surplus 

(owners’ equity in GAAP) is also reduced by an 

equal amount.

A nonadmitted asset is an item that does not meet 

the strict requirements of liquidity for SAP. Examples are, company office buildings, furniture, 

fixtures, supplies, prepaid expenses and uncollected premiums more than 90 days old. These 

items are nonadmitted for SAP because it would be 

difficult to convert them into cash in a short period 

of time without a loss in value.

SAP also differs from GAAP in its more strict 

rules for the financial statement recognition of reinsurance, deferred taxes and premium 

deficiencies.

Because companies are regulated individually by 

states, SAP is focused on an individual insurance 

company presentation of results. Unlike GAAP, 

the concept of consolidated statements does not exist. Combined statements for a group of 

property/casualty insurance companies can be prepared but may not be all inclusive of all entities in 

the organization. Combined statements are not 

prepared for other types of insurers.

The NAIC’s role in SAP

SAP is promulgated by the NAIC and is published 

in its Accounting Practices and Procedures Manual. This manual is for sale to the public. 

Changes to SAP are typically adopted as of January 1 of the year.
Appendix B: State Regulation Section 930B

Office of Thrift Supervision March 2002 Holding Companies Handbook 930B.5

SAP stands separate and apart from GAAP. It has 

not received Other Comprehensive Basis of Accounting (OCBOA) standing from the American 

Institute of Certified Public Accountants (AICPA).

A standing committee of the NAIC is charged with 

reviewing changes to GAAP to determine the applicability and impact on SAP. This is done to 

address new developments in the world of financial 

reporting but is not done with the intent that SAP 

be changed to match GAAP.

SAP statements are prepared on NAIC standard 

forms called blanks. Statements are prepared for 

the first three quarters and at year-end. All companies report based upon calendar quarters and a 

December 31 year-end. The year-end blank is 

much more detailed than the quarterly blank.

Statutory Financial Statements

SAP statements include a balance sheet, income 

statement and cash flow statement. In addition, a 

number of schedules present detailed information 

regarding investments, claims and reinsurance.

Each major insurance industry has its own specific 

blanks version. Separate versions exist for property/casualty, life/health, health maintenance 

organization, dental plans, fraternal organizations 

and title insurance. 

Prescribed and Permitted Practices

The NAIC prescribes SAP. State insurance departments, as the regulatory authority, continue to 

have the ability to grant companies permission to 

deviate from SAP. State approved deviations from 

SAP are considered permitted practices. Companies must include in the Notes to the Financial 

Statement permitted practices and their impact.

State insurance departments grant a permitted 

practice for an individual company when prescribed SAP would result in financial reporting 

that would be inappropriate or misleading for the 

situation.

SUMMARY

The insurance industry is regulated primarily at the 

state level. The insurance regulators of the 50 

states, the District and the 4 territories developed 

methods of communicating and coordinating activities through the NAIC and informal channels of 

communication. This cooperation and communication has resulted in a regulatory system and 

structure that is consistent in many ways while still 

providing states the ability to address local concerns.
Appendix C: A. M. Best Section 930C

A. M. BEST

Office of Thrift Supervision March 2002 Holding Companies Handbook 930C.1

The A. M. Best (Best) Company is a widely recognized, and highly regarded firm that analyzes 

and rates insurance companies. Best has been 

publishing ratings of insurance companies since 

1906.

Independent ratings are an important indicator of 

company solvency and financial condition. Best’s 

ratings provide an independent opinion of an insurance company’s ability to meet policyholder 

obligations (claim payments). Those evaluating a 

company or marketing relationship can use these 

ratings to identify concerns of a financial nature.

Best’s information, consistent with state insurance 

regulation, is on an individual insurance company 

basis. The ratings do consider the impact of other 

companies in the structure, and the impact the 

holding company may have on the rated company.

Best ratings are available to the general public free 

of charge. The easiest way to obtain these ratings 

is through the Company’s website 

www.ambest.com. Ratings can be obtained by entering the company name. Ratings for other 

companies in the group are also available.

There are 16 major letter ratings divided between 

the following two broad categories:

Secure – (strong ability to meet ongoing obligation 

to policyholders)

A++ and A+ Superior

A and A- Excellent

B++ and B+ Very Good

Vulnerable – (good ability to meet ongoing obligations to policyholders)

B and B- Fair

C++ and C+ Marginal

C and C- Weak

D Poor

E Under Regulatory Supervision

F In Liquidation

To obtain an alphabetical Best’s rating, an insurance company must have a minimum of five 

consecutive years of operating results, be of a certain size, provide the required financial and 

operating information and pay a fee. 

In addition to the letter rating, Best assigns a rating 

outlook to most companies. The outlook provides 

a sense of potential future direction for the company over the next 2 to 24 months. The indicators 

can be described as positive, negative or stable 

based upon expected business trends.

The process employed by Best is based on analysis 

of Statutory Accounting Principles (SAP) financial 

statements. This is supplemented with Generally 

Accepted Accounting Principles (GAAP) audited 

financial statements and SEC filings (where available), and other information. In order to receive a 

letter rating, Best must have the ability to conduct 

ongoing discussions with managements.

Best reviews and updates the ratings of each company at least annually. Reviews outside of the 

annual cycle are triggered by events that may materially impact the company. Examples of these 

events include: acquisitions, mergers and sales, 

major changes in reinsurance programs, demutualization, catastrophes, significant financial 

concerns regarding an affiliate, parent or subsidiary, significant changes in regulations or 

legislation, or unexpected changes in earnings.
Appendix C: A. M. Best Section 930C

930C.2 Holding Companies Handbook March 2002 Office of Thrift Supervision

OBTAINING INFORMATION

To facilitate your understanding of insurance enterprises with thrifts within the structure, you 

should review the Best rating. A review of the 

Best rating and the supporting analysis will aid 

you in identifying potential areas of concern in the 

examination process. It will also provide perspective on the current state of the insurance operation 

and its outlook in the near term.

Best ratings can be supplemented by obtaining a 

detailed company profile. These profiles contain a 

history and analysis of each company. Profiles can 

be ordered through the Best website. The profile is 

delivered to you through e-mail in a matter of minutes.

Individual company profiles cost $35 per company. Most insurance structures are comprised of 

several, sometimes, many, individual insurance 

companies. Requesting profiles for all the companies is typically not necessary and may be cost 

prohibitive.

In order to make the best use of funds, you may 

want to obtain profiles initially only for the largest 

companies in the structure. Going forward you 

should then consider obtaining profiles for any 

company in the enterprise with a rating in the vulnerable category or for any company with a 

significant rating decline.

OTS has established a prefunded account for staff 

to obtain these reports. The Manager of Information Services Branch in Washington administers 

the OTS account. Your region can forward the 

names of authorized users to Washington so that 

access can be established.

SUMMARY

Best’s has a long history and is highly regarded in 

its ability to evaluate insurance companies. Your 

use of Best information can help you in identifying 

areas of concern and in developing the scope of 

holding company examinations.
SECTION: Large and Complex Enterprises Section 940

(Conglomerates)

INTRODUCTION

Office of Thrift Supervision November 2003 Holding Companies Handbook 940.1

A conglomerate is generally defined as a corporate 

enterprise made up of a number of different companies, or legal entities, that operate in diversified 

fields. Some of our large and complex holding 

company enterprises (Category II) fall in this category. Often, conglomerates are highly integrated 

and managed differently than a more traditional 

holding company – with less regard for separate 

corporate existence and more focus on, for instance, product lines or geographic areas. Such 

functional management allows enterprises to take 

advantage of the synergies among their components, to deliver better products to the market, and 

to provide higher returns to stockholders. 

This shift from managing along legal entity lines to 

functional lines means that the information and 

conclusions drawn during the examinations of individual entities within the conglomerate may be 

incomplete unless understood in the context of the 

examination findings of other related legal entities 

or centralized functions. In short, we must think 

along functional or centralized lines in order for the 

examination process to match the business practice. Therefore, it is appropriate to consider a 

broad scope of intra-group transactions, as well as 

risk concentrations across company lines. Furthermore, while the thrift and other regulated 

financial activities may have capital adequacy 

guidelines, as emphasized in Section 300, the capital adequacy of the consolidated holding company 

enterprise must also be evaluated.

This Section will provide you with a better understanding of the additional areas to consider within 

each CORE component when you examine a conglomerate. You should consider this guidance in 

connection with your examination and ongoing supervision of large and complex holding company 

enterprises that engage in multiple lines of business. This would typically include diversified 

holding companies, or holding companies that control numerous different legal entities engaged in 

lines of business that cross traditional sectors. A 

joint decision will be made by senior management 

in DC and the region as to whether a holding company enterprise is: 1) a conglomerate subject to the 

guidance contained in this Section; and 2) a conglomerate subject to a directive issued by the 

European Parliament and the Council of the European Union (see Appendix A). 

ONGOING SUPERVISION AND USE OF 

SUPERVISORY PLANS

The complexity of the conglomerate will mean that 

we need to approach supervision differently. The 

rapidly changing environment of a conglomerate 

means that we will need to increase planning and 

offsite monitoring. Ongoing supervision allows for 

timely adjustments to our supervisory strategy as 

conditions change within the organization or the 

economy. To be effective, our supervisory efforts

must be flexible and responsible. The supervisory 

process needs to be dynamic and forward looking 

in order to respond to technological advances, 

product innovation, new risk management systems 

and techniques, changes in markets, and the financial condition and operating performance of 

entities within the conglomerate. 

We will use a more formalized annual supervisory 

planning process in supervising conglomerates. 

This process will be documented in a customized 

Supervisory Plan. The Supervisory Plan will serve 

to focus our efforts on major areas of risk, particularly those that may not be subject to full review 

by other regulatory authorities. In addition, the 

Supervisory Plan will outline our expectations with 

respect to reporting requirements, especially as 

they relate to risk concentrations, intra-group 

transactions, and capital adequacy. The goals and 

expectations outlined in the Supervisory Plan must 

be communicated to management to ensure that 

they understand the regulatory scheme in place for 

their organization and that OTS has their full cooperation.

In all likelihood there will be other regulators that 

have a supervisory role with respect to entities in 

the conglomerate. If there are other regulators, we 

will need to work closely with them to ensure that 

our combined supervisory efforts are seamless, 
SECTION: Large and Complex Enterprises Section 940

(Conglomerates)

940.2 Holding Companies Handbook November 2003 Office of Thrift Supervision

regulatory burden is reduced, and duplication is 

avoided. In this regard, you should get input from 

supervisors responsible for significant regulated 

entities when formulating the Supervisory Plan. 

The Administration section outlines the functional 

regulation procedures. In addition to coordinating 

with fellow U.S. financial regulators, in many conglomerates you may also need to communicate 

with financial regulators or nonfinancial regulators 

in other countries.

The first step is to identify and establish communication with other interested regulators. Once you 

have done so, you should establish acceptable procedures for sharing information, as well as a 

general understanding of what types of information 

you will exchange. Depending on the regulator, a 

formal information sharing agreement may exist. 

To most effectively supervise the conglomerate, 

you should ask the other regulators for their supervisory assessment of the entity(ies) that they are 

primarily responsible for, as well as the nature of 

any major sanctions or supervisory measures they 

have deemed necessary. 

As the group-wide regulator of the conglomerate, 

we should share the following:

• An organizational chart or similar summary of 

the major entities in the conglomerate that also 

identifies other regulators and their point of 

contact. This step will facilitate communication between interested regulators, as well as 

give other regulators the opportunity to verify 

the accuracy of your assessment of the major 

entities in the conglomerate.

• A list of major shareholders and managers that 

exercise significant influence in the conglomerate.

• The strategic policies of the conglomerate. 

This will allow each interested regulator to assess the impact of the conglomerate’s policies 

on their relevant regulated entity.

• Your conclusions about the financial condition 

and capital adequacy of the conglomerate.

• Any significant risk concentrations or intragroup transactions that may raise supervisory 

concern.

• Assessment of the capability and effectiveness 

of management.

• Your assessment of the adequacy of risk management and internal control systems of the 

conglomerate.

• Any developments with major entities in the 

conglomerate (including the thrift) that may 

adversely impact other entities in the enterprise.

• Much of this information will be contained in 

the holding company examination report. You 

may share your supervisory findings with other 

supervisors. These conclusions should be presented to the other regulators using the 

Conglomerate Supervisory Review format. 

You will draw much of the information needed 

to complete the Review from the holding company examination report. Examination 

conclusions should be summarized in the review.

The guidance in this Section will help you assess 

the risks that are unique to a conglomerate. The 

following discussion outlines elements that you 

should consider in each CORE component of the 

holding company examination.

CAPITAL

One of our most important functions is to ensure 

that a conglomerate maintains adequate capital to 

support its risk profile and that it meets the minimum regulatory capital standards of any regulated 

financial sector (banking, insurance, or securities). 

Your review on a group-wide basis does not diminish the need for functional regulators to maintain 

and monitor regulated entities’ compliance with the 

sector’s requirements. The reason for conducting a 

capital analysis at the conglomerate level is to 

identify, and, if necessary, address concerns of 

large intra-group holdings of capital that cause difficulties in one entity to be transmitted to other 

entities within the group. 
SECTION: Large and Complex Enterprises Section 940

(Conglomerates)

Office of Thrift Supervision November 2003 Holding Companies Handbook 940.3

Your main goal is to assess capital adequacy on a 

group-wide basis and identify instances of double 

or multiple gearing that can overstate group-wide 

capital. You must also identify minority interests 

and quality of capital issues that will impact your 

capital analysis. A group-wide analysis will require you to consider the entire conglomerate, 

including both regulated and unregulated entities. 

While the capital requirements for regulated entities such as banks, insurance companies, and 

securities firms, are explicit, you will need to develop a notional capital proxy for unregulated 

entities based on the most analogous capital rules 

for a regulated entity. For instance, the regulatory 

capital standards for a banking company could be 

used to develop a notional capital proxy for a leasing company. If you cannot develop a notional 

capital proxy for an unregulated entity, then you 

should deduct the parent’s investment in that entity 

(as determined under the equity method of accounting) from the group’s capital.

Definitions of regulatory capital also vary from 

sector to sector. For instance, what may constitute 

regulatory capital in one industry, may not be includable as regulatory capital in another industry. 

In those instances where surplus capital in one sector offsets capital deficits in other sectors, you will 

need to make a qualitative assessment as to 

whether that surplus capital would be includable as 

regulatory capital in the capital deficient sector and 

is transferable to that sector.

In addition, conglomerates need to have board approved capital adequacy policies in place to 

provide capital management guidelines to senior 

managers. Capital adequacy policies should address the fundamentals of capital management such 

as identifying appropriate levels of capital 

throughout the organization, how the conglomerate 

will raise capital when needed, dividend and share 

repurchase policies, and overall capital and capital 

allocation strategies. 

A conglomerate’s capital adequacy is based on the 

five principles discussed below. While your capital adequacy analysis will need to be based on 

these principles, also consider the discussion of 

leveraging, earnings, and cash flow analysis described in the other sections of this Handbook.

1. Identify instances of double or multiple 

gearing, for example where the same capital 

is used simultaneously as a buffer against 

risk in two or more legal entities.

Double gearing involves two entities within a conglomerate that both include the same capital in 

their capital bases. Typically, this involves a parent company obtaining capital that is 

downstreamed to a subsidiary and counted as capital a second time. Multiple gearing is another 

iteration of this process whereby the same capital 

is counted by a third company as capital. Also be 

aware that double and multiple gearing can occur 

in different forms when capital is raised by a subsidiary and then upstreamed, or a sister affiliate 

raises capital that is transferred to a related company through a purchase of stock or other equity 

instrument. Capital gearing is likely to overstate 

the external capital of a conglomerate, as it is double-counted through the organization. As such, 

intra-group holdings of capital should be excluded. 

As an example, assume that a parent insurance 

company has available capital1of $1,500 with 

$500 invested as common stock in a wholly owned 

regulated bank. Also assume that the second-tier 

bank, with available capital of $900, invests $250 

of its capital into a wholly owned regulated securities company (third-tier organization) in the form 

of common stock. The securities company has 

available capital of $500. Further, assume that the 

capital required levels are $800 for the top-tier 

parent, $800 for the second-tier bank, and $400 for 

 

1

Throughout this Section, the term “available capital” includes the various definitions of regulatory capital in each 

industry worldwide and as a description of any substitute for 

“regulatory capital” in unregulated industries where you 

need to develop a notional capital proxy. If you cannot develop a notional capital proxy for an unregulated entity, then 

you should deduct the parent’s investment in that entity (as 

determined under the equity method of accounting) from the 

group’s capital.
SECTION: Large and Complex Enterprises Section 940

(Conglomerates)

940.4 Holding Companies Handbook November 2003 Office of Thrift Supervision

the third-tier securities company for a total of 

$2,000.

Parent 

Insurance 

Company

100% 

Owned 

2

nd Tier 

Banking 

Company

100% 

Owned 

3

rd Tier 

Securities 

Company

GroupWide 

Totals

Available 

Capital2$1,500 $900 $500 $2,900

Capital 

Required -800 -800 -400 -2,000

Capital 

Surplus / 

- Deficit 

Before 

Adj. For 

Gearing 700 100 100 900

Adj. for 

Multiple 

Gearing -500 -250 0 -750

Capital 

Surplus / 

- Deficit 

After Adj. 

For Gearing 200 -150 100 150

By simply aggregating the available capital of the 

three entities ($1,500 + $900 + $500 = $2,900), it 

would appear that on a combined basis the groupwide available capital easily exceeds the capital 

required of $2,000. However, as $500 of the parent’s available capital was downstreamed into the 

second-tier bank and counted by the bank as available capital, that capital is double-geared. Further, 

the bank’s investment of $250 of its available capital in its securities company represents an instance 

of multiple gearing because the same funds are 

now being counted by three different entities as 

 

2

 It is assumed for this example that available capital at the 

insurance company, the bank, and the securities company includes $500, $400, and $250 of general reserves, 

respectively. The composition of available capital may differ depending upon the regulations for each industry and in 

each country.

available capital. Removing the double and triple 

counting of capital by deducting the insurance 

company’s $500 investment in the bank, and the 

bank’s $250 investment in the securities company, 

$750 in total, the entire conglomerate maintains a 

group-wide capital surplus of only $150. Also 

note that the parent’s capital surplus is reduced 

from $700 to $200 and the bank’s capital surplus 

of $100 becomes a capital deficit of $150. As the 

example shows, the capital adequacy of conglomerates may appear significantly better before 

double and multiple-gearing is recognized and removed from group-wide capital. 

2. Identify instances where a parent issues 

debt and downstreams the proceeds in the 

form of equity, which can result in excessive 

leverage.

The use of borrowings at one level of a conglomerate that is then infused to other entities as capital 

raises concerns about excessive leverage. Excessive leveraging can ultimately lead to concerns 

with meeting debt service requirements if the company’s earnings and/or cash flow were to 

deteriorate. This is particularly an issue when the 

borrowing company must rely on dividends from 

subsidiaries or capital injections from a parent or 

an affiliate to service the debt. As other regulated 

entities generally must meet minimum regulatory 

capital requirements and/or where regulators have 

the authority to preclude dividend payments to protect the equity of the regulated entity, a source of 

income and cash flow for the borrowing company 

may become unavailable. 

In addition, loan arrangements often contain covenants and restrictions that can impact a company’s 

ability to provide cash flow support to service the 

debt through dividends or capital injections from 

other entities within the organizational structure. 
SECTION: Large and Complex Enterprises Section 940

(Conglomerates)

Office of Thrift Supervision November 2003 Holding Companies Handbook 940.5

3. Identify the effects of double, multiple, or 

excessive gearing through unregulated intermediate holding companies which have 

participations in dependents or affiliates engaged in financial activities.

Your evaluation of capital adequacy for the conglomerate must also identify instances where 

intermediate unregulated holding companies provide capital to subsidiaries or affiliates. You will 

need to effectively eliminate the capital contribution of all of the intermediate holding companies in 

the organizational structure to deduct the impact of 

capital gearing. 

4. Identify the risks being accepted by unregulated entities.

As unregulated entities are not required to meet 

regulatory capital standards, they pose a separate 

and distinct problem when assessing capital. The 

solution is to develop a notional capital proxy for 

regulatory capital thresholds. For unregulated entities that have activities similar to regulated 

entities, for example leasing, you should apply the 

capital requirements of the most analogous regulated industry, such as banking, to construct a 

notional capital proxy. If you cannot develop a notional capital proxy for an unregulated entity, then 

you should deduct the parent’s investment in that 

entity (as determined under the equity method of 

accounting) from the group’s capital.

Consider an example of an unregulated parent 

holding company with two wholly owned regulated

subsidiaries (a bank and an insurance company) 

and one wholly owned unregulated subsidiary 

(leasing company). The relevant financial 

information and required capital levels are: 

Unregulated Parent Holding Company

Investment in Bank Subsidiary $700

Investment in Insurance Subsidiary 200

Investment in Leasing Subsidiary 100

Equity Capital 300

Capital Required 0

100% Owned Bank Subsidiary

Equity Capital $700

General Reserves 100

Available Capital3800

Capital Required -100

Capital Surplus / - Deficit 700

100% Owned Insurance Subsidiary

Equity Capital $200

General Reserves 100

Available Capital 300

Capital Required -300

Capital Surplus / - Deficit 0

100% Owned Unregulated Leasing Co. 

Equity Capital $100

Notional Capital Proxy -150

Capital Surplus / -Deficit -50

The example demonstrates that while the regulated 

entities have available capital to meet their own required capital levels, the overall group is 

insufficiently capitalized because the parent has 

downstreamed capital to its subsidiaries and there 

is an undercapitalized unregulated leasing company within the structure of the organization. The 

result of eliminating the double-gearing of the capital through consolidation and identifying a notional 

capital proxy for the unregulated leasing company 

results in the group-wide capital deficit. 

 

3

 Note that the definition of regulatory capital will vary between industries and countries. In this example, the $100 of 

general reserves at the insurance company and the bank are 

included in available capital. 
SECTION: Large and Complex Enterprises Section 940

(Conglomerates)

940.6 Holding Companies Handbook November 2003 Office of Thrift Supervision

Group-Wide Totals

Equity Capital Consolidated $300

General Reserves 200

Available Capital 500

Aggregate Capital Required -550

Group-Wide Capital 

Surplus / - Deficit 

-50

In this example, the parent holding company is unregulated and considered a shell company with its 

only significant assets being investments in subsidiaries; therefore, a notional capital proxy is not 

required. However, if this parent holding company 

had substantial operations, then you would also 

have to develop a notional capital proxy for the 

parent company and factor the additional capital 

needed into your analysis. The capital analysis 

method used in this example is referred to as the 

Accounting Consolidation method and relies on 

consolidation to remove double-gearing of capital 

through elimination of intercompany account balances and transactions. This method is explained 

in further detail in Appendix B. 

5. Identify investments in regulated and unregulated subsidiaries to ensure that the 

treatment of minority and majority interests 

is prudent.

In those instances where parent companies control 

less than 100 percent of one or more subsidiaries, 

you will need to carefully assess each interest. 

You will need to determine if your assessment of 

capital adequacy is more representative of the associated risks by fully aggregating the interests or 

excluding them by pro rating the interests. In 

situations where the conglomerate maintains a majority ownership interest, in excess of 50 percent 

but less than 100 percent, full consolidation is 

typically required. However, full consolidation is 

likely to overstate capital adequacy when capital 

surpluses exist. If you fully aggregate the surplus 

capital of subsidiaries where the parent holds less 

than a 100 percent interest, you may overstate 

capital adequacy, as compared to pro rating the 

capital surplus based on the parent’s ownership interest. Pro rating the capital surplus recognizes the 

minority interest holders’ right to their proportionate share of the surplus capital. It is expected that 

you would generally pro rate surplus capital if the 

conglomerate’s interest in an entity is less than 100 

percent. Additional discussion of the prudent 

treatment of majority and minority interests is detailed in Appendix C. 

After pro rating the capital surplus, your assessment will also need to take into account any types 

of restrictions on the transferability of the surplus 

capital in the lower tier entities. If you decide that 

restrictions are present that prohibit the transfer of 

the surplus capital, then you will need to exclude 

any nontransferable surplus capital from available 

capital. The following page discusses transferability of capital.

In those cases where the parent holds less than a 

100 percent interest in a subsidiary that is capital 

deficient, pro rata attribution of that capital deficiency may understate the parent’s obligation to 

provide capital. The parent may have an obligation to fund a capital deficiency in excess of its pro 

rata ownership interest. For instance, in the event 

of a capital deficit at a regulated entity in which 

the parent owns 60 percent of the common equity 

with proportionate voting control, the conglomerate’s liability to fund the capital deficit may exceed 

60 percent of the deficit because it is the control 

owner. In this instance, the parent’s obligation to 

fund the capital call may exceed its pro rata interest in the subsidiary. It is expected that the entire 

capital deficit of a sector or an entity will be factored into the group-wide capital analysis, if the 

parent holds a majority interest. 

When the conglomerate holds a minority interest in 

an entity, you will need to carefully analyze 

whether the conglomerate’s interest is a controlling 

interest based on percentage ownership, voting 

rights, and any other factors. Other factors to consider would be board membership, participation in 

operations or policy making, and significant intercompany relationships or transactions. Normally, 

you should expect that only the pro rata portion of 

the surplus capital of the subsidiary would be 
SECTION: Large and Complex Enterprises Section 940

(Conglomerates)

Office of Thrift Supervision November 2003 Holding Companies Handbook 940.7

available to the parent that holds a minority interest. If the parent’s minority interest in a subsidiary 

is such that the parent can exert significant influence and has significant exposure to risk, you 

should treat the interest like a majority interest. 

The test of significant influence and exposure to 

risk can generally be expected to apply to interests 

of 20 percent or more, but under 50 percent. 

CAPITAL MEASUREMENT METHODS

There are three capital measurement methods to 

assess capital adequacy – the Accounting Consolidation method, the Deduction and Aggregation 

method, and the Book Value / Requirement Deduction method. You may also combine each of the 

methods to best capture the conglomerate’s capital 

adequacy requirements. Examples of each of the 

methods are presented in Appendix B.

You must first understand the ownership interests 

of each company throughout the conglomerate before you begin your capital assessment. 

Understanding the structure of the conglomerate is 

essential to identify unregulated entities, capital 

gearing, use of debt downstreamed or upstreamed 

as capital, and partial ownership interests. The 

availability of information, consolidated or unconsolidated, may dictate which capital measurement 

method is appropriate. Your choice of method will 

depend on which is best suited for that particular 

conglomerate. You have the flexibility to determine if one method, or a combination of the 

methods, most appropriately captures the risk and 

capital structure of the conglomerate. Examples of 

each of the methods are contained in Appendix B.

When applying any of these methods, you need to 

take into account any of the conglomerate’s proportional share of any less than wholly owned 

entities. Proportional share means the proportion 

of the subscribed capital which is held directly, or 

indirectly by that entity. When a regulated lower 

tier entity has a capital deficit, or an unregulated 

entity has a notional capital deficit, you will need 

to determine how to best reflect that deficit in your 

analysis. If a conglomerate holds a majority interest, and in some instances a minority interest, you 

would typically include the entire capital deficit in 

your analysis. However, if you determine that the 

parent holding company is only responsible for its 

share of that entity’s capital deficit, you may account for that capital deficit on a proportional 

basis.

Regardless of the method chosen, you must ensure 

that: 1) any capital gearing or intra-group capital 

is eliminated; 2) that the capital requirements for 

each different financial sector shall be met by 

available capital as calculated according to the corresponding rules of that sector; 3) if the parent has 

a capital deficit only cross-sector capital that 

complies with the parent’s capital rules is allowable; 4) where sectoral rules limit the eligibility of 

cross-sector capital, these limits would apply in 

principle when calculating capital at the level of 

the conglomerate; 5) when calculating available 

capital at the conglomerate level, you must consider the effectiveness of transferability of capital 

across different legal entities; and 6) in the case of 

a nonregulated entity, a notional solvency requirement must be calculated, or the parent’s investment 

in the nonregulated entity (as determined under the 

equity method of accounting) must be deducted 

from the group’s capital. 

If there are capital surpluses within the conglomerate, you will need to determine if those surpluses 

can be employed in other parts of the organization. 

For instance, you will need to determine if the 

capital surplus of an insurance entity or sector can 

be transferred to the parent or another entity within 

the group. In making that determination, there 

may be legal, tax, shareholder rights, policyholder 

rights, restrictions imposed by primary regulators, 

and other considerations that will need to be 

weighed in assessing if the surplus capital is transferable. You will also need to consider the capital 

rules for the relevant sectors and whether the surplus capital is of a form that would meet the 

capital eligibility rules of the other sectors. If not, 

then the surplus capital should not be considered 

transferable and available to other parts of the 

conglomerate. 

The Accounting Consolidation method compares 

the fully consolidated capital of the conglomerate 

to the sum of the capital required for each sector or 
SECTION: Large and Complex Enterprises Section 940

(Conglomerates)

940.8 Holding Companies Handbook November 2003 Office of Thrift Supervision

entity. Available capital includes only those elements that qualify for regulatory capital in 

accordance with the relevant rules for each sector. 

The regulator for each entity or sector determines 

the regulatory capital required. This method requires the elimination of all intra-group balance 

sheet transactions, which is usually accomplished 

by consolidating the entities. The capital surplus 

or deficit positions for each subsidiary is then identified and used to assess the availability of capital 

group-wide to resolve any capital deficits. You 

will also need to develop a notional capital proxy 

for any unregulated entities, or deduct the parent’s 

investment in that entity (as determined under the 

equity method of accounting) from the group’s 

capital when a proxy is not available, and then add 

together the total capital required amounts and 

compare to the available capital group-wide. 

The Deduction and Aggregation method involves 

summing the available capital of each regulated 

and nonregulated sector or entity in accordance 

with the appropriate sectoral rules and comparing 

this to the sum of the individual capital required of 

the regulated sectors and the notional capital proxies for the unregulated sectors, plus the book value 

of the investments in those entities or sectors. The 

book value of the investments are included as they 

represent geared capital that is not eliminated because this approach is conducted using the 

conglomerate’s unconsolidated accounts. If you 

cannot develop a notional capital proxy for an unregulated entity, then you should deduct the 

parent’s investment in that entity (as determined 

under the equity method of accounting) from the 

group’s capital.

The third method is the Book Value / Required 

Deduction method. This method takes the balance 

sheet of each company within the group and looks 

through to the net assets of each related company 

using unconsolidated balance sheet data. The conglomerate’s capital surplus / deficit is calculated as 

the difference between parent’s available capital 

and the sum of the parent’s required capital and the 

higher of the book value of the parent’s investment 

in each entity or sector and the capital required for 

each entity or sector. 

When evaluating capital adequacy, regardless of 

the method, you should consider the following 

points: 

• What is the conglomerate’s capital and capital 

allocation strategy?

• Does the conglomerate have an effective capital adequacy policy? Does it describe their 

capital and capital allocation strategy? Does it 

identify minimum capital thresholds? 

• Where is capital held within the conglomerate 

and why is it held there?

• What factors affect the allocation of capital 

across the conglomerate (for example, regulatory or risk factors)?

• How are decisions made on capital allocation?

• How are capital decisions affected by the legal 

entity and business line structures?

• Do management and the board periodically review overall capital adequacy as well as the 

capital adequacy of the individual subsidiaries?

• Are there any plans to issue new capital instruments or additional equity? Are there any 

stock repurchase plans in place or contemplated? 

• To what extent, if any, are legal entities able to 

raise capital on more favorable terms than others?

• Is the parent and/or any of the individual entities rated by the rating agencies? If so, what 

are the ratings? Have any of the rating agencies indicated that their ratings are under 

review for an upgrade or a downgrade? If so, 

what are the implications for the organization?

• Is there surplus capital available in the corporate structure that can be transferred to other 

entities within the conglomerate? If so, are 

there impediments to flows of capital among 

legal entities?
SECTION: Large and Complex Enterprises Section 940

(Conglomerates)

Office of Thrift Supervision November 2003 Holding Companies Handbook 940.9

• What restrictions are placed on the instruments 

available to the conglomerate for raising capital and what is the nature of the restrictions? 

Consider the affect of debt covenants.

• Are there unregulated entities within the corporate structure? If so, what are their lines of 

business? Do any of the regulated entities 

have significant interests in on- or off-balancesheet assets or liabilities with these entities, 

such as debt guarantees?

• Are partial ownership interests present in the 

structure of any of the subsidiaries? If so, 

what are their ownership and voting rights? 

Are there other factors that could influence a 

determination as to their obligations?

• Have you evaluated quality of capital issues, 

such as the use of subordinated debt or other 

equity-like instruments that may not be considered to be acceptable regulatory capital for all 

of the regulated entities across the conglomerate?

• Have all of the intercompany transactions been 

identified that could impact your capital assessment? Such intercompany transactions 

could be on- or off-balance sheet or include 

less obvious items such as significant tax liabilities. 

• Does the conglomerate or any of its individual 

entities securitize any of its products? If so, 

how are the securitizations managed and structured? Are the securitizations properly 

accounted for and monitored on a regular basis? Are these activities properly capitalized?

• Are there significant derivatives outstanding? 

What is the impact of the derivative positions 

on capital adequacy?

• If derivatives are present, are they used to 

hedge certain risks, to speculate on market 

movements, or are any of the entities actively 

engaged in derivatives as a line of business? 

Prior to undertaking your capital analysis, you will 

need to understand the conglomerate’s organizational structure. Only by understanding the legal 

structure of each significant entity, can you begin 

to consider the capital implications.

ORGANIZATIONAL STRUCTURE 

As with all holding company enterprises, you must 

determine the organizational structure and reporting hierarchy. It is not unusual for a conglomerate 

to have a large number of separately chartered legal entities. Some of the entities within the 

conglomerate may be regulated, whereas others 

may not. 

In assessing the organizational structure of the 

conglomerate, you should consider:

• What factors influence the overall approach to 

the corporate legal structure?

• How closely is the conglomerate’s business 

line structure aligned with its corporate legal 

structure? If not closely aligned, what factors 

influenced the “divergent” structure?

• What is the conglomerate’s strategy with respect to corporate legal structure?

• Does management feel this is an ideal structure? If not, what changes would make it 

optimal and what impediments exist that prevent management from implementing those 

changes?

• What legal entities are regulated, and by 

whom? How does management view the regulatory structure within which it must operate?

In addition to wholly or majority owned subsidiaries, the conglomerate may have a variety of 

significant investments where they are not the majority owner. Despite the fact that these 

investments represent only a minority ownership 

interest, they may, nonetheless, be important to the 

ongoing operation and financial condition of the 

conglomerate. They may also add increased or additional types of risk to the structure. You should 

also identify minority investments and evaluate 

their risk. 
SECTION: Large and Complex Enterprises Section 940

(Conglomerates)

940.10 Holding Companies Handbook November 2003 Office of Thrift Supervision

Understanding the organizational structure, and the 

factors that influence its design will better position 

you to evaluate the risks within the conglomerate. 

By combining business lines, conglomerates offer 

the potential for broad diversifications. However, 

new risk concentrations may arise at the group 

level. More specifically, different entities within 

the conglomerate could be exposed to the same or 

similar risk factors, or to apparently unrelated risk 

factors that may interact under unusually stressful 

circumstances.

A risk concentration refers to exposures or loss potential that is borne by entities within the 

conglomerate that are large enough to threaten the 

capital adequacy, or the financial position in general, of the entities in the conglomerate. Risk 

concentrations can arise in a conglomerate’s assets, liabilities or off-balance sheet items. Risk 

concentrations can take many forms, including exposures to:

• Individual counterparties;

• Groups of individual counterparties or related 

entities;

• Counterparties in specific geographical locations;

• Industry sectors;

• Specific products;

• Service providers (for example, back office 

services); and 

• Natural disasters or catastrophes.

Conglomerates must have comprehensive systems 

to measure, monitor, and manage risk concentrations. Systems should be able to aggregate 

exposures across legal entities and business lines. 

To assess whether the conglomerate has adequate 

risk management processes in place to manage 

group-wide risk concentrations, you should consider:

• What are the conglomerate’s principal risks? 

For each risk:

 How does the conglomerate measure the 

risk?

 What kinds of risk reports are available 

and how frequently are they produced? 

Who reviews and is responsible to respond 

to the reports?

 Is the risk managed centrally or by individual legal entities?

• What are the major risk-taking legal entities 

within the conglomerate?

• What risk control mechanism does the conglomerate have in place (for example, limits, 

vacation policy, job rotation)? If limits exist, 

are they established by legal entity, business 

line, or conglomerate? Who establishes and 

monitors them? Who has authority to override 

limits?

 Does management perform stress testing, 

contingency planning and back testing? If 

so, evaluate the results.

Most conglomerates will have some degree of 

country risk. Country risk is an exposure, credit, 

price, capital markets, foreign exchange, settlement, or other type of risk, that can be directly 

impacted by the social, political, economic, or legal 

climate of other countries. These risks can arise 

from direct lending to foreign borrowers, underwriting insurance to foreign entities, entering into 

capital market contracts with foreign counterparties, or operating offices or subsidiary companies 

in other countries. These risks are present with 

both foreign and domestic entities or other entities, 

and sovereign nations themselves. You will need 

to determine if the conglomerate has significant direct or indirect country risk. A conglomerate has 

direct country risk when it is a party to financial 

transactions with entities based in other countries 

as compared to indirect foreign risk wherein the 

conglomerate is a party to financial transactions 

with entities based in the same country and that entity has direct foreign risk. An example of indirect 

foreign risk would be an American based conglomerate lending to an American manufacturing 

company that has foreign operations or other significant foreign exposures. The manufacturing 
SECTION: Large and Complex Enterprises Section 940

(Conglomerates)

Office of Thrift Supervision November 2003 Holding Companies Handbook 940.11

company could be impacted by adverse results of 

its international operations caused by political 

changes that directly affect the company’s repayment abilities. If the conglomerate does have 

significant country risk, you will need to consider:

• If board approved policies, procedures, and 

authorizations have been established?

• If country limits have been established and if 

the actual exposures versus the limits are 

monitored on a regular basis at a senior level?

• If country risk exists to emerging market countries that may be more volatile, or is the 

country risk limited to developed countries?

• If country risk is monitored and controlled on a 

centralized or decentralized basis?

• If an effective country risk rating system that 

risk ranks foreign exposures, including credit 

and capital market exposures, has been established?

A specific type of country risk is foreign exchange 

risk, i.e., the conglomerate undertakes transactions 

in foreign currencies that are subject to price and 

settlement risk. If the conglomerate is exposed periodically or continuously to significant foreign 

exchange risk, then you will need to consider:

• How the conglomerate manages its foreign exchange risk?

• What type of foreign exchange risk is the conglomerate exposed to, such as direct lending in 

other currencies, capital market transactions in 

other currencies, or overseas operations that 

are funded in other currencies?

• How large is the conglomerate’s foreign exchange risk relative to earnings and capital?

• Do the conglomerate’s policies and procedures 

directly address authorizations for conducting 

such transactions and exposure limits by types 

of transactions and by country?

• Does the conglomerate maintain specific foreign exchange counterparty and settlement 

limits by entity? Are the limits monitored on a 

regular basis with exceptions identified?

• Does the conglomerate hedge its foreign exchange risk? If so, what policies, procedures, 

controls, and reporting have been established?

As you draw conclusions about risk concentrations, keep in mind that all risk concentrations are 

not inherently bad if well managed. A certain degree of concentration is an acceptable result of a 

well-articulated business strategy – for instance, 

product specialization or targeting a particular customer base. 

RELATIONSHIP

The integrated nature and size of a typical conglomerate makes it a challenge to assess the 

effectiveness of management and the relationship 

between the various entities in the group. In our 

role of supervising the conglomerate, we must look 

beyond how decision makers, and the relationship 

in general, impact the thrift to also assess how 

management oversees the conglomerate as a whole. 

You should begin by considering:

• What is the overall management structure of 

the conglomerate?

• How closely does the management structure 

align with the business lines or corporate legal 

entities and what is the strategy for alignment?

• How is the conglomerate managed and controlled – on a regional basis, on a global basis, 

business line basis, or some combination of 

these? 

• How does the conglomerate manage businesses 

that cut across geographic and legal boundaries?

• What responsibilities do different types of 

managers (for example, legal entity, corporate, 

or business line) have within the conglomerate 

and how do these managers interact? 
SECTION: Large and Complex Enterprises Section 940

(Conglomerates)

940.12 Holding Companies Handbook November 2003 Office of Thrift Supervision

• What roles and responsibilities does the conglomerate’s board of directors have? What is 

the composition of the board? For example, 

what percentage is outside directors? Are outside directors independent of management? 

How do the roles and responsibilities of the 

conglomerate’s board compare to those of the 

legal entities? What degree of overlap exists?

In its oversight role, the board must ensure that the 

conglomerate’s risk management program is adequate to identify, monitor, and control any 

significant risk to the conglomerate. Conglomerates with good risk management programs will rely 

on a reporting and control system that clearly identifies emerging and established risks posed by 

excessive concentrations, changing markets, 

economies, and interest rate environments, 

substantial or inappropriate intra-group 

transactions, significant off-balance sheet 

activities, and compliance with the conglomerate’s 

policies and procedures. 

Given that a conglomerate is generally going to be 

a complex organization, it follows that its internal 

controls should be sophisticated. An integral part 

of a good risk management program incorporates a 

system of internal controls that are sufficient to 

identify areas of weakness, particularly in financial 

reporting and accounting systems and records, and 

with regard to regulatory compliance. Good internal controls will ensure that management and 

financial accounting reports are accurate and properly portray the risk profile of the conglomerate. 

Conglomerates with strong risk management programs will ensure that internal controls are well 

integrated throughout the organization, from the 

board to line employees, through policies and procedures that clearly delineate authorities, 

responsibilities, permissible activities, and limits. 

You will need to evaluate how the conglomerate 

ensures the integrity of its internal control structure, including controls over information 

technology (IT). You should begin your assessment by asking the following questions:

• Does the conglomerate maintain an effective 

risk management program? Is the board and 

senior management actively engaged in risk 

management? Does the board approve risk 

management and other significant policies?

• Do policies and procedures clearly delineate 

limits, activities, responsibilities, and authorities? Are policies and procedures updated on a 

timely basis for changes? Are policy and procedural changes communicated to employees?

• Are management reports sufficient to identify 

and monitor significant risks to the conglomerate? Are these reports accurate and timely? 

Who reviews these reports and how often?

• Does the conglomerate model its significant 

risks? If so, do they properly document the 

methodology, data, and assumptions employed? Do they back-test the results? Who 

reviews modeling results and how often?

• Is the system of internal controls appropriate 

to the type and level of risks posed by the nature and scope of the conglomerate’s 

activities? Are controls managed centrally, 

along geographic or business lines?

• Does the board and management support 

strong internal controls by properly addressing 

policy exceptions, excessive risks, regulatory 

compliance, and employee misconduct?

• Are strong internal controls evident in the conglomerate’s IT infrastructure? Is the IT 

infrastructure subject to outside reviews periodically? 

• Are there contingency plans in place for major 

operational concerns such as IT failures, disasters, liquidity needs, etc...? Are the 

contingency plans tested and up to-date?

• Does the organizational structure establish 

clear lines of authority and responsibility for 

monitoring adherence to policies, procedures, 

and limits? 

• Does the conglomerate ensure adequate separation of duties where appropriate throughout 

the organization? 
SECTION: Large and Complex Enterprises Section 940

(Conglomerates)

Office of Thrift Supervision November 2003 Holding Companies Handbook 940.13

• Are internal controls and information systems 

adequately tested and reviewed with coverage, 

procedures, findings, and responses properly 

documented and material weaknesses reviewed 

at an appropriate level? Are exceptions corrected effectively and on a timely basis? 

• What mechanisms are in place to identify and 

correct internal control breaches, violations, 

and other issues of noncompliance?

• What information is available to monitor and 

ensure compliance with relevant laws and 

regulations?

• How is the internal audit function structured? 

What roles and responsibilities belong to the 

centralized element of the audit function (if 

there is one)? What roles belong to centralized 

units of the internal audit function, if any?

• What types of information, summaries and reports are available on the results of internal 

audits? To whom is this information available? What is the process for following up or 

acting on issues requiring action identified by 

the internal auditor? 

• How does the conglomerate ensure sufficient 

independence of the internal audit function? 

To whom does the internal audit function report? Are there any aspects of the audit 

function that are outsourced? If yes, to whom 

and how is the decision to outsource made?

• How does the conglomerate ensure the independence of the external audit process? What 

is the role of nonexecutive board members? 

How does the external audit firm interact with 

the internal audit function? How does the conglomerate select its external auditor?

• What information is available on external audit 

issues? Who is this information made available to? Who is responsible for, and what 

follow-up is conducted, with respect to deficiencies or other issues identified by the 

external audit?

• What are the major incentives provided to 

management to meet the conglomerate’s goals 

and objectives? What impedes meeting these 

goals and objectives?

• How are strategic business and individual 

goals developed, communicated, and monitored?

Intra-group transactions and exposures are an important element of corporate governance and 

internal control. Given the size, complexity and 

number of legal entities within a large conglomerate, control over capital, funding, and other risk 

and income-transferring mechanisms is critical. 

Furthermore, different approaches to capital regulation and accounting requirements in different 

financial sectors may increase the opportunities for 

regulatory arbitrage.

Intra-group transactions and exposures can facilitate synergies between the different legal entities in 

the conglomerate. Such synergies can lead to 

healthy cost efficiencies and profit maximization, 

and more effective control of capital and funding. 

However, significant intra-group transactions and 

exposures can also expose one part of a conglomerate to problems or ailments in another part of the 

conglomerate. Where regulated entities are predominant in the conglomerate, and business lines 

and other activities follow legal entity lines, there 

may be few supervisory concerns. 

However, if there are significant unregulated entities in the conglomerate, or the way in which the 

operations are managed differ from the legal entity 

structure, then sound management of intra-group 

transactions is even more important.

It is management’s, and ultimately the board of directors’, responsibility to achieve the appropriate 

balance between the benefits and risks of intragroup transactions and exposures. Sound risk 

management of intra-group transactions and exposures begins with policies and procedures approved 

by the board or other appropriate body and active 

oversight by both the board and management. The 

conglomerate’s policies and procedures should set 

transaction and exposure limits. 
SECTION: Large and Complex Enterprises Section 940

(Conglomerates)

940.14 Holding Companies Handbook November 2003 Office of Thrift Supervision

Intra-group transactions and exposures can take 

many forms. You are probably most familiar with 

the transactions that are covered by the affiliate 

regulations involving a thrift. In a conglomerate, 

new types of intra-group transactions and exposures arise. Intra-group transactions and 

exposures can arise through:

• Cross shareholdings;

• Trading operations whereby one company 

within the group deals with, or on behalf of, 

another company in the group;

• Centralized management of short-term liquidity within the conglomerate;

• Guarantees, loans and commitments provided 

to, or received from, other entities in the 

group;

• Providing management or other service arrangements (for example back office services);

• Exposures to major shareholders (including 

loans and off-balance sheet exposures such as 

commitments and guarantees);

• Exposures arising from placing client assets 

with another legal entity in the group;

• Purchases or sales of assets between entities in 

the group;

• Transfer of risk through reinsurance; and

• Transactions that shift third party risk exposure between entities within the conglomerate.

Your assessment of intra-group transactions and 

exposures can begin by considering:

• What information is available on the range of 

intra-group and related entity transactions and 

exposures? What types of management information reports are produced and how 

frequently?

• What is the conglomerate’s overall strategy 

with respect to intra-group transactions and 

exposures? What types of intra-group/related 

entity transactions or other arrangements are 

used (for example, servicing agreements, 

loans)? 

• How are intra-group and related entity exposures and transactions monitored?

• What is the volume of intra-group/related entity transactions and level of finance 

exposures? Does the conglomerate have internal limits or thresholds on such transactions or 

exposures? Are there internal or external limits or thresholds on such transactions or 

exposures (such as regulatory, borrowing, or 

board set limits)?

• What is the level of financial exposure to entities that are not wholly owned? Are there 

limits or thresholds for transactions and exposures to such entities?

The following transactions with any regulated entity in the conglomerate would raise supervisory 

concern:

• Transactions that result in capital or income 

being inappropriately transferred from a regulated entity.

• Transactions that are on terms or under circumstances that are not at arm’s length or not 

under terms and circumstances that a thirdparty would accept.

• Transactions that can adversely affect the 

capital, liquidity or profitability of entities 

within the group.

• Transactions that are used as a means of supervisory arbitrage to evade capital or other 

regulatory requirements.

Public disclosure of intra-group transactions and 

exposures can promote market discipline by providing insight into the relationships among the 

various entities in the conglomerate. Insightful 

public disclosure allows for more effective market 

discipline because stakeholders in the conglomerate 

will be better able to understand the dynamics of 
SECTION: Large and Complex Enterprises Section 940

(Conglomerates)

Office of Thrift Supervision November 2003 Holding Companies Handbook 940.15

the conglomerate’s financial statements and risk 

management activities.

Intra-group relationships and transactions, on- and 

off-balance sheet, will often times significantly impact how a company within the group operates, 

raises its funding, implements its risk management 

program, and manages other facets of its business. 

Understanding these relationships between entities 

within a conglomerate is an important and necessary initial step to analyzing its capital adequacy 

and financial performance. 

EARNINGS

A conglomerate, by definition, will be a large complex business, likely encompassing a number of 

different lines of business, with each line of business offering a variety of different products. As a 

result, your earnings assessment will need to include an analysis of each of these different 

business segments to understand how they contribute to the financial performance of the 

conglomerate as a whole. You will, therefore, first 

need to understand the organizational structure of 

the conglomerate to determine the primary lines of 

business, the most significant entities within the 

group and their roles, as well as their geographic 

reach. Only after achieving a solid understanding 

of the organizational structure, and the interrelationships among the entities, can you begin to 

analyze earnings.

Your assessment will include an analysis of earnings, cash flow, and liquidity, conducted on both a 

consolidated and an unconsolidated basis. You 

will have to identify those entities that contribute 

significant earnings, cash flow, and liquidity to the 

parent company or affiliates. The analysis of inter-company support via earnings, cash flow, and 

liquidity is as important as understanding the contribution of the individual entities to the 

consolidated conglomerate’s results. While intercompany transactions can be managed in a prudent 

manner and to the benefit of the conglomerate, 

such transactions can also transmit financial problems to other entities within the group and 

jeopardize the reputation, and possibly, the financial stability of the conglomerate. You need to 

identify those situations where inter-company 

transactions pose concerns and potential risk to the 

conglomerate. 

Your analysis may be complicated when any significant entities within the group are unregulated. 

If a significant company within the group is unregulated, then regulatory reports will not be 

available to provide insight into the financial performance of that company or line of business. 

Available information may be limited to only the 

public domain and what the conglomerate provides. In addition, inter-company transactions 

between unregulated entities can pose a greater 

risk, as they are not subject to regulatory restrictions or review. Only by understanding the 

individual entities, regulated and unregulated, and 

group-wide earnings and cash flows, can you 

properly assess the conglomerate’s financial stability, ability to service debt and pay dividends, and 

generate new capital to support growth and losses.

Begin your analysis with a review of the conglomerate’s corporate structure and identify the major 

entities, the predominant lines of business, regulated versus unregulated entities, the primary 

business products, and their geographic reach. 

You will need to review the analyses performed as 

part of the Organization and Relationship sections 

of this Handbook module. After completing this 

review, you will need to consider:

• If any regulatory reports describe concerns 

with the financial or risk profile of a company 

or line of business, or with any inter-company 

transactions?

• Are there any inter-company transactions that 

are indicative of a particular business segment 

or significant company that is overly reliant on 

other parts of the conglomerate for financial 

support? Your review should include analyzing consolidating balance sheets and income 

statements for on-balance sheet items, and 

other reports for off-balance sheet intercompany relationships, such as financial derivatives. 
SECTION: Large and Complex Enterprises Section 940

(Conglomerates)

940.16 Holding Companies Handbook November 2003 Office of Thrift Supervision

• Are there any lines of business or significant 

entities within the conglomerate that are experiencing earnings, cash flow, or liquidity 

problems? If so, has management identified 

the situation and developed a remedial plan?

• How is the financial control function organized 

with respect to legal entities and business 

lines? What part of the conglomerate is responsible for accounting and financial 

reporting issues? 

• Does the conglomerate obtain annual independent audits? If so, are audits prepared for 

the conglomerate on a group-wide basis or are 

there individual audit reports for separate entities within the corporate structure? Is the 

audit opinion qualified in any manner? Are 

there any significant audit adjustments? 

• What accounting rules are used by the conglomerate? How are these rules applied across 

the conglomerate? How do they vary across 

geographic lines and business segments? How 

is accounting reconciled across different financial sectors or countries?

• Are there any new accounting pronouncements 

that will significantly impact any of the individual entities?

The ability of the conglomerate to generate consistently strong earnings provides the ability to grow, 

pursue opportunities, access capital markets at reduced costs, and absorb losses. The earnings 

strength of the conglomerate will be dependent on 

the earnings of the major business segments. Each 

business segment may have significantly different 

factors driving its earnings from stock market activity for a securities broker/dealer, to the interest 

rate and credit risk environment for a bank, to 

catastrophic weather events for a property and 

casualty insurance underwriter. As a result, the 

conglomerate’s earnings may have components 

that are cyclical or volatile in nature, or susceptible 

to particular events, all of which you will need to 

consider. In addition, your analysis should focus 

on the most significant, and if present, the most 

problematic entities within the conglomerate. 

When conducting your analysis, you will need to 

consider:

• How profitable are the major business segments and the significant entities within the 

conglomerate? What are the short and long 

term profitability trends?

• Are earnings stable and generated by core operations, or are there volatile or cyclical 

earnings components?

• Are significant nonrecurring gains present, 

such as a large gain from the sale of assets that 

are benefiting net income? 

• Are there unprofitable or under-performing 

business segments or significant entities within 

the conglomerate? If so, how is management 

addressing these problems?

• How strong are the conglomerate’s basic financial measures, such as return on equity, 

cost of equity, return on assets, and turnover? 

• Does management and the board periodically 

review earnings performance of the individual 

entities and on a group-wide basis?

• Does the conglomerate have a budget and financial projections? Are they produced at the 

individual company level and on a group-wide 

basis?

• Are any of the individual entities or lines of 

businesses significantly under-reserved for potential losses?

• Does the strategic plan identify any major actions such as stock repurchase plans, new 

products, or lines of business that will have a 

significant financial or risk impact on any of 

the entities or lines of business? 

• How do the individual entities and the conglomerate as a whole, manage their income 

taxes? Are there significant income tax liabilities due? Are there any new changes to 

income tax regulations or laws that will significantly alter future tax liabilities? 
SECTION: Large and Complex Enterprises Section 940

(Conglomerates)

Office of Thrift Supervision November 2003 Holding Companies Handbook 940.17

Your assessment of the financial stability of the 

conglomerate will also need to identify potential 

problems with cash flow or liquidity within the 

conglomerate. To identify potential cash flow or 

liquidity issues, you will need to analyze the cash 

flow and liquidity needs and resources for each 

major company and/or line of business. In addition, you may need to evaluate the balance sheet of 

the underlying entities to identify significant concentrations of assets that are not liquid or do not 

generate cash, such as goodwill or deferred policy 

acquisition costs. 

Of prime concern is the conglomerate’s ability to 

meet its financial obligations on a timely basis. If 

one company within the group defaults, or loses 

the confidence of market participants, the reputation and financial wherewithal of the entire 

organization can be jeopardized, which can translate to problems for an entire sector and other 

conglomerates if there are significant crossholdings. Your analysis needs to identify any concerns with a conglomerate being able to meet its 

financial obligations on a timely basis including 

repaying debt, honoring financial derivatives, debt 

guarantees and other types of commitments, and 

meeting all underlying debt and other types of 

covenants. You will need to identify concerns with 

deterioration in a company’s debt service abilities 

and/or liquidity position, and seek remedial action 

where appropriate. Your analysis will need to 

consider:

• Is there publicly available information from 

rating agencies on the conglomerate or its significant subsidiaries? Is the conglomerate well 

rated and considered financially sound? Has 

any rating agency announced its intent to conduct a credit review of the conglomerate with 

an outlook towards changing the rating?

• Do regulatory reports of individual entities or 

lines of business indicate any concerns with 

cash flow management, the liquidity position, 

or the ability of an entity to meet its financial 

obligations?

• Is access to the capital markets performed only 

at the parent level or through a specialized entity, or do the individual entities maintain 

access to the capital markets?

• Are there any legal, tax, or regulatory restrictions that could impact the conglomerate’s 

ability to manage its cash flows and service its 

debt? 

• Are there inter-company guarantees provided 

on debt or other types of contracts that could 

pose a significant funding issue?

• Are there other types of inter-company transactions, particularly with unregulated entities 

within the group that could impact the financial strength of a company within the group?

• How is cash flow and liquidity managed for 

the conglomerate as a group and on an individual company basis? Are these functions 

centralized or decentralized?

• Does the conglomerate and the individual entities maintain liquidity and borrowing policies 

and limits consistent with prudential standards? How are these policies and limits 

applied group-wide?

• How are liquidity and cash flow demands 

measured on an everyday basis? Is senior 

management regularly involved in monitoring 

the liquidity needs of the conglomerate? What 

information is available on liquidity? How 

frequently is it produced?

• Do the individual entities generate sufficient 

cash flow to service their own debt or are they 

reliant on subsidiaries or outside resources to 

meet debt service and other obligations?

• Is there any significant credit drawn or available to any of the entities? If so, are there any 

significant restrictions or covenants associated 

with any credit agreements that could prevent 

the payment of dividends or other transfers of 

capital, the use of liquidity, ability to borrow, 

or otherwise significantly impact the conglomerate’s or any of the individual company’s 

operations or ability to service it’s debt?
SECTION: Large and Complex Enterprises Section 940

(Conglomerates)

940.18 Holding Companies Handbook November 2003 Office of Thrift Supervision

• Are there any significant unfunded obligations, 

such as under-funded pension plans, that could 

significantly impact the conglomerate’s liquidity or earnings? 

• Are there significant off-balance sheet items 

such as commitments, securitizations, financial 

derivatives, or lease commitments that could 

require significant liquidity commitments at the 

conglomerate level or at any of the significant 

subsidiaries?

• What plans have been made for crisis or contingency funding? To what extent have such 

plans been elaborated? 

As you conduct your financial analysis, refer as 

needed to Section 600 of this Handbook for additional guidance. You have the flexibility in 

choosing those areas of the Handbook that will be 

useful in completing your assessment. 

Your conclusions about the financial wherewithal 

of the conglomerate will need to carefully weigh all 

of the above factors, as well as consider management’s approach in conducting the conglomerate’s 

business and the organizational structure. Your final assessment should be from the perspective of 

the conglomerate as a whole, highlighting its financial strengths and weaknesses. You should also 

address any significant concerns with the financial 

stability of any of the major underlying entities, 

regulated or unregulated. 

SUMMARY

Your assessment of a conglomerate will require 

you to carefully weigh all of the CORE components and their interrelationships. You will need to 

conduct your comprehensive assessment from the 

perspective of the consolidated regulator at the 

parent, top-tier, organization within the conglomerate. Particular emphasis, however, should be 

placed upon a parallel assessment of the top-tier 

financial company. While the primary emphasis 

will be to analyze the conglomerate’s capital adequacy and risk profile, such an analysis cannot be 

conducted without first considering the Organization and Relationship components. In order to 

understand the dynamics of the conglomerate, you 

will need to: 

• Understand the organization – how it is structured, managed, and controlled. You will need 

to identify the conglomerate’s most significant 

entities and understand how they conduct their 

business.

• Identify and understand all significant intragroup relationships and transactions to assess 

their impact on the organization’s earnings, 

risk profile, and capital adequacy.

• Coordinate closely with other regulators and 

consider their examination and inspection reports, publicly available information, and 

information provided by management.

• Assess the conglomerate’s major risk exposures and how these risks are impacted, both 

domestically and internationally, by economic 

changes, legal and tax considerations, how the 

conglomerate conducts its business, and the 

stability of the financial markets in which they 

operate. 

• Determine the conglomerate’s group-wide 

capital adequacy. This includes assessing 

capital adequacy relative to the needs of each 

major business sector and the parent’s own 

capital adequacy.

As the consolidated regulator of the conglomerate, 

we need to ensure that we coordinate closely with 

all interested regulators worldwide. This involves 

sharing information with other regulators so that 

all parties understand the conglomerate’s overall 

dynamics. This also involves being prepared to act 

accordingly in the event of a crisis by obtaining information from the conglomerate on the 

consequences of such an event, their contingency 

plans and options to minimize the impact of a crisis, and exchanging information with all interested 

regulators to assist in coordinating and executing 

any necessary supervisory actions. 
Appendix A: Financial Activities in the Section 940A

European Union

Office of Thrift Supervision November 2003 Holding Companies Handbook 940A.1

Worldwide, the regulation of conglomerates is 

evolving. Banking, insurance, and securities regulators have recognized that the risks of the 

combined enterprise must be evaluated. The Joint 

Forum1, a group established by the Basel Committee on Banking Supervision, the International 

Organization of Securities Commissions, and the 

International Association of Insurance Supervisors, 

has outlined principles related to the supervision of 

conglomerates. 

It is widely recognized that a form of supplementary supervision is needed and that a central 

regulatory contact point is essential. As the word 

“supplementary” implies, the supervision of the enterprise is in addition to the role of the primary 

regulator(s) for each financial sector. Since the 

OTS has numerous holding companies with operations throughout the world, this guidance is 

designed to ensure that our regulatory approach to 

conglomerates is considered equivalent to the standards and principles set by other governing bodies. 

This approach ensures that our holding companies 

are on a level playing field, and not subject to unnecessary or duplicative regulatory burden by 

having to comply with differing regulatory 

schemes. 

The substance of the guidance provided throughout 

this Section relies heavily on documents produced 

by the Joint Forum. In particular, in July 2001, 

the Joint Forum produced a compendium of documents on issues relating to conglomerates.2

 These 

papers document the combined thoughts of representatives of various and different financial sectors 

across many nations with regard to what supervisory measures are needed to adequately oversee a 

conglomerate. The compendium of documents address coordination among regulators, information 

sharing, capital adequacy, fit and proper tests on 

 

1

 The Joint Forum is comprised of an equal number of senior 

bank, insurance and securities supervisors representing each 

supervisory constituency. Thirteen countries are represented 

in the Joint Forum: Australia, Belgium, Canada, France, 

Germany, Italy, Japan, Netherlands, Spain, Sweden, Switzerland, United Kingdom and the U.S. 

2

 http://www.bis.org/publ/joint02.pdf

management’s capabilities and effectiveness, intragroup transactions and exposures, and risk concentrations. 

The European Parliament and the Council of the 

European Union issued a directive on December 

16, 2002 (EU Directive) outlining measures to address the risks with regard to financial groups with 

financial activities across more than one sector.3 

The articles of the EU Directive and objectives 

therein outline a supervisory approach similar to 

that spelled out in the Joint Forum documents. 

U.S. companies engaged in financial activities in a 

member state of the European Union4 may fall 

within the scope of the EU Directive. 

The EU Directive defines a conglomerate as a 

group of companies under common control that 

engage predominantly in financial activities (insurance, securities, and banking). Conglomerates 

must have a significant interest in insurance and at 

least one other financial activity (banking or securities), to fall within the scope of the EU Directive. 

In addition, the ratio of aggregate assets of all financial sector entities to total consolidated assets 

of the conglomerate should exceed 40 percent.

An interest in a financial sector is considered significant if:

• The ratio of that sector’s assets to the total financial sector assets exceeds 10 percent; and

• The ratio of the capital requirements imposed 

by the regulator of that sector to the total aggregate capital requirements for all financial 

sectors in the group exceeds 10 percent.

 

3

http://europa.eu.int/eurlex/ 

pri/en/oj/dat/2003/l_035/l_03520030211en00010027.pdf

4

 As of November 2003, the member states include Austria, 

Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, 

Sweden, and the United Kingdom. The following countries 

are in process of fulfilling the requirements to accede to the 

European Union: Estonia, Latvia, Lithuania, Poland, Hungary, Slovakia, the Czech republic, Slovenia, Malta, and 

Cyprus.
Appendix A: Financial Activities in the Section 940A

European Union

940A.2 Holding Companies Handbook November 2003 Office of Thrift Supervision

The EU Directive also recognizes that it may be 

appropriate to apply this guidance in situations 

where these thresholds are not met or maintained. 

For instance, if one or more of the ratios noted 

herein fell below threshold levels during the current 

annual cycle, but is expected to return to prior levels. Similarly, there may be situations where these 

thresholds are never met, but the characteristics of 

the conglomerate warrant reviewing it as if it were.

The EU Directive requires that one single authority 

be appointed for the overview of each conglomerate and that such authority ensure that information 

is coordinated and exchanged between the different 

supervisors involved in the supervision of the conglomerate’s component parts. 

The regulator that will perform the supplemental 

supervision is typically identified through mutual 

agreement among all concerned member states, 

however, where an agreement is not reached, authority is assigned to the regulator of the parent 

regulated entity. If the parent is not a regulated entity, certain geographic and quantitative tests are 

employed to assign the role to the member state 

with the most significant connection to the group. 

Regulators in third-party countries (countries like 

the U.S. that are not members to the European Union) can serve in this role if their supervisory 

approach is deemed to be equivalent to the supplementary supervision regime. While an 

equivalency determination will ultimately be made 

by the regulatory authorities of the member states, 

OTS believes that its supervisory approach is 

equivalent. Section 940 is designed to ensure that 

the scope of our holding company examination of a 

conglomerate is sufficient to fulfill these responsibilities under the EU Directive.

If OTS is deemed equivalent, you must ensure that 

our responsibilities in this role are fulfilled. Our 

responsibilities would include gathering and disseminating relevant or essential information. We 

would also need to ensure that there are procedures 

for sharing information on an ordinary basis as 

well as in emergency situations. Close coordination with fellow regulators is achieved through 

periodic meetings, input on the content of the enterprise’s supervisory plan, and sharing of 

information obtained in regulatory reports filed by 

each agency. Information sharing or regulatory 

cooperation agreements may be in place, but are 

not required by the EU Directive.

If a holding company enterprise is subject to the 

EU Directive, a primary staff contact will be designated to communicate with international 

regulatory authorities to initiate information sharing procedures and develop an appropriate 

Supervisory Plan for the conglomerate.
Appendix B: Methods to Assess Section 940B

Capital Adequacy

Office of Thrift Supervision November 2003 Regulatory Handbook 940B.1

The prescribed methods to assess group-wide capital include the Accounting Consolidation method, the Deduction and Aggregation method, and the Book Value / Requirement Deduction method. In addition, if 

necessary, you can also combine two or more of these methods to conduct your capital adequacy analysis. 

The following pages outline the three methods and provide examples of each. 

The following is an abbreviated consolidated balance sheet divided into the individual subsidiaries including a 

banking company that is the parent, an insurance subsidiary that is wholly owned by the parent, a securities 

company that is 60 percent owned by the parent, and an unregulated finance subsidiary that is wholly owned 

by the parent. The examples in this appendix are based on the financial information shown below.

Regulated 

Banking 

Parent

Regulated 

Insurance 

Subsidiary 

100% Owned

Regulated 

Securities 

Subsidiary 

60% Owned

Unregulated 

Finance 

Subsidiary 

100% Owned

Eliminations Consolidated

Most Assets $315 $150 $225 $120 $810

General Reserves -4 -2 -2 -2 -10

Investment In: 

Insurance Sub. 

Securities Sub. 

Finance Sub. 

Totals

10

12

 5

27 0 0 0 -$27 0

Total Assets 338 148 223 118 800

Total Liabilities 275 138 203 113 729

Minority Interest18 8

Equity Capital 63 10 20 5 -35 63

Liabilities & 

Equity Capital $338 $148 $223 $118 $800

 

1

 In this example, it is assumed that a third party minority investor owns 40 percent of the securities subsidiary. This minority ownership interest equals 

$20 of equity capital at the securities subsidiary multiplied by 40 percent, or $8.
Appendix B: Methods to Assess Section 940B

Capital Adequacy

940B.2 Regulatory Handbook November 2003 Office of Thrift Supervision

Accounting Consolidation Method:

• Uses consolidated financial information to eliminate intra-group transactions and capital gearing.

• Breaks down the consolidated balance sheet into its major sectors.

• Compares the conglomerate’s consolidated available capital to capital needs. 

• Calculates the capital requirement for each regulated entity and a notional capital proxy for each unregulated entity. If a proxy cannot be developed for an unregulated entity, then you should deduct the 

parent’s investment in that entity (as determined under the equity method of accounting) from the 

group’s capital.

• Determines the transferability of capital. 

• Aggregates the individual capital requirements and notional capital proxies (or deduction for unregulated entities for which no proxy can be developed) of each entity or sector and compares this to the 

group-wide available capital to identify a group-wide capital surplus or deficit.

The group-wide capital surplus equals $12 in the second table on the following page. However, this assumes 

that the capital surpluses of the other entities are available (transferable) to offset the capital deficit at the finance subsidiary. In such an instance, you will need to determine if the surplus capital is transferable to capital 

deficient sectors and is also eligible as capital in the capital deficient sectors. If the surplus capital is not transferable or eligible, then capital is considered inadequate at the finance subsidiary. 

When minority interests are present, you will need to decide whether to include or exclude the minority interests 

in your capital assessment. The first table on the following page “Accounting Consolidation Capital Assessment Using Full Consolidation” includes the minority interest as available capital while the second table 

excludes the minority interests from capital. As a result, the $5 capital surplus of the securities subsidiary is 

pro rated 60 percent, or $3, reducing group-wide capital by $2. See Appendix C for additional discussion of 

majority and minority interests. Generally, you are expected to exclude or pro rate capital surpluses when the 

conglomerate holds less than a 100 percent ownership interest in an entity. 

However, you are expected to include, and not pro rate capital deficits, when the conglomerate has less than 100 

percent ownership in an entity. For example, if the parent’s ownership interest in the finance subsidiary were 

only a majority interest, you would still include the entire $3 capital deficit in your analysis.
Appendix B: Methods to Assess Section 940B

Capital Adequacy

Office of Thrift Supervision November 2003 Regulatory Handbook 940.B3

Accounting Consolidation Capital Assessment Using Full Consolidation

Regulated 

Banking Parent

Regulated 

Insurance 

Subsidiary 

100% Owned

Regulated 

Securities 

Subsidiary 

60% Owned

Unregulated 

Finance 

Subsidiary 

100% Owned

Group-Wide 

Totals

Equity Capital $63 $10 $20 $5 $98

General 

Reserves

4 2 2 2 10

Available 

Capital 67 12 22 7 108

Deduct 

Investment In 

Subsidiaries -27 0 0 0 -27

Capital Required / 

Proxy 3

-32 -10 -17 -10 -69

Capital Surplus / 

- Deficit $8 $2 $5 -$3 $12

Accounting Consolidation Capital Assessment Using Pro Rata Consolidation

Regulated 

Banking Parent

Regulated 

Insurance 

Subsidiary 

100% Owned

Regulated 

Securities 

Subsidiary 

60% Owned

Unregulated 

Finance 

Subsidiary 

100% Owned

Group-Wide 

Totals

Equity Capital $63 $10 $12.0 $5 $90.0

General 

Reserves

4 2 1.2 2 9.2

Available 

Capital2 67 12 13.2 7 99.2

Deduct 

Investment In 

Subsidiaries

-27 0 0 0 -27

Capital Required / 

Proxy 3

-32 -10 -10.2 -10 -62.2

Capital Surplus / 

- Deficit $8 $2 $3.0 -$3 $10.04

 

2 Note that the capital amounts include general reserves as part of available capital. The use of general reserves, or other items, as available capital will 

vary in different sectors or industries.

3

 In this example we have developed a notional capital proxy for the unregulated finance subsidiary. If it is not possible to develop a proxy for an unregulated entity, you will need to deduct that entity from the conglomerate's group wide totals. In this example you would need to deduct the unregulated 

finance subsidiary's $7 of available capital and the $10 capital proxy from the group totals. You would not need to change the $27 deduction for investment in subsidiaries because you would still want to eliminate the parent's $5 investment in the finance subsidiary. Once you have deducted the 

unregulated entity, you would assess the remainder of the conglomerate's balance sheet as described in this Section of the Handbook. You will need to rely 

on other tools to assess the capital adequacy of the unregulated entity such as peer comparisons, debt to equity ratios, and cashflow analyses as described in 

Section 300 of the Handbook.

4

 The table above, “Accounting Consolidation Capital Assessment Using Full Consolidation” includes the minority interest as available capital while the 

first table “Accounting Consolidation Capital Assessment Using Pro Rata Consolidation” excludes the minority interests from capital. As a result, in the 

first table the $5 capital surplus of the securities subsidiary is pro rated 60 percent, or $3, reducing group-wide capital by $2, which is the difference in the 

group-wide capital results of $10 versus $12. See Appendix C for additional discussion of majority and minority interests.
Appendix B: Methods to Assess Section 940B

Capital Adequacy

940B.4 Regulatory Handbook November 2003 Office of Thrift Supervision

Deduction and Aggregation Method:

• Uses unconsolidated statements and is predicated on pro rata inclusion of subsidiaries.

• Sums the available capital for each regulated and nonregulated entity or sector. 

• Sums the capital requirements for each regulated and nonregulated entity or sector with the book value of the 

investments in the entities or sectors in the group.

• Determines the transferability of surplus capital.

• Compares required capital to available capital to identify a surplus or deficit on a group-wide basis.

The group-wide capital surplus equals $10 in this example. However, this assumes that the capital surpluses of the 

other entities are available to offset the capital deficit at the unregulated finance subsidiary. In such an instance, you 

will need to determine if the surplus capital is transferable to capital deficient sectors and if the company is regulated, 

the surplus capital is also eligible as capital in the capital deficient sectors. If the surplus capital is not transferable, 

then capital is considered inadequate at the finance subsidiary. Generally, you are expected to exclude or pro rate

available capital and required capital when the conglomerate holds less than a 100 percent ownership interest in an 

entity. However, you are expected to include and not pro rate capital deficits when the conglomerate has a majority interest in an entity. For example, if the parent’s ownership interest in the finance subsidiary were less than 100 

percent, you would still include the entire $3 capital deficit in your analysis. See Appendix C for additional discussion 

of majority and minority interests.

Regulated 

Banking Parent

Regulated Insurance Subsidiary 

100% Owned

Pro Rated Regulated Securities 

Subsidiary 

60% Owned

Unregulated 

Finance 

Subsidiary 

100% Owned

Group-Wide 

Totals

Available Capital 5

$67 $12 $13.2 $7 $99.2

Capital Required / Proxy 6

-32 -10 -10.2 -10 -62.2

Inv. in Subsidiaries -27 -27.0

Capital Surplus / - Deficit $8 $2 $3.0 -$3 $10.0

 

5 Note that the capital amounts below include general reserves as part of available capital. The use of general reserves, or other items, as available capital 

will vary in different sectors and countries. 

6

 In this example we have developed a notional capital proxy for the unregulated finance subsidiary. If it is not possible to develop a proxy for an unregulated entity, you will need to deduct that entity from the conglomerate's group wide totals. In this example you would need to deduct the unregulated 

finance subsidiary's $7 of available capital and the $10 capital proxy from the group totals. You would not need to change the $27 deduction for investment in subsidiaries because you would still want to eliminate the parent's $5 investment in the finance subsidiary. Once you have deducted the 

unregulated entity, you would assess the remainder of the conglomerate's balance sheet as described in this Section of the Handbook. You will need to rely 

on other tools to assess the capital adequacy of the unregulated entity such as peer comparisons, debt to equity ratios, and cashflow analyses as described in 

Section 300 of the Handbook.

Parent Bank

Investments in Subsidiaries

$10 $12 $5
Appendix B: Methods to Assess Section 940B

Capital Adequacy

Office of Thrift Supervision November 2003 Regulatory Handbook 940.B5

Book Value / Requirement Deduction Method:

• Uses unconsolidated statements.

• Performs analysis from parent company perspective.

• Predicated on pro rata consolidation of subsidiaries.

• Focuses on capital surplus or deficit of each dependent (subsidiary) and the transferability of available 

capital to the parent or elsewhere in the group.

Summary Steps to Complete the Book Value / Requirement Deduction 

Method:

• Calculate the parent’s available capital according to the relevant capital rules for that sector.

• Calculate the parent’s required capital according to the relevant capital rules for that sector.

• Calculate the higher of the book value of the parent’s investment in other entities or sectors, or these 

entities’ capital requirements, pro rated as appropriate.

• Sum the parent’s required capital and the higher of the book value of the parent’s investment in other 

entities or sectors and these entities’ capital requirements.

• Determine the transferability of surplus capital.

• Calculate the group-wide capital surplus / deficit by comparing the parent’s available capital to the 

sum of the parent’s required capital and the higher of the book value of the parent’s investment in 

other entities or sectors, or these entities’ capital requirements.

The group-wide capital surplus equals $3 in this example. While this method excludes the available capital of 

the subsidiaries, it also only takes into account the higher of the subsidiary capital requirements or the investment in the subsidiary, ignoring the lower of the two items. The net result in this case is that surplus capital is 

estimated to be $3 versus $10 in the prior two methods. While the example calculates a capital surplus, it assumes that the capital surpluses of the other entities are available to offset the capital deficit at the unregulated 

finance subsidiary. In such an instance, you will need to determine if the surplus capital is transferable to 

capital deficient sectors and if the company is regulated, the surplus capital is also eligible as capital in the 

capital deficient sectors. If the surplus capital is not transferable, then capital is considered inadequate at the 

finance subsidiary. Generally, you are expected to exclude or pro rate required capital when the conglomerate 

owns less than 100 percent of an entity. However, you are expected to include and not pro rate capital deficits

when the conglomerate has a majority interest in an entity. For example, if the parent’s ownership interest in 

the finance subsidiary were less than 100 percent, you would still include the entire $3 capital deficit in your 

analysis. See Appendix C for additional discussion of majority and minority interests.
Appendix B: Methods to Assess Section 940B

Capital Adequacy

940B.6 Regulatory Handbook November 2003 Office of Thrift Supervision

Book Value / Requirement Deduction Method (Continued):

Unconsolidated 

Regulated Banking 

Parent

Regulated Insurance 

Subsidiary 100% 

Owned

Regulated Securities 

Subsidiary 60% Owned

Unregulated Finance 

Subsidiary 100% 

Owned

Available Capital 7$67 $12 $13.2 $7

Capital Required / 

Proxy 8 32 10 10.2 10

Surplus/ (Deficit) $35 $2 $3.0 -$3

Parent’s Available Capital ($63 Equity Capital plus $4 General Reserves) $67

Sum:

Parent’s Capital Required $32

Calculate the higher of the book value of the parent’s investment in each individual entity or sector or 

these entities’ capital requirements:

Insurance Subsidiary 10

Securities Subsidiary 12

Unregulated Finance Subsidiary 10

Total Capital Required 64

Group-Wide Capital Surplus / - Deficit $3

 

7 Note that the capital amounts below include general reserves as part of available capital. The use of general reserves, or other items, as available capital 

will vary in different sectors and countries. 

8

In this example we have developed a notional capital proxy for the unregulated finance subsidiary. If it is not possible to develop a proxy for an unregulated entity, you will need to deduct that entity from the conglomerate. In this example you would need to eliminate the $10 deduction for the capital proxy 

and instead subtract the Parent's $5 investment in the Finance Subsidiary from the $64 of Total Capital Required. Once you have deducted the unregulated 

entity, you would assess the remainder of the conglomerate's balance sheet as described in this section of the Handbook. You will need to rely on other 

tools to assess the capital adequacy of the unregulated entity such as peer comparisons, debt to equity ratios, and cashflow analyses as described in Section 

300 of the Handbook.

Parent Bank

Investments in Subsidiaries

$10 $12 $5