70444 Federal Register / Vol. 69, No. 233 / Monday, December 6, 2004 / Notices 

Memorandum and resolution re: 

Proposed 2005 Corporate Operating 

Budget. 

The meeting will be held in the Board 

Room on the sixth floor of the FDIC 

Building located at 550 17th Street, 

NW., Washington, DC. 

The FDIC will provide attendees with 

auxiliary aids (e.g., sign language 

interpretation) required for this meeting. 

Those attendees needing such assistance 

should call (202) 416–2089 (Voice); 

(202) 416–2007 (TTY), to make 

necessary arrangements. 

Requests for further information 

concerning the meeting may be directed 

to Mr. Robert E. Feldman, Executive 

Secretary of the Corporation, at (202) 

898–7043.

Dated: November 30, 2004.

Federal Deposit Insurance Corporation. 

Robert E. Feldman, 

Executive Secretary.

[FR Doc. E4–3464 Filed 12–3–04; 8:45 am] 

BILLING CODE 6714–01–P

FEDERAL RESERVE SYSTEM

[Docket No. OP–1207] 

Bank Holding Company Rating System

AGENCY: Board of Governors of the 

Federal Reserve System.

ACTION: Notice.

SUMMARY: The Federal Reserve has 

revised its bank holding company (BHC) 

rating system to better reflect and 

communicate its supervisory priorities 

and practices. The revised BHC rating 

system emphasizes risk management; 

implements a comprehensive and 

adaptable framework for analyzing and 

rating financial factors; and provides a 

framework for assessing and rating the 

potential impact of the nondepository 

entities of a holding company on the 

subsidiary depository institution(s).

DATES: The revised rating system will be 

applied to all BHC inspections 

beginning on or after January 1, 2005, as 

well as to inspections opened in 2004 

and closed in 2005, at the discretion of 

the Reserve Bank.

FOR FURTHER INFORMATION CONTACT:

Deborah Bailey, Associate Director, 

(202–452–2634), Barbara Bouchard, 

Deputy Associate Director, (202–452–

3072), Molly Mahar, Senior Supervisory 

Financial Analyst, (202–452–2568), or 

Anna Lee Hewko, Supervisory Financial 

Analyst, (202–530–6260). For users of 

Telecommunications Device for the Deaf 

(‘‘TDD’’) only, contact (202) 263–4869.

SUPPLEMENTARY INFORMATION:

Background 

On July 23, 2004, the Federal Reserve 

published a notice in the Federal 

Register (69 FR 43996) requesting 

comment on proposed revisions to the 

BHC rating system. The BHC rating 

system is an internal rating system used 

by the Federal Reserve as a management 

information and supervisory tool that 

defines the condition of all BHCs, 

including financial holding companies 

(FHCs), in a systematic way. First and 

foremost, a BHC’s rating provides a 

summary evaluation of the BHC’s 

condition for use by the supervisory 

community. Second, the BHC rating 

forms the basis of supervisory responses 

and actions. Third, the BHC rating 

provides the basis for supervisors’

discussion of the firm’s condition with 

BHC management. Fourth, the BHC 

rating determines whether the BHC is 

entitled to expedited applications 

processing and to certain regulatory 

exemptions. 

The former BHC rating system, 

implemented in 1979 and commonly 

referred to as the BOPEC rating system, 

focused on the financial condition of 

discrete legal entities, consolidated 

capital, and consolidated earnings. It 

also included composite financial 

condition and management ratings. 

Since that time, a number of changes 

have occurred in the financial services 

industry, prompting a shift in 

supervisory policies and procedures 

away from historical analyses of 

financial condition, toward more 

forward looking assessments of risk 

management and financial factors. In 

order to address this shift, the Federal 

Reserve introduced a risk management 

rating for all bank holding companies in 

the mid-1990s. Although this 

adjustment proved an effective tool for 

assessing risk management, it was not 

the central focus of the rating system. 

Moreover, as the banking industry has 

continued to evolve over the past 

decade, the focus of the Federal 

Reserve’s examination program for bank 

holding companies has increasingly 

centered on a comprehensive review of 

financial risk and the adequacy of risk 

management. As a result, in order to 

more fully align the rating process for 

BHCs with current supervisory 

practices, the Federal Reserve is revising 

the BHC rating system to emphasize risk 

management; introduce a 

comprehensive and adaptable 

framework for analyzing and rating 

financial factors; and provide a 

framework for assessing and rating the 

potential impact of the nondepository 

entities of a holding company on the 

subsidiary depository institution(s). 

Summary of the Revised Rating System 

Each BHC is assigned a composite 

rating (C) based on an evaluation and 

rating of its managerial and financial 

condition and an assessment of future 

potential risk to its subsidiary 

depository institution(s). The main 

components of the rating system 

represent: Risk Management (R); 

Financial Condition (F); and potential 

Impact (I) of the parent company and 

nondepository subsidiaries (collectively 

nondepository entities) on the 

subsidiary depository institutions. 

While the Federal Reserve expects all 

bank holding companies to act as a 

source of strength to their subsidiary 

depository institutions, the Impact 

rating focuses on downside risk—that is, 

on the likelihood of significant negative 

impact by the nondepository entities on 

the subsidiary depository institution. A 

fourth component rating, Depository 

Institution (D), will generally mirror the 

primary regulator’s assessment of the 

subsidiary depository institutions. Thus, 

the primary component and composite 

ratings are displayed: 

RFI/C (D)

In order to provide a consistent 

framework for assessing risk 

management, the R component is 

supported by four subcomponents that 

reflect the effectiveness of the banking 

organization’s risk management and 

controls. The subcomponents are: Board 

and Senior Management Oversight; 

Policies, Procedures, and Limits; Risk 

Monitoring and Management 

Information Systems; and Internal 

Controls. The F component is similarly 

supported by four subcomponents 

reflecting an assessment of the quality of 

the banking organization’s Capital; 

Asset Quality; Earnings; and Liquidity. 

A simplified version of the rating 

system that requires only the 

assignment of the risk management 

component rating and composite rating 

will be applied to noncomplex bank 

holding companies with assets at or 

below $1 billion. 

Composite, component, and 

subcomponent ratings are assigned 

based on a 1 to 5 numeric scale. A 1 

numeric rating indicates the highest 

rating, strongest performance and 

practices, and least degree of 

supervisory concern, whereas a 5 

numeric rating indicates the lowest 

rating, weakest performance, and the 

highest degree of supervisory concern. 

The Federal Reserve recognizes the 

interrelationship between the risk 

management and financial performance 

components of the revised rating 

system, an interrelationship that is 

Federal Register / Vol. 69, No. 233 / Monday, December 6, 2004 / Notices 70445

inherent in all supervisory rating 

systems. As such, examiners are 

expected to consider that a risk 

management factor may have a bearing 

on the assessment of a financial 

subcomponent or component rating and 

vice versa. In general, however, the risk 

management component and 

subcomponents should be viewed as the 

forward-looking component of the rating 

system and the financial condition 

component and subcomponents should 

be viewed as the current component of 

the rating system. For example, a BHC’s 

ability to monitor and manage market 

risk (or sensitivity to market risk) 

should be evaluated together with the 

organization’s ability to monitor and 

manage all risks under the R component 

of the rating system. However, poor 

market risk management may also be 

reflected in the F component if it 

impacts earnings or capital. 

Comments Received and Changes Made 

The Federal Reserve received a total 

of 13 comments regarding the proposed 

revisions to the BHC rating system. The 

comments came from banking 

organizations, trade associations, several 

Reserve Banks and one law firm. 

Commenters generally supported 

changes to the rating system, stating that 

the move to a more forward-looking 

assessment of risk management systems 

and the condition of the consolidated 

organization is appropriate. 

Many commenters recommended that 

the rating scale for the subcomponents 

under the risk management rating be 

changed from a three point qualitative 

scale to a five point numeric rating scale 

in order to provide more granularity and 

consistency with the rest of the rating 

system. In response, the Federal Reserve 

has changed the rating scale for the risk 

management subcomponent ratings to a 

five point numeric rating scale. 

Several commenters raised concerns 

that the new rating system is signaling 

a move by the Federal Reserve to lessen 

its reliance on the work of primary bank 

regulators and other functional nonbank 

regulators in its supervision of BHCs. 

The revised BHC rating system was 

developed to align the BHC rating 

process with the Federal Reserve’s 

current supervisory practices in carrying 

out consolidated or umbrella 

supervision of BHCs. As such, the 

revised rating system and the 

accompanying implementation 

guidance is not intended to signal a shift 

in the Federal Reserve’s supervisory 

practices of coordinating with and 

relying to the greatest extent possible on 

the work of primary bank and other 

functional nonbank regulators. This 

intent is clearly stated in the final 

policy. 

Commenters also raised concerns 

about the ability of the Federal Reserve 

to apply the new rating system in a 

consistent manner due to the large 

number of subcomponent ratings in the 

new system and the inherent 

subjectivity in the rating process. As is 

the case with all supervisory rating 

systems, there is some subjectivity 

inherent in the revised BHC rating 

system; however, the Federal Reserve 

has made and will continue to make 

every effort to provide appropriate 

examiner guidance and training around 

the revised BHC rating system to ensure 

that the system is applied in a 

consistent manner. In addition, the 

Federal Reserve notes that the 

subcomponents under the R rating are 

based on the same guidance that has 

been used to rate risk management since 

1995 and are therefore familiar to 

examination staff. Examination staff also 

is very familiar with assigning capital, 

asset quality, earnings, and liquidity 

ratings, as these components are 

important elements of our existing 

rating systems. The Federal Reserve 

believes that the subcomponents will 

increase consistency and transparency 

in the rating process by providing a 

clearer basis for the component ratings. 

Commenters raised concerns about 

the possibility of one factor being 

weighted too heavily in the composite 

rating due to overlap between the 

component ratings and because the 

proposal stated that the composite 

rating may not be the numerical average 

of the component ratings. There is an 

interrelationship among the component 

ratings in the revised BHC rating system 

that is inherent in all supervisory rating 

systems. Federal Reserve examiners will 

consider that a risk management factor 

may have a bearing on the assessment 

of a financial subcomponent or 

component rating and vice versa, and 

weight that factor proportionately in the 

overall composite rating. Consistent 

with current rating practices for the 

BOPEC and CAMELS rating systems, 

some components may be given more 

weight than others in determining the 

composite rating, depending on the 

importance of that component in the 

overall condition of the BHC. In general, 

assignment of a composite rating may 

incorporate any factor that bears 

significantly on the overall condition 

and soundness of the BHC. Therefore, 

the composite rating is not derived by 

computing the arithmetic average of the 

component ratings. Nevertheless, the 

composite rating generally bears a close 

relationship to the component ratings 

assigned. 

Commenters also raised questions 

about whether the Federal Reserve 

intends to impose de facto capital 

requirements on nondepository 

subsidiaries, whether the language in 

the proposal around the use of market 

indicators is signaling more extensive 

use of these references in the rating 

process, and whether the Federal 

Reserve intends to run the BOPEC rating 

system in conjunction with the revised 

BHC rating system for some time period 

of time. The Federal Reserve has 

clarified in the final policy that, 

consistent with current practice, the 

revised BHC rating system assesses the 

consolidated capital adequacy of the 

organization and is not intended to 

impose de facto capital requirements on 

nondepository subsidiaries. In addition, 

the Federal Reserve has clarified and 

simplified the language around the use 

of market indicators in the revised 

rating system to indicate that, consistent 

with current practice, examination staff 

should use these indicators as a source 

of information complementary to the 

examination process. Also, the Federal 

Reserve is implementing a quality 

assurance program around the new 

rating system during the first year of 

implementation that includes a 

mechanism to collect feedback from 

examination staff to address any 

significant implementation issues and to 

discuss difficult rating decisions to 

ensure consistent application of the 

revised rating system.

Finally, a few commenters suggested 

that BHC understanding of the revised 

rating system would be enhanced if the 

Federal Reserve were to utilize a 

temporary dual implementation period 

during which the BOPEC rating system 

and the revised rating system would be 

applied simultaneously and a BHC’s 

BOPEC rating would prevail. The 

Federal Reserve has determined that a 

direct and prompt adoption of the 

revised rating system is preferable 

because the revised rating system better 

reflects current supervisory practices 

and because use of a single rating 

system would minimize regulatory 

burden on both examination staff and 

institutions. To ensure that BHCs 

understand the revised rating system, 

examination staff will be prepared to 

discuss the differences and similarities 

between the revised rating system and 

the BOPEC system with senior BHC 

officials during the first inspection cycle 

under the revised rating system. 

Moreover, during the first inspection 

cycle under the revised rating system, in 

situations in which a BHC has received 

a ratings downgrade, examiners will be 

prepared to discuss with senior BHC 

70446 Federal Register / Vol. 69, No. 233 / Monday, December 6, 2004 / Notices 

1A simplified version of the rating system that 

includes only the R and C components will be 

applied to noncomplex bank holding companies 

with assets at or below $1 billion.

2This risk management rating replaces the risk 

management rating required for BHCs by SR 95–51.

3Another subcomponent assessing the adequacy 

of disclosures relating to risk exposures, risk 

assessment, and capital adequacy for BHCs using 

the advanced internal ratings based approach to 

risk-based capital may be added once the Basel II 

framework has been implemented in the United 

States. The Federal Reserve does not intend to 

adopt such a disclosure rating without going out for 

public comment.

officials the new ratings and how they 

compare with the BOPEC ratings for that 

institution. 

Disclosure 

The numeric ratings for bank holding 

companies under the revised BHC rating 

system will be disclosed to the bank 

holding company for its confidential 

use, in accordance with current 

disclosure practices. Under no 

circumstances should the bank holding 

company or any of its directors, officers, 

or employees disclose or make public 

any of the ratings. 

Implementation 

The revised BHC rating system 

becomes effective January 1, 2005, and 

is to be used for all BHC inspections 

commencing after that date. Inspections 

opened in 2004 and closed in 2005 may 

assign either the BOPEC rating or the 

RFI/C(D) rating. Although the timing of 

implementation is relatively close to the 

December release of the final rating 

system, supervision and examination 

staff at all twelve Reserve Banks and the 

Board of Governors have had and will 

continue to receive appropriate training 

in the revised rating system. Moreover, 

the revised rating system was developed 

and reviewed over a number of years 

with participation from a wide range of 

Federal Reserve System supervision and 

examination staff. Because the revised 

BHC rating system incorporates factors 

that have been routinely considered by 

examiners for years in evaluating a 

BHC’s condition, the revised rating 

system should not have a significant 

effect on the conduct of inspections or 

on the regulatory burden of supervised 

institutions. 

Text of the Bank Holding Company 

Rating System 

Bank Holding Company Rating System 

The bank holding company (BHC) 

rating system provides an assessment of 

certain risk management and financial 

condition factors that are common to all 

BHCs, as well as an assessment of the 

potential impact of the parent BHC and 

its nondepository subsidiaries 

(collectively nondepository entities) on 

the BHC’s subsidiary depository 

institutions. Under this system, the 

Federal Reserve endeavors to ensure 

that all BHCs, including financial 

holding companies (FHCs), are 

evaluated in a comprehensive and 

uniform manner, and that supervisory 

attention is appropriately focused on the 

BHCs that exhibit financial and 

operational weaknesses or adverse 

trends. The rating system serves as a 

useful vehicle for identifying problem or 

deteriorating BHCs, as well as for 

categorizing BHCs with deficiencies in 

particular areas. Further, the rating 

system assists the Federal Reserve in 

following safety and soundness trends 

and in assessing the aggregate strength 

and soundness of the financial industry. 

Each BHC1 is assigned a composite 

rating (C) based on an overall evaluation 

and rating of its managerial and 

financial condition and an assessment 

of future potential risk to its subsidiary 

depository institution(s). The main 

components of the rating system 

represent: Risk Management 2 (R); 

Financial Condition (F); and Impact (I) 

of the nondepository entities on the 

subsidiary depository institutions. 

While the Federal Reserve expects all 

bank holding companies to act as a 

source of strength to their subsidiary 

depository institutions, the Impact 

rating focuses on downside risk—that is, 

on the likelihood of significant negative 

impact by the nondepository entities on 

the subsidiary depository institution(s). 

A fourth rating, Depository Institution(s) 

(D), will generally mirror the primary 

regulator’s assessment of the subsidiary 

depository institution(s). Thus, the 

primary component and composite 

ratings are displayed:

RFI/C (D) 

In order to provide a consistent 

framework for assessing risk 

management, the R component is 

supported by four subcomponents that 

reflect the effectiveness of the banking 

organization’s risk management and 

controls. The subcomponents are: Board 

and Senior Management Oversight; 

Policies, Procedures, and Limits; Risk 

Monitoring and Management 

Information Systems; and Internal 

Controls. The F component is also 

supported by four subcomponents 

reflecting an assessment of the quality of 

the consolidated banking organization’s 

Capital; Asset Quality; Earnings; and 

Liquidity. 

Composite, component, and 

subcomponent ratings are assigned 

based on a 1 to 5 numeric scale. A 1 

numeric rating indicates the highest 

rating, strongest performance and 

practices, and least degree of 

supervisory concern, whereas a 5 

numeric rating indicates the lowest 

rating, weakest performance, and the 

highest degree of supervisory concern. 

The following three sections contain 

detailed descriptions of the composite, 

component, and subcomponent ratings, 

implementation guidance by BHC type, 

and definitions of the ratings. 

I. Description of the Rating System 

Elements

The Composite (C) Rating 

C is the overall composite assessment 

of the BHC as reflected by consolidated 

risk management, consolidated financial 

strength, and the potential impact of the 

nondepository entities on the subsidiary 

depository institutions. The composite 

rating encompasses both a forwardlooking and static assessment of the 

consolidated organization, as well as an 

assessment of the relationship between 

the depository and nondepository 

entities. Consistent with current Federal 

Reserve practice, the C rating is not 

derived as a simple numeric average of 

the R, F, and I components; rather, it 

reflects examiner judgment with respect 

to the relative importance of each 

component to the safe and sound 

operation of the BHC. 

The Risk Management (R) Component 

R represents an evaluation of the 

ability of the BHC’s board of directors 

and senior management, as appropriate 

for their respective positions, to 

identify, measure, monitor, and control 

risk. The R rating underscores the 

importance of the control environment, 

taking into consideration the complexity 

of the organization and the risk inherent 

in its activities. 

The R rating is supported by four 

subcomponents that are each assigned a 

separate rating. The four 

subcomponents are as follows: (1) Board 

and Senior Management Oversight; (2) 

Policies, Procedures and Limits; (3) Risk 

Monitoring and Management 

Information Systems; and (4) Internal 

Controls.3 The subcomponents are 

evaluated in the context of the risks 

undertaken by and inherent in a 

banking organization and the overall 

level of complexity of the firm’s 

operations. They provide the Federal 

Reserve System with a consistent 

framework for evaluating risk 

management and the control 

environment. Moreover, the 

subcomponents provide a clear 

structure and basis for discussion of the 

R rating with BHC management, reflect 

the principles of SR Letter 95–51, are 

Federal Register / Vol. 69, No. 233 / Monday, December 6, 2004 / Notices 70447

4SR Letter 95–51 contains a detailed description 

of the four risk management subcomponents.

5The Board of Directors is considered separate 

from Management.

6Of course, the regulatory minimum capital ratios 

for BHCs are eight percent total risk-based capital, 

four percent tier 1 risk-based capital, three percent 

tier 1 leverage for BHCs rated strong, and four 

percent tier 1 leverage for all other BHCs. See 12 

CFR 225, Appendices A and D.

familiar to examiners, and parallel the 

existing risk assessment process.

Risk Management Subcomponents 4

Board and Senior Management 

Oversight 5

This subcomponent evaluates the 

adequacy and effectiveness of board and 

senior management’s understanding and 

management of risk inherent in the 

BHC’s activities, as well as the general 

capabilities of management. It also 

includes consideration of management’s 

ability to identify, understand, and 

control the risks undertaken by the 

institution, to hire competent staff, and 

to respond to changes in the 

institution’s risk profile or innovations 

in the banking sector. 

Policies, Procedures and Limits 

This subcomponent evaluates the 

adequacy of a BHC’s policies, 

procedures, and limits given the risks 

inherent in the activities of the 

consolidated BHC and the 

organization’s stated goals and 

objectives. This analysis will include 

consideration of the adequacy of the 

institution’s accounting and risk 

disclosure policies and procedures. 

Risk Monitoring and Management 

Information Systems 

This subcomponent assesses the 

adequacy of a BHC’s risk measurement 

and monitoring, and the adequacy of its 

management reports and information 

systems. This analysis will 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 organization’s 

activities. 

Internal Controls 

This subcomponent evaluates the 

adequacy of a BHC’s internal controls 

and internal audit procedures, including 

the accuracy of financial reporting and 

disclosure and the strength and 

influence, within the organization, of 

the internal audit team. This analysis 

will also 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 

organization. 

The Financial Condition (F) Component 

F represents an evaluation of the 

consolidated organization’s financial 

strength. The F rating focuses on the 

ability of the BHC’s resources to support 

the level of risk associated with its 

activities. The F rating is supported by 

four subcomponents: capital (C), asset 

quality (A), earnings (E), and liquidity 

(L). The CAEL subcomponents can be 

evaluated along individual business 

lines, product lines, or on a legal entity 

basis, depending on what is most 

appropriate given the structure of the 

organization. The assessment of the 

CAEL components should utilize 

benchmarks and metrics appropriate to 

the business activity being evaluated. 

Consistent with current supervisory 

practices, examination staff should 

continue to review relevant market 

indicators, such as external debt ratings, 

credit spreads, debt and equity prices, 

and qualitative rating agency 

assessments as a source of information 

complementary to examination findings. 

Financial Condition Subcomponents 

(CAEL) 

Capital Adequacy 

C reflects the adequacy of an 

organization’s consolidated capital 

position, from a regulatory capital 

perspective and an economic capital 

perspective, as appropriate to the BHC.6

The evaluation of capital adequacy 

should consider the risk inherent in an 

organization’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.

Asset Quality 

A reflects the quality of an 

organization’s consolidated assets. The 

evaluation should include, as 

appropriate, both on-balance sheet and 

off-balance sheet exposures, and the 

level of criticized and nonperforming 

assets. Forward-looking indicators of 

asset quality, such as the adequacy of 

underwriting standards, the level of 

concentration risk, the adequacy of 

credit administration policies and 

procedures, and the adequacy of 

management information systems for 

credit risk may also inform the Federal 

Reserve’s view of asset quality. 

Earnings 

E reflects the quality of consolidated 

earnings. The evaluation considers the 

level, trend, and sources of earnings, as 

well as the ability of earnings to 

augment capital as necessary, to provide 

ongoing support for a BHC’s activities.

Liquidity 

L reflects the consolidated 

organization’s ability to attract and 

maintain the sources of funds necessary 

to support its operations and meet its 

obligations. The funding conditions for 

each of the material legal entities in the 

holding company structure should be 

evaluated to determine if any 

weaknesses exist that could affect the 

funding profile of the consolidated 

organization. 

The Impact (I) Component 

Like the other components and 

subcomponents, the I component is 

rated on a five point numerical scale. 

However, the descriptive definitions of 

the numerical ratings for I are different 

than those of the other components and 

subcomponents. The I ratings are 

defined as follows: 

1—Low likelihood of significant 

negative impact; 

2—Limited likelihood of significant 

negative impact; 

3—Moderate likelihood of significant 

negative impact; 

4—Considerable likelihood of 

significant negative impact; and 

5—High likelihood of significant 

negative impact. 

The I component is an assessment of 

the potential impact of the 

nondepository entities on the subsidiary 

depository institution(s). The I 

assessment will evaluate both the risk 

management practices and financial 

condition of the nondepository 

entities—an analysis that will borrow 

heavily from the analysis conducted for 

the R and F components. Consistent 

with current practices, nondepository 

entities will be evaluated using 

benchmarks and analysis appropriate 

for those businesses. In addition, for 

functionally regulated nondepository 

subsidiaries, examination staff will 

continue to rely, to the extent possible, 

on the work of those functional 

regulators to assess the risk management 

practices and financial condition of 

those entities. In rating the I component, 

examination staff is required to evaluate 

the degree to which current or potential 

issues within the nondepository entities 

present a threat to the safety and 

soundness of the subsidiary depository 

institution(s). In this regard, the I 

component will give a clearer indication 

of the degree of risk posed by the 

nondepository entities to the federal 

safety net than does the current rating 

system. 

The I component focuses on the 

aggregate impact of the nondepository 

entities on the subsidiary depository 

institution(s). In this regard, the I rating 

70448 Federal Register / Vol. 69, No. 233 / Monday, December 6, 2004 / Notices 

7As a general rule, nondepository subsidiaries 

should be included in the I analysis whenever their 

assets exceed five percent of the BHC’s consolidated 

capital or $10 million, whichever is lower.

8As described in the BHC inspection manual, SR 

95–51, SR 97–24, SR 99–15, and SR 02–01.

9The determination of whether a holding 

company is ‘‘complex’’ versus ‘‘noncomplex’’ is 

made at least annually on a case-by-case basis 

taking into account and weighing a number of 

considerations, such as: The size and structure of 

the holding company; the extent of intercompany 

transactions between depository institution 

subsidiaries and the holding company or 

nondepository subsidiaries of the holding company; 

the nature and scale of any nondepository activities, 

including whether the activities are subject to 

review by another regulator and the extent to which 

the holding company is conducting Gramm-LeachBliley authorized activities (e.g., insurance, 

securities, merchant banking); whether risk 

management processes for the holding company are 

consolidated; and whether the holding company 

has material debt outstanding to the public. Size is 

a less important determinant of complexity than 

many of the factors noted above, but generally 

companies of significant size (e.g., assets of $10 

billion on balance sheet or managed) would be 

considered complex, irrespective of the other 

considerations.

does not include individual 

subcomponent ratings for the parent 

company and nondepository 

subsidiaries. An I rating is always 

assigned for each BHC; however, as is 

currently the case, nonmaterial 

nondepository subsidiaries7 may be 

excluded from the I analysis at examiner 

discretion. Any risk management and 

financial issues at the nondepository 

entities that potentially impact the 

safety and soundness of the subsidiary 

depository institution(s) should be 

identified in the written comments 

under the I rating. This approach is 

consistent with the Federal Reserve’s 

objective not to extend bank-like 

supervision to nondepository entities.

The analysis of the parent company 

for the purpose of assigning an I rating 

should emphasize weaknesses that 

could directly impact the risk 

management or financial condition of 

the subsidiary depository institution(s). 

Similarly, the analysis of the 

nondepository subsidiaries for the 

purpose of assigning an I rating should 

emphasize weaknesses that could 

negatively impact the parent company’s 

relationship with its subsidiary 

depository institution(s) and 

weaknesses that could have a direct 

impact on the risk management 

practices or financial condition of the 

subsidiary depository institution(s). The 

analysis under the I component should 

consider existing as well as potential 

issues and risks that may impact the 

subsidiary depository institution(s) now 

or in the future. Particular attention 

should be paid to the following risk 

management and financial factors in 

assigning the I rating: 

Risk Management Factors 

• Strategic Considerations: The 

potential risks posed to the subsidiary 

depository institution(s) by the 

nondepository entities’ strategic plans 

for growth in existing activities and 

expansion into new products and 

services; 

• Operational Considerations: The 

spillover impact on the subsidiary 

depository institution(s) from actual 

losses, a poor control environment, or 

an operational loss history in the 

nondepository entities; 

• Legal and Reputational 

Considerations: The spillover effect on 

the subsidiary depository institution(s) 

of complaints and litigation that name 

one or more of the nondepository 

entities as defendants, or violations of 

laws or regulations, especially 

pertaining to intercompany transactions 

where the subsidiary depository 

institution(s) is involved; and 

• Concentration Considerations: The 

potential risks posed to the subsidiary 

depository institution(s) by 

concentrations within the 

nondepository entities in business lines, 

geographic areas, industries, customers, 

or other factors. 

Financial Factors 

• Capital Distribution: The 

distribution and transferability of 

capital across the legal entities;

• Intra-Group Exposures: The extent 

to which intra-group exposures, 

including servicing agreements, have 

the potential to undermine the 

condition of subsidiary depository 

institution(s); and, 

• Parent Company Cash Flow and 

Leverage: The extent to which the 

parent company is dependent on 

dividend payments, from both the 

nondepository subsidiaries and the 

subsidiary depository institution(s), to 

service debt and cover fixed charges. 

Also, the effect that these upstreamed 

cash flows have had, or can be expected 

to have, on the financial condition of 

the BHC’s nondepository subsidiaries 

and subsidiary depository institution(s). 

The Depository Institutions (D) 

Component 

The (D) component will generally 

reflect the composite CAMELS rating 

assigned by the subsidiary depository 

institution’s primary supervisor. In a 

multi-bank BHC, the (D) rating will 

reflect a weighted average of the 

CAMELS composite ratings of the 

individual subsidiary depository 

institutions, weighted by both asset size 

and the relative importance of each 

depository institution within the 

holding company structure. In this 

regard, the CAMELS composite rating 

for a subsidiary depository institution 

that dominates the corporate culture 

may figure more prominently in the 

assignment of the (D) rating than would 

be dictated by asset size, particularly 

when problems exist within that 

depository institution. 

The (D) component conveys 

important supervisory information, 

reflecting the primary supervisor’s 

assessment of the legal entity. The (D) 

component stands outside of the 

composite rating although significant 

risk management and financial 

condition considerations at the 

depository institution level are 

incorporated in the consolidated R and 

F ratings, which are then factored into 

the C rating. 

Consistent with current practice, if, in 

the process of analyzing the financial 

condition and risk management 

programs of the consolidated 

organization, a major difference of 

opinion regarding the safety and 

soundness of the subsidiary depository 

institution(s) emerges between the 

Federal Reserve and the depository 

institution’s primary regulator, then the 

(D) rating should reflect the Federal 

Reserve’s evaluation. 

To highlight the presence of one or 

more problem depository institution(s) 

in a multi-bank BHC whose depository 

institution component, based on 

weighted averages, might not otherwise 

reveal their presence (i.e., depository 

institution ratings of 1, 2 or 3), a 

problem modifier, ‘‘P’’ would be 

attached to the depository institution 

rating (e.g., 1P, 2P, or 3P). Thus, 2P 

would indicate that, while on balance 

the depository subsidiaries are rated 

satisfactory, there exists a problem 

depository institution (composite 4 or 5) 

among the subsidiary depository 

institutions. The problem identifier is 

unnecessary when the depository 

institution component is rated 4 or 5. 

II. Implementation of the BHC Rating 

System by Bank Holding Company 

Type 

The Federal Reserve revised the BHC 

rating system to align the rating system 

with current Federal Reserve 

supervisory practices. The rating system 

will require analysis and support 

similar to that required by the former 

BOPEC rating system for BHCs of all 

sizes.8 As such, the level of analysis and 

support will vary based upon whether a 

BHC has been determined to be 

‘‘complex’’ or ‘‘noncomplex.’’ 9 In 

addition, the resources dedicated to the 

inspection of each BHC will continue to 

Federal Register / Vol. 69, No. 233 / Monday, December 6, 2004 / Notices 70449

10The federal safety net includes the federal 

deposit insurance fund, the payments system, and 

the Federal Reserve’s discount window.

be determined by the risk posed by the 

subsidiary depository institution(s) to 

the federal safety net 10 and the risk 

posed by the BHC to the subsidiary 

depository institution(s).

Noncomplex BHCs with Assets of $1 

Billion or Less (Shell Holding 

Companies) 

Rating: R and C 

Consistent with SR 02–1, examination 

staff will assign only an R and C rating 

for all companies in the shell BHC 

program (noncomplex BHCs with assets 

under $1 billion). The R rating is the M 

rating from the subsidiary depository 

institution’s CAMELS rating. To provide 

consistent rating terminology across 

BHCs of all sizes, the terminology is 

changed to R from the former M. The C 

rating is the subsidiary depository 

institution’s composite CAMELS rating. 

Noncomplex BHCs With Assets Greater 

Than $1 Billion 

One-Bank Holding Company 

Rating: RFI/C (D) 

For all noncomplex, one-bank holding 

companies with assets of greater than $1 

billion, examination staff will assign all 

component and subcomponent ratings; 

however, examination staff should 

continue to rely heavily on information 

and analysis contained in the primary 

regulator’s report of examination for the 

subsidiary depository institution to 

assign the R and F ratings. If 

examination staff have reviewed the 

primary regulator’s examination report 

and are comfortable with the analysis 

and conclusions contained in that 

report, then the BHC ratings should be 

supported with concise language that 

indicates that the conclusions are based 

on the analysis of the primary regulator. 

No additional analysis will be required. 

Please note, however, in cases where 

the analysis and conclusions of the 

primary regulator are insufficient to 

assign the ratings, the primary regulator 

should be contacted to ascertain 

whether additional analysis and support 

may be available. Further, if discussions 

with the primary regulator do not 

provide sufficient information to assign 

the ratings, discussions with BHC 

management may be warranted to obtain 

adequate information to assign the 

ratings. In most cases, additional 

information or support obtained through 

these steps will be sufficient to permit 

the assignment of the R and F ratings. 

To the extent that additional analysis is 

deemed necessary, the level of analysis 

and resources spent on this assessment 

should be in line with the level of risk 

the subsidiary depository institution 

poses to the federal safety net. In 

addition, any activities that involve 

information gathering with respect to 

the subsidiary depository institution 

should be coordinated with and, if 

possible, conducted by, the primary 

regulator of that institution. 

Examination staff are required to 

make an independent assessment in 

order to assign the I rating, which 

provides an evaluation of the impact of 

the BHC on the subsidiary depository 

institution. Analysis for the I rating in 

non-complex one-bank holding 

companies should place particular 

emphasis on issues related to parent 

company cash flow and compliance 

with sections 23A and 23B of the 

Federal Reserve Act.

Multi-Bank Holding Company 

Rating: RFI/C (D) 

For all noncomplex BHCs with assets 

of greater than $1 billion and more than 

one subsidiary depository institution, 

examination staff will assign all 

component and subcomponent ratings 

of the new system. Examiners should 

rely, to the extent possible, on the work 

conducted by the primary regulators of 

the subsidiary depository institutions to 

assign the R and F ratings. However, any 

risk management or other important 

functions conducted by the 

nondepository entities of the BHC, or 

conducted across legal entity lines, 

should be subject to review by Federal 

Reserve examination staff. These 

reviews should be conducted in 

coordination with the primary 

regulator(s). The assessment for the I 

rating requires an independent 

assessment by Federal Reserve 

examination staff. 

Complex BHCs 

Rating: RFI/C (D) 

For complex BHCs, examination staff 

will assign all component and 

subcomponent ratings of the new rating 

system. The ratings analysis should be 

based on the primary and functional 

regulators’ assessment of the subsidiary 

entities, as well as on the examiners’

assessment of the consolidated 

organization as determined through offsite review and the BHC inspection 

process, as appropriate. The resources 

needed for the inspection and the level 

of support needed for developing a full 

rating will depend on the complexity of 

the organization, including structure 

and activities (see footnote 7), and 

should be commensurate with the level 

of risk posed by the subsidiary 

depository institution(s) to the federal 

safety net and the level of risk posed by 

the BHC to the subsidiary depository 

institution(s). 

Nontraditional BHCs 

Rating: RFI/C (D) 

Examination staff are required to 

assign the full rating system for 

nontraditional BHCs. Nontraditional 

BHCs include BHCs in which most or 

all nondepository entities are regulated 

by a functional regulator and in which 

the subsidiary depository institution(s) 

are small in relation to the 

nondepository entities. The rating 

system is not intended to introduce 

significant additional work in the rating 

process for these organizations. As 

discussed above, the level of analysis 

conducted and resources needed to 

inspect the BHC and to assign the 

consolidated R and F ratings should be 

commensurate with the level of risk 

posed by the subsidiary depository 

institution(s) to the federal safety net 

and the level of risk posed by the BHC 

to the subsidiary depository 

institution(s). The report of examination 

by, and other information obtained 

from, the functional and primary bank 

regulators should provide the basis for 

the consolidated R and F ratings. Onsite work, to the extent it involves areas 

that are the primary responsibility of the 

functional or primary bank regulator, 

should be coordinated with and, if 

possible, conducted by, those regulators. 

Examination staff should concentrate 

their independent analysis for the R and 

F ratings around activities and risk 

management conducted by the parent 

company and non-functionally 

regulated nondepository subsidiaries, as 

well as around activities and risk 

management functions that are related 

to the subsidiary depository 

institution(s), for example, audit 

functions for the depository 

institution(s) and compliance with 

sections 23A and 23B. 

Examination staff are required to 

make an independent assessment of the 

impact of the nondepository entities on 

the subsidiary depository institution(s) 

in order to assign the I rating. 

III. Rating Definitions for the RFI/C (D) 

Rating System 

All component and subcomponent 

ratings are rated on a five point numeric 

scale. With the exception of the I 

component, ratings will be assigned in 

ascending order of supervisory concern 

as follows: 1—Strong; 2—Satisfactory; 

3—Fair; 4—Marginal; and 5—

Unsatisfactory. 

70450 Federal Register / Vol. 69, No. 233 / Monday, December 6, 2004 / Notices 

11Framework for Risk-Focused Supervision of 

Large Complex Institutions, August 1997; SR Letter 

95–51, Rating the Adequacy of Risk Management 

Processes and Internal Controls at State Member 

Banks and Bank Holding Companies.

A description of the I component 

ratings is in the I section below. 

As is current Federal Reserve practice, 

the component ratings are not derived 

as a simple numeric average of the 

subcomponent ratings; rather, weight 

afforded to each subcomponent in the 

overall component rating will depend 

on the severity of the condition of that 

subcomponent and the relative 

importance of that subcomponent to the 

consolidated organization. Similarly, 

some components may be given more 

weight than others in determining the 

composite rating, depending on the 

situation of the BHC. Assignment of a 

composite rating may incorporate any 

factor that bears significantly on the 

overall condition and soundness of the 

BHC, although generally the composite 

rating bears a close relationship to the 

component ratings assigned. 

Composite Rating

Rating 1 (Strong). BHCs in this group 

are sound in almost every respect; any 

negative findings are basically of a 

minor nature and can be handled in a 

routine manner. 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, and the 

nondepository entities pose little risk to 

the subsidiary depository institution(s). 

Rating 2 (Satisfactory). BHCs in this 

group are fundamentally sound but may 

have modest weaknesses in risk 

management practices or financial 

condition. The weaknesses could 

develop into conditions of greater 

concern but are believed correctable in 

the normal course of business. As such, 

the supervisory response is limited. 

Cash flow is adequate to service 

obligations, and the nondepository 

entities are unlikely to have a significant 

negative impact on the subsidiary 

depository institution(s). 

Rating 3 (Fair). BHCs in this group 

exhibit a combination of weaknesses in 

risk management practices and financial 

condition that range from fair to 

moderately severe. These companies are 

less resistant to the onset of adverse 

business conditions and would likely 

deteriorate if concerted action is not 

effective in correcting the areas of 

weakness. Consequently, these 

companies are vulnerable and require 

more than normal supervisory attention 

and financial surveillance. However, the 

risk management and financial capacity 

of the company, including the potential 

negative impact of the nondepository 

entities on the subsidiary depository 

institution(s), pose only a remote threat 

to its continued viability. 

Rating 4 (Marginal). BHCs in this 

group have an immoderate volume of 

risk management and financial 

weaknesses, which may pose a 

heightened risk of significant negative 

impact on the subsidiary depository 

institution(s). The holding company’s 

cash flow needs may be being met only 

by upstreaming imprudent dividends 

and/or fees from its subsidiaries. Unless 

prompt action is taken to correct these 

conditions, the organization’s future 

viability could be impaired. These 

companies require close supervisory 

attention and substantially increased 

financial surveillance. 

Rating 5 (Unsatisfactory). The critical 

volume and character of the risk 

management and financial weaknesses 

of BHCs in this category, and concerns 

about the nondepository entities 

negatively impacting the subsidiary 

depository institution(s), could lead to 

insolvency without urgent aid from 

shareholders or other sources. The 

imminent inability to prevent liquidity 

and/or capital depletion places the 

BHC’s continued viability in serious 

doubt. These companies require 

immediate corrective action and 

constant supervisory attention. 

Risk Management Component 

Rating 1 (Strong). A rating of 1 

indicates that management effectively 

identifies and controls all major types of 

risk posed by the BHC’s activities. 

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 are 

understood, reviewed, and approved by 

the board. 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 that is 

necessary to make timely and 

appropriate decisions in response to 

changing conditions. Risk management 

practices and the organization’s 

infrastructure are flexible and highly 

responsive to changing industry 

practices and current regulatory 

guidance. Staff has sufficient 

experience, expertise and depth to 

manage the risks assumed by the 

institution. 

Internal controls and audit procedures 

are sufficiently comprehensive and 

appropriate to the size and activities of 

the institution. There are few noted 

exceptions to the institution’s 

established policies and procedures, 

and none is material. Management 

effectively and accurately monitors the 

condition of the institution consistent 

with the standards of safety and 

soundness, and in accordance with 

internal and supervisory policies and 

practices. Risk management processes 

are fully effective in identifying, 

monitoring, and controlling the risks to 

the institution. 

Rating 2 (Satisfactory). A rating of 2 

indicates that the institution’s 

management of risk is largely effective, 

but lacking in some modest degree. 

Management demonstrates a 

responsiveness and ability to cope 

successfully with existing and 

foreseeable risks that may arise in 

carrying out the institution’s business 

plan. While the institution may have 

some minor risk management 

weaknesses, these problems have been 

recognized and are in the process of 

being resolved. Overall, board and 

senior management oversight, policies 

and limits, risk monitoring procedures, 

reports, and management information 

systems are considered satisfactory and 

effective in maintaining a safe and 

sound institution. Risks are controlled 

in a manner that does not require more 

than normal supervisory attention. 

The BHC’s risk management practices 

and infrastructure are satisfactory and 

generally are adjusted appropriately in 

response to changing industry practices 

and current regulatory guidance. Staff 

experience, expertise and depth are 

generally appropriate to manage the 

risks assumed by the institution.

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 safety and 

soundness of the institution. 

Rating 3 (Fair). A rating of 3 signifies 

that risk management practices are 

lacking in some important ways and, 

therefore, are a cause for more than 

normal supervisory attention. One or 

more of the four elements of sound risk 

management11 (active board and senior 

management oversight; adequate 

policies, procedures, and limits; 

adequate risk management monitoring 

and management information systems; 

comprehensive internal controls) is 

considered less than acceptable, and has 

precluded the institution from fully 

addressing one or more significant risks 

to its operations. Certain risk 

Federal Register / Vol. 69, No. 233 / Monday, December 6, 2004 / Notices 70451

management practices are in need of 

improvement to ensure that 

management and the board are able to 

identify, monitor, and control all 

significant risks to the institution. Also, 

the risk management structure may need 

to be improved in areas of significant 

business activity, or staff expertise may 

not be commensurate with the scope 

and complexity of business activities. In 

addition, management’s response to 

changing industry practices and 

regulatory guidance may need to 

improve.

The internal control system may be 

lacking in some important aspects, 

particularly as indicated by continued 

control exceptions or by a failure to 

adhere to written policies and 

procedures. The risk management 

weaknesses could have adverse effects 

on the safety and soundness of the 

institution if corrective action is not 

taken by management. 

Rating 4 (Marginal). A rating of 4 

represents deficient risk management 

practices that fail to identify, monitor, 

and control significant risk exposures in 

many material respects. Generally, such 

a situation reflects a lack 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 institution may have serious 

identified weaknesses, such as an 

inadequate separation of duties, that 

require substantial improvement in 

internal control or accounting 

procedures, or improved adherence to 

supervisory standards or requirements. 

The risk management deficiencies 

warrant a high degree of supervisory 

attention because, unless properly 

addressed, they could seriously affect 

the safety and soundness of the 

institution. 

Rating 5 (Unsatisfactory). A rating of 

5 indicates a critical absence of effective 

risk management practices with respect 

to the identification, monitoring, or 

control over significant risk exposures. 

One or more of the four elements of 

sound risk management is considered 

wholly deficient, and management and 

the board have not demonstrated the 

capability to address these deficiencies. 

Internal controls are critically weak 

and, as such, could seriously jeopardize 

the continued viability of the 

institution. If not already evident, there 

is an immediate concern as to the 

reliability of accounting records and 

regulatory reports and the potential for 

losses if corrective measures are not 

taken immediately. Deficiencies in the 

institution’s risk management 

procedures and internal controls require 

immediate and close supervisory 

attention. 

Risk Management Subcomponents 

Board and Senior Management 

Oversight 

Rating 1 (Strong). An assessment of 

Strong signifies that the board and 

senior management are forward-looking, 

fully understand the types of risk 

inherent in the BHC’s activities, and 

actively participate in managing those 

risks. The board has approved overall 

business strategies and significant 

policies, and ensures that senior 

management is fully capable of 

managing the activities that the BHC 

conducts. Consistent with the standards 

of safety and soundness, oversight of 

risk management practices is strong and 

the organization’s overall business 

strategy is effective. 

Senior management ensures that risk 

management practices are rapidly 

adjusted in accordance with 

enhancements to industry practices and 

regulatory guidance, and exposure 

limits are adjusted as necessary to 

reflect the institution’s changing risk 

profile. Policies, limits, and tracking 

reports are appropriate, understood, and 

regularly reviewed. 

Management provides effective 

supervision of the day-to-day activities 

of all officers and employees, including 

the supervision of the senior officers 

and the heads of business lines. It hires 

staff that possess experience and 

expertise consistent with the scope and 

complexity of the organization’s 

business activities. There is a sufficient 

depth of staff to ensure sound 

operations. Management ensures 

compliance with laws and regulations 

and that employees have the integrity, 

ethical values, and competence 

consistent with a prudent management 

philosophy and operating style.

Management responds appropriately 

to changes in the marketplace. It 

identifies all risks associated with new 

activities or products before they are 

launched, and ensures that the 

appropriate infrastructure and internal 

controls are established. 

Rating 2 (Satisfactory). An assessment 

of Satisfactory indicates that board and 

senior management have an adequate 

understanding of the organization’s risk 

profile and provide largely effective 

oversight of risk management practices. 

In this regard, the board has approved 

all major business strategies and 

significant policies, and ensures that 

senior management is capable of 

managing the activities that the BHC 

conducts. Oversight of risk management 

practices is satisfactory and the 

organization’s overall business strategy 

is generally sound. 

Senior management generally adjusts 

risk management practices 

appropriately in accordance with 

enhancements to industry practices and 

regulatory guidance, and adjusts 

exposure limits as necessary to reflect 

the institution’s changing risk profile, 

although these practices may be lacking 

in some modest degree. Policies, limits, 

and tracking reports are generally 

appropriate, understood, and regularly 

reviewed, and the new product approval 

process adequately identifies the 

associated risks and necessary controls. 

Senior management’s day-to-day 

supervision of management and staff at 

all levels is generally effective. The level 

of staffing, and its experience, expertise, 

and depth, is sufficient to operate the 

business lines in a safe and sound 

manner. Minor weaknesses may exist in 

the staffing, infrastructure, and risk 

management processes for individual 

business lines or products, but these 

weaknesses have been identified by 

management, are correctable in the 

normal course of business, and are in 

the process of being addressed. 

Weaknesses noted should not have a 

significant effect on the safety and 

soundness of the institution. 

Rating 3 (Fair). An assessment of Fair 

signifies that board and senior 

management oversight is lacking in 

some important way and, therefore, is a 

cause for more than normal supervisory 

attention. The weaknesses may involve 

a broad range of activities or be material 

to a major business line or activity. 

Weaknesses in one or more aspect of 

board and senior management oversight 

have precluded the institution from 

fully addressing one or more significant 

risks to the institution. The deficiencies 

may include a lack of knowledge with 

respect to the organization’s risk profile, 

insufficient oversight of risk 

management practices, ineffective 

policies or limits, inadequate or underutilized management reporting, an 

inability to respond to industry 

enhancements and changes in 

regulatory guidance, or failure to 

execute appropriate business strategies. 

Staffing may not be adequate or staff 

may not possess the experience and 

expertise needed for the scope and 

complexity of the organization’s 

business activities. The day-to-day 

supervision of officer and staff 

activities, including the management of 

senior officers or heads of business 

lines, may be lacking. Certain risk 

management practices are in need of 

improvement to ensure that 

management and the board is able to

70452 Federal Register / Vol. 69, No. 233 / Monday, December 6, 2004 / Notices 

identify, monitor, and control all 

significant risks to the institution. 

Weaknesses noted could have adverse 

effects on the safety and soundness of 

the institution if corrective action is not 

taken by management. 

Rating 4 (Marginal). An assessment of 

Marginal represents deficient oversight 

practices that reflect a lack of adequate 

guidance and supervision by 

management and the board. A number 

of significant risks to the institution 

have not been adequately addressed, 

and the board and senior management 

function warrants a high degree of 

supervisory attention. Multiple board 

and senior management weaknesses are 

in need of immediate improvement. 

They may include a significant lack of 

knowledge with respect to the 

organization’s risk profile, largely 

insufficient oversight of risk 

management practices, ineffective 

policies or limits, inadequate or 

considerably under-utilized 

management reporting, an inability to 

respond to industry enhancements and 

changes in regulatory guidance, or 

failure to execute appropriate business 

strategies. Staffing may not be adequate 

or possess the experience and expertise 

needed for the scope and complexity of 

the organization’s business activities, 

and the day-to-day supervision of officer 

and staff activities, including the 

management of senior officers or heads 

of business lines, may be considerably 

lacking. These conditions warrant a 

high degree of supervisory attention 

because, unless properly addressed, 

they could seriously affect the safety 

and soundness of the institution. 

Rating 5 (Unsatisfactory). An 

assessment of Unsatisfactory indicates a 

critical absence of effective board and 

senior management oversight practices. 

Problems may include a severe lack of 

knowledge with respect to the 

organization’s risk profile, insufficient 

oversight of risk management practices, 

wholly ineffective policies or limits, 

critically inadequate or under-utilized 

management reporting, a complete 

inability to respond to industry 

enhancements and changes in 

regulatory guidance, or failure to 

execute appropriate business strategies. 

Staffing may be inadequate, inexpert, 

and/or inadequately supervised. The 

deficiencies require immediate and 

close supervisory attention, as 

management and the board have not 

demonstrated the capability to address 

them. Weaknesses could seriously 

jeopardize the continued viability of the 

institution.

Policies, Procedures and Limits 

Rating 1 (Strong). An assessment of 

Strong indicates that the policies, 

procedures, and limits provide for 

effective identification, measurement, 

monitoring, and control of the risks 

posed by all significant activities, 

including lending, investing, trading, 

trust, and fiduciary activities. Policies, 

procedures, and limits are consistent 

with the institution’s goals and 

objectives and its overall financial 

strength. The policies clearly delineate 

accountability and lines of authority 

across the institution’s activities. The 

policies also provide for the review of 

new activities to ensure that the 

infrastructure necessary to identify, 

monitor, and control the associated risks 

is in place before the activities are 

initiated. 

Rating 2 (Satisfactory). An assessment 

of Satisfactory indicates that the 

policies, procedures and limits cover all 

major business areas, are thorough and 

substantially up-to-date, and provide a 

clear delineation of accountability and 

lines of authority across the institution’s 

activities. Policies, procedures, and 

limits are generally consistent with the 

institution’s goals and objectives and its 

overall financial strength. Also, the 

policies provide for adequate due 

diligence before engaging in new 

activities or products. Any deficiencies 

or gaps that have been identified are 

minor in nature and in the process of 

being addressed. Weaknesses should not 

have a significant effect on the safety 

and soundness of the institution. 

Rating 3 (Fair). An assessment of Fair 

signifies that deficiencies exist in 

policies, procedures, and limits that 

require more than normal supervisory 

attention. The deficiencies may involve 

a broad range of activities or be material 

to a major business line or activity. The 

deficiencies may include policies, 

procedures, or limits (or the lack 

thereof) that do not adequately identify, 

measure, monitor, or control the risks 

posed by significant activities; are not 

consistent with the experience of staff, 

the organization’s strategic goals and 

objectives, or the financial strength of 

the institution; or do not clearly 

delineate accountability or lines of 

authority. Also, the policies may not 

provide for adequate due diligence 

before engaging in new activities or 

products. Weaknesses noted could have 

adverse effects on the safety and 

soundness of the institution unless 

corrective action is taken by 

management. 

Rating 4 (Marginal). An assessment of 

Marginal indicates deficient policies, 

procedures, and limits that do not 

address a number of significant risks to 

the institution. Multiple practices are in 

need of immediate improvement, which 

may include policies, procedures, or 

limits (or the lack thereof) that 

ineffectively identify, measure, monitor, 

or control the risks posed by significant 

activities; are not commensurate with 

the experience of staff, the institution’s 

strategic goals and objectives, or the 

financial strength of the institution; or 

do not delineate accountability or lines 

of authority. Moreover, policies may be 

considerably lacking with regards to 

providing for effective due diligence 

before engaging in new activities or 

products. These conditions warrant a 

high degree of supervisory attention 

because, unless properly addressed, 

they could seriously affect the safety 

and soundness of the institution. 

Rating 5 (Unsatisfactory). An 

assessment of Unsatisfactory indicates a 

critical absence of effective policies, 

procedures, and limits. Policies, 

procedures, or limits (or the lack 

thereof) are largely or entirely 

ineffective with regard to identifying, 

measuring, monitoring, or controlling 

the risks posed by significant activities; 

are completely inconsistent with the 

experience of staff, the organization’s 

strategic goals and objectives, or the 

financial strength of the institution; or 

do not delineate accountability or lines 

of authority. Also, policies may be 

completely lacking with regard to 

providing for effective due diligence 

before engaging in new activities or 

products. Critical weaknesses could 

seriously jeopardize the continued 

viability of the institution and require 

immediate and close supervisory 

attention. 

Risk Monitoring and MIS 

Rating 1 (Strong). An assessment of 

Strong indicates that risk monitoring 

practices and MIS reports address all 

material risks. The key assumptions, 

data sources, and procedures used in 

measuring and monitoring risk are 

appropriate, thoroughly documented, 

and frequently tested for reliability. 

Reports and other forms of 

communication are consistent with 

activities, are structured to monitor 

exposures and compliance with 

established limits, goals, or objectives, 

and compare actual versus expected 

performance when appropriate. 

Management and board reports are 

accurate and timely and contain 

sufficient information to identify 

adverse trends and to thoroughly 

evaluate the level of risk faced by the 

institution. 

Rating 2 (Satisfactory). An assessment 

of Satisfactory indicates that risk 

Federal Register / Vol. 69, No. 233 / Monday, December 6, 2004 / Notices 70453

monitoring practices and MIS reports 

cover major risks and business areas, 

although they may be lacking in some 

modest degree. In general, the reports 

contain valid assumptions that are 

periodically tested for accuracy and 

reliability and are adequately 

documented and distributed to the 

appropriate decision-makers. Reports 

and other forms of communication 

generally are consistent with activities; 

are structured to monitor exposures and 

compliance with established limits, 

goals, or objectives; and compare actual 

versus expected performance when 

appropriate. Management and board 

reports are generally accurate and 

timely, and broadly identify adverse 

trends and the level of risk faced by the 

institution. Any weaknesses or 

deficiencies that have been identified 

are in the process of being addressed. 

Rating 3 (Fair). An assessment of Fair 

signifies that weaknesses exist in the 

institution’s risk monitoring practices or 

MIS reports that require more than 

normal supervisory attention. The 

weaknesses may involve a broad range 

of activities or be material to a major 

business line or activity. They may 

contribute to ineffective risk 

identification or monitoring through 

inappropriate assumptions, incorrect 

data, poor documentation, or the lack of 

timely testing. In addition, MIS reports 

may not be distributed to the 

appropriate decision-makers, adequately 

monitor significant risks, or properly 

identify adverse trends and the level of 

risk faced by the institution. 

Weaknesses noted could have adverse 

effects on the safety and soundness of 

the institution if corrective action is not 

taken by management. 

Rating 4 (Marginal). An assessment of 

Marginal represents deficient risk 

monitoring practices or MIS reports 

that, unless properly addressed, could 

seriously affect the safety and 

soundness of the institution. A number 

of significant risks to the institution are 

not adequately monitored or reported. 

Ineffective risk identification may result 

from notably inappropriate 

assumptions, incorrect data, poor 

documentation, or the lack of timely 

testing. In addition, MIS reports may not 

be distributed to the appropriate 

decision-makers, may inadequately 

monitor significant risks, or fail to 

identify adverse trends and the level of 

risk faced by the institution. The risk 

monitoring and MIS deficiencies 

warrant a high degree of supervisory 

attention because, unless properly 

addressed, they could seriously affect 

the safety and soundness of the 

institution.

Rating 5 (Unsatisfactory). An 

assessment of Unsatisfactory indicates a 

critical absence of risk monitoring and 

MIS. They are wholly deficient due to 

inappropriate assumptions, incorrect 

data, poor documentation, or the lack of 

timely testing. Moreover, MIS reports 

may not be distributed to the 

appropriate decision-makers, fail to 

monitor significant risks, or fail to 

identify adverse trends and the level of 

risk faced by the institution. These 

critical weaknesses require immediate 

and close supervisory attention, as they 

could seriously jeopardize the 

continued viability of the institution. 

Internal Controls 

Rating 1 (Strong). An assessment of 

Strong indicates that the system of 

internal controls is robust for the type 

and level of risks posed by the nature 

and scope of the organization’s 

activities. The organizational structure 

establishes clear lines of authority and 

responsibility for monitoring adherence 

to policies, procedures, and limits, and 

wherever applicable, exceptions are 

noted and promptly investigated. 

Reporting lines provide clear 

independence of the control areas from 

the business lines and separation of 

duties throughout the organization. 

Robust procedures exist for ensuring 

compliance with applicable laws and 

regulations, including consumer laws 

and regulations. Financial, operational, 

and regulatory reports are reliable, 

accurate, and timely. Internal audit or 

other control review practices provide 

for independence and objectivity. 

Internal controls and information 

systems are thoroughly tested and 

reviewed; the coverage, procedures, 

findings, and responses to audits and 

review tests are well documented; 

identified material weaknesses are given 

thorough and timely high level 

attention; and management’s actions to 

address material weaknesses are 

objectively reviewed and verified. The 

board or its audit committee regularly 

reviews the effectiveness of internal 

audits and other control review 

activities. 

Rating 2 (Satisfactory). An assessment 

of Satisfactory indicates that the system 

of internal controls adequately covers 

major risks and business areas, with 

some modest weaknesses. In general, 

the control functions are independent 

from the business lines, and there is 

appropriate separation of duties. The 

control system supports accuracy in 

record-keeping practices and reporting 

systems, is adequately documented, and 

verifies compliance with laws and 

regulations, including consumer laws 

and regulations. Internal controls and 

information systems are adequately 

tested and reviewed, and the coverage, 

procedures, findings, and responses to 

audits and review tests are documented. 

Identified material weaknesses are given 

appropriate attention and management’s 

actions to address material weaknesses 

are objectively reviewed and verified. 

The board or its audit committee 

reviews the effectiveness of internal 

audits and other control review 

activities. Any weaknesses or 

deficiencies that have been identified 

are modest in nature and in the process 

of being addressed. 

Rating 3 (Fair). An assessment of Fair 

signifies that weaknesses exist in the 

system of internal controls that require 

more than normal supervisory attention. 

The weaknesses may involve a broad 

range of activities or be material to a 

major business line or activity. The 

weaknesses may include insufficient 

oversight of internal controls and audit 

by the board or its audit committee; 

unclear or conflicting lines of authority 

and responsibility; a lack of 

independence between control areas 

and business activities; or ineffective 

separation of duties. The internal 

control system may produce inadequate 

or untimely risk coverage and 

verification, including monitoring 

compliance with both safety and 

soundness and consumer laws and 

regulations; inaccurate records or 

financial, operational, or regulatory 

reporting; a lack of documentation for 

work performed; or a lack of timeliness 

in management review and correction of 

identified weaknesses. Weaknesses 

noted could have adverse effects on the 

safety and soundness of the institution 

if corrective action is not taken by 

management. 

Rating 4 (Marginal). An assessment of 

Marginal represents a deficient internal 

control system that does not adequately 

address a number of significant risks to 

the institution. The deficiencies may 

include neglect of internal controls and 

audit by the board or its audit 

committee; conflicting lines of authority 

and responsibility; a lack of 

independence between control areas 

and business activities; or no separation 

of duties in critical areas. The internal 

control system may produce inadequate, 

untimely, or nonexistent risk coverage 

and verification in certain areas, 

including monitoring compliance with 

both safety and soundness and 

consumer laws and regulations; 

inaccurate records or financial, 

operational, or regulatory reporting; a 

lack of documentation for work 

performed; or infrequent management 

review and correction of identified 

weaknesses. The internal control 

70454 Federal Register / Vol. 69, No. 233 / Monday, December 6, 2004 / Notices 

deficiencies warrant a high degree of 

supervisory attention because, unless 

properly addressed, they could 

seriously affect the safety and 

soundness of the institution. 

Rating 5 (Unsatisfactory). An 

assessment of Unsatisfactory indicates a 

critical absence of an internal control 

system. There may be no oversight by 

the board or its audit committee; 

conflicting lines of authority and 

responsibility; no distinction between 

control areas and business activities; or 

no separation of duties. The internal 

control system may produce totally 

inadequate or untimely risk coverage 

and verification, including monitoring 

compliance with both safety and 

soundness and consumer laws and 

regulations; completely inaccurate 

records or regulatory reporting; a severe 

lack of documentation for work 

performed; or no management review 

and correction of identified weaknesses. 

Such deficiencies require immediate 

and close supervisory attention, as they 

could seriously jeopardize the 

continued viability of the institution. 

Financial Condition Component 

Rating 1 (Strong). A rating of 1 

indicates that the consolidated BHC is 

financially sound in almost every 

respect; any negative findings are 

basically of a minor nature and can be 

handled in a routine manner. The 

capital adequacy, asset quality, 

earnings, and liquidity of the 

consolidated BHC are more than 

adequate to protect the company from 

reasonably foreseeable external 

economic and financial disturbances. 

The company generates more than 

sufficient cash flow to service its debt 

and fixed obligations with no harm to 

subsidiaries of the organization. 

Rating 2 (Satisfactory). A rating of 2 

indicates that the consolidated BHC is 

fundamentally financially sound, but 

may have modest weaknesses 

correctable in the normal course of 

business. The capital adequacy, asset 

quality, earnings and liquidity of the 

consolidated BHC are adequate to 

protect the company from external 

economic and financial disturbances. 

The company also generates sufficient 

cash flow to service its obligations; 

however, areas of weakness could 

develop into areas of greater concern. To 

the extent minor adjustments are 

handled in the normal course of 

business, the supervisory response is 

limited. 

Rating 3 (Fair). A rating of 3 indicates 

that the consolidated BHC exhibits a 

combination of weaknesses ranging 

from fair to moderately severe. The 

company has less than adequate 

financial strength stemming from one or 

more of the following: modest capital 

deficiencies, substandard asset quality, 

weak earnings, or liquidity problems. As 

a result, the BHC and its subsidiaries are 

less resistant to adverse business 

conditions. The financial condition of 

the BHC will likely deteriorate if 

concerted action is not taken to correct 

areas of weakness. The company’s cash 

flow is sufficient to meet immediate 

obligations, but may not remain 

adequate if action is not taken to correct 

weaknesses. Consequently, the BHC is 

vulnerable and requires more than 

normal supervision. Overall financial 

strength and capacity are still such as to 

pose only a remote threat to the viability 

of the company. 

Rating 4 (Marginal). A rating of 4 

indicates that the consolidated BHC has 

either inadequate capital, an 

immoderate volume of problem assets, 

very weak earnings, serious liquidity 

issues, or a combination of factors that 

are less than satisfactory. An additional 

weakness may be that the BHC’s cash 

flow needs are met only by upstreaming 

imprudent dividends and/or fees from 

subsidiaries. Unless prompt action is 

taken to correct these conditions, they 

could impair future viability. BHCs in 

this category require close supervisory 

attention and increased financial 

surveillance. 

Rating 5 (Unsatisfactory). A rating of 

5 indicates that the volume and 

character of financial weaknesses of the 

BHC are so critical as to require urgent 

aid from shareholders or other sources 

to prevent insolvency. The imminent 

inability of such a company to service 

its fixed obligations and/or prevent 

capital depletion due to severe 

operating losses places its viability in 

serious doubt. Such companies require 

immediate corrective action and 

constant supervisory attention.

The Financial Condition 

Subcomponents 

The financial condition 

subcomponents can be evaluated along 

business lines, product lines, or legal 

entity lines—depending on which type 

of review is most appropriate for the 

holding company structure. 

Capital Adequacy 

Rating 1 (Strong). A rating of 1 

indicates that the consolidated BHC 

maintains more than adequate capital to 

support the volume and risk 

characteristics of all parent and 

subsidiary business lines and products; 

provide a sufficient cushion to absorb 

unanticipated losses arising from the 

parent and subsidiary activities; and 

support the level and composition of 

parent and subsidiary borrowing. In 

addition, a company assigned a rating of 

1 has more than sufficient capital to 

provide a base for the growth of risk 

assets and the entry into capital markets 

as the need arises for the parent 

company and subsidiaries. 

Rating 2 (Satisfactory). A rating of 2 

indicates that the consolidated BHC 

maintains adequate capital to support 

the volume and risk characteristics of all 

parent and subsidiary business lines 

and products; provide a sufficient 

cushion to absorb unanticipated losses 

arising from the parent and subsidiary 

activities; and support the level and 

composition of parent and subsidiary 

borrowing. In addition, a company 

assigned a rating of 2 has sufficient 

capital to provide a base for the growth 

of risk assets and the entry into capital 

markets as the need arises for the parent 

company and subsidiaries. 

Rating 3 (Fair). A rating of 3 indicates 

that the consolidated BHC may not 

maintain sufficient capital to ensure 

support for the volume and risk 

characteristics of all parent and 

subsidiary business lines and products; 

the unanticipated losses arising from the 

parent and subsidiary activities; or the 

level and composition of parent and 

subsidiary borrowing. In addition, a 

company assigned a rating of 3 may not 

maintain a sufficient capital position to 

provide a base for the growth of risk 

assets and the entry into capital markets 

as the need arises for the parent 

company and subsidiaries. The capital 

position of the consolidated BHC could 

quickly become inadequate in the event 

of asset deterioration or other negative 

factors and therefore requires more than 

normal supervisory attention. 

Rating 4 (Marginal). A rating of 4 

indicates that the capital level of the 

consolidated BHC is significantly below 

the amount needed to ensure support 

for the volume and risk characteristics 

of all parent and subsidiary business 

lines and products; the unanticipated 

losses arising from the parent and 

subsidiary activities; and the level and 

composition of parent and subsidiary 

borrowing. In addition, a company 

assigned a rating of 4 does not maintain 

a sufficient capital position to provide a 

base for the growth of risk assets and the 

entry into capital markets as the need 

arises for the parent company and 

subsidiaries. If left unchecked, the 

consolidated capital position of the 

company might evolve into weaknesses 

or conditions that could threaten the 

viability of the institution. The capital 

position of the consolidated BHC 

requires immediate supervisory 

attention. 

Federal Register / Vol. 69, No. 233 / Monday, December 6, 2004 / Notices 70455

Rating 5 (Unsatisfactory). A rating of 

5 indicates that the level of capital of 

the consolidated BHC is critically 

deficient and in need of immediate 

corrective action. The consolidated 

capital position threatens the viability of 

the institution and requires constant 

supervisory attention. 

Asset Quality

Rating 1 (Strong). A rating of 1 

indicates that the BHC maintains strong 

asset quality across all parts of the 

organization, with a very low level of 

criticized and nonperforming assets. 

Credit risk across the organization is 

commensurate with management’s 

abilities and modest in relation to credit 

risk management practices. 

Rating 2 (Satisfactory). A rating of 2 

indicates that the BHC maintains 

satisfactory asset quality across all parts 

of the organization, with a manageable 

level of criticized and nonperforming 

assets. Any identified weaknesses in 

asset quality are correctable in the 

normal course of business. Credit risk 

across the organization is commensurate 

with management’s abilities and 

generally modest in relation to credit 

risk management practices. 

Rating 3 (Fair). A rating of 3 indicates 

that the asset quality across all or a 

material part of the consolidated BHC is 

less than satisfactory. The BHC may be 

facing a decrease in the overall quality 

of assets currently maintained on and 

off balance sheet. The BHC may also be 

experiencing an increase in credit risk 

exposure that has not been met with an 

appropriate improvement in risk 

management practices. BHCs assigned a 

rating of 3 require more than normal 

supervisory attention. 

Rating 4 (Marginal). A rating of 4 

indicates that the BHC’s asset quality is 

deficient. The level of problem assets 

and/or unmitigated credit risk subjects 

the holding company to potential losses 

that, if left unchecked, may threaten its 

viability. BHCs assigned a rating of 4 

require immediate supervisory 

attention. 

Rating 5 (Unsatisfactory). A rating of 

5 indicates that the BHC’s asset quality 

is critically deficient and presents an 

imminent threat to the institution’s 

viability. BHCs assigned a rating of 5 

require immediate remedial action and 

constant supervisory attention. 

Earnings 

Rating 1 (Strong). A rating of 1 

indicates that the quantity and quality 

of the BHC’s consolidated earnings over 

time are more than sufficient to make 

full provision for the absorption of 

losses and/or accretion of capital when 

due consideration is given to asset 

quality and BHC growth. Generally, 

BHCs with a 1 rating have earnings well 

above peer-group averages. 

Rating 2 (Satisfactory). A rating of 2 

indicates that the quantity and quality 

of the BHC’s consolidated earnings over 

time are generally adequate to make 

provision for the absorption of losses 

and/or accretion of capital when due 

consideration is given to asset quality 

and BHC growth. Generally, BHCs with 

a 2 earnings rating have earnings that 

are in line with or slightly above peergroup averages. 

Rating 3 (Fair). A rating of 3 indicates 

that the BHC’s consolidated earnings are 

not fully adequate to make provisions 

for the absorption of losses and the 

accretion of capital in relation to 

company growth. The consolidated 

earnings of companies rated 3 may be 

further clouded by static or inconsistent 

earnings trends, chronically insufficient 

earnings, or less than satisfactory asset 

quality. BHCs with a 3 rating for 

earnings generally have earnings below 

peer-group averages. Such BHCs require 

more than normal supervisory attention. 

Rating 4 (Marginal). A rating of 4 

indicates that the BHC’s consolidated 

earnings, while generally positive, are 

clearly not sufficient to make full 

provision for losses and the necessary 

accretion of capital. BHCs 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 the previous year. The 

earnings of such companies are 

generally substantially below peergroup averages. Such BHCs require 

immediate supervisory attention. 

Rating 5 (Unsatisfactory). A rating of 

5 indicates that the BHC is experiencing 

losses or a level of earnings that is worse 

than that described for the 4 rating. 

Such losses, if not reversed, represent a 

distinct threat to the BHC’s solvency 

through erosion of capital. Such BHCs 

require immediate and constant 

supervisory attention. 

Liquidity 

Rating 1 (Strong). A rating of 1 

indicates that the BHC maintains 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. 

Rating 2 (Satisfactory). A rating of 2 

indicates that the BHC maintains 

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. 

Rating 3 (Fair). A rating of 3 indicates 

that the BHC’s liquidity levels or funds 

management practices are in need of 

improvement. BHCs 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. Such 

BHCs require more than normal 

supervisory attention. 

Rating 4 (Marginal). A rating of 4 

indicates that the BHC’s liquidity levels 

or funds management practices are 

deficient. Institutions 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 and 

require immediate supervisory 

attention. 

Rating 5 (Unsatisfactory). A rating of 

5 indicates that the BHC’s liquidity 

levels or funds management practices 

are critically deficient and may threaten 

the continued viability of the 

institution. Institutions rated 5 require 

constant supervisory attention and 

immediate external financial assistance 

to meet maturing obligations or other 

liquidity needs. 

Impact Component 

The I component rating reflects the 

aggregate potential impact of the 

nondepository entities on the subsidiary 

depository institution(s). It is rated on a 

five point numerical scale. Ratings will 

be assigned in ascending order of 

supervisory concern as follows: 

1—Low likelihood of significant 

negative impact; 

2—Limited likelihood of significant 

negative impact; 

3—Moderate likelihood of significant 

negative impact; 

4—Considerable likelihood of 

significant negative impact; and 

5—High likelihood of significant 

negative impact. 

Rating 1 (Low Likelihood of 

Significant Negative Impact). A rating of 

1 indicates that the nondepository 

entities of the BHC are highly unlikely 

to have a significant negative impact on 

the subsidiary depository institution(s) 

due to the sound financial condition of 

the nondepository entities, the strong 

risk management practices within the 

nondepository entities, or the corporate

70456 Federal Register / Vol. 69, No. 233 / Monday, December 6, 2004 / Notices 

structure of the BHC. The BHC 

maintains an appropriate capital 

allocation across the organization 

commensurate with associated risks. 

Intra-group exposures, including 

servicing agreements, are very unlikely 

to undermine the financial condition of 

the subsidiary depository institution(s). 

Parent company cash flow is sufficient 

and not dependent on excessive 

dividend payments from subsidiaries. 

The potential risks posed to the 

subsidiary depository institution(s) by 

strategic plans, the control environment, 

risk concentrations, or legal or 

reputational issues within or facing the 

nondepository entities are minor in 

nature and can be addressed in the 

normal course of business. 

Rating 2 (Limited Likelihood of 

Significant Negative Impact). A rating of 

2 indicates a limited likelihood that the 

nondepository entities of the BHC will 

have a significant negative impact on 

the subsidiary depository institution(s) 

due to the adequate financial condition 

of the nondepository entities, the 

satisfactory risk management practices 

within the parent nondepository 

entities, or the corporate structure of the 

BHC. The BHC maintains adequate 

capital allocation across the 

organization commensurate with 

associated risks. Intra-group exposures, 

including servicing agreements, are 

unlikely to undermine the financial 

condition of the subsidiary depository 

institution(s). Parent company cash flow 

is satisfactory and generally does not 

require excessive dividend payments 

from subsidiaries. The potential risks 

posed to the subsidiary depository 

institution(s) by strategic plans, the 

control environment, risk 

concentrations, or legal or reputational 

issues within the nondepository entities 

are modest and can be addressed in the 

normal course of business.

Rating 3 (Moderate Likelihood of 

Significant Negative Impact). A rating of 

3 indicates a moderate likelihood that 

the aggregate impact of the 

nondepository entities of the BHC on 

the subsidiary depository institution(s) 

will have a significant negative impact 

on the subsidiary depository 

institution(s) due to weaknesses in the 

financial condition and/or risk 

management practices of the 

nondepository entities. The BHC may 

have only marginally sufficient 

allocation of capital across the 

organization to support risks. Intragroup exposures, including servicing 

agreements, may have the potential to 

undermine the financial condition of 

the subsidiary depository institution(s). 

Parent company cash flow may at times 

require excessive dividend payments 

from subsidiaries. Strategic growth 

plans, weaknesses in the control 

environment, risk concentrations or 

legal or reputational issues within the 

nondepository entities may pose 

significant risks to the subsidiary 

depository institution(s). A BHC 

assigned a 3 impact rating requires more 

than normal supervisory attention, as 

there could be adverse effects on the 

safety and soundness of the subsidiary 

depository institution(s) if corrective 

action is not taken by management. 

Rating 4 (Considerable Likelihood of 

Significant Negative Impact). A rating of 

4 indicates that there is a considerable 

likelihood that the nondepository 

entities of the BHC will have a 

significant negative impact on the 

subsidiary depository institution(s) due 

to weaknesses in the financial condition 

and/or risk management practices of the 

nondepository entities. A 4-rated BHC 

may have insufficient capital within the 

nondepository entities to support their 

risks and activities. Intra-group 

exposures, including servicing 

agreements, may also have the 

immediate potential to undermine the 

financial condition of the subsidiary 

depository institution(s). Parent 

company cash flow may be dependent 

on excessive dividend payments from 

subsidiaries. Strategic growth plans, 

weaknesses in the control environment, 

risk concentrations or legal or 

reputational issues within the 

nondepository entities may pose 

considerable risks to the subsidiary 

depository institution(s). A BHC 

assigned a 4 impact rating requires 

immediate remedial action and close 

supervisory attention because the 

nondepository entities could seriously 

affect the safety and soundness of the 

subsidiary depository institution(s). 

Rating 5 (High Likelihood of 

Significant Negative Impact). A rating of 

5 indicates a high likelihood that the 

aggregate impact of the nondepository 

entities of the BHC on the subsidiary 

depository institution(s) is or will 

become significantly negative due to 

substantial weaknesses in the financial 

condition and/or risk management 

practices of the nondepository entities. 

Strategic growth plans, a deficient 

control environment, risk 

concentrations or legal or reputational 

issues within the nondepository entities 

may pose critical risks to the subsidiary 

depository institution(s). The parent 

company also may be unable to meet its 

obligations without excessive support 

from the subsidiary depository 

institution(s). The BHC requires 

immediate and close supervisory 

attention, as the nondepository entities 

seriously jeopardize the continued 

viability of the subsidiary depository 

institution(s). 

(D) (Depository Institutions) Component 

The (D) component identifies the 

overall condition of the subsidiary 

depository institution(s) of the BHC. For 

BHCs with only one subsidiary 

depository institution, the (D) 

component rating generally will mirror 

the CAMELS composite rating for that 

depository institution. To arrive at a (D) 

component rating for BHCs with 

multiple subsidiary depository 

institutions, the CAMELS composite 

ratings for each of the depository 

institutions should be weighted, giving 

consideration to asset size and the 

relative importance of each depository 

institution within the overall structure 

of the organization. In general, it is 

expected that the resulting (D) 

component rating will reflect the lead 

depository institution’s CAMELS 

composite rating. 

If in the process of analyzing the 

financial condition and risk 

management programs of the 

consolidated organization, a major 

difference of opinion regarding the 

safety and soundness of the subsidiary 

depository institution(s) emerges 

between the Federal Reserve and the 

depository institution’s primary 

regulator, then the (D) rating should 

reflect the Federal Reserve’s evaluation.

By order of the Board of Governors of the 

Federal Reserve System.

Dated: December 1, 2004. 

Jennifer J. Johnson, 

Secretary of the Board.

[FR Doc. 04–26723 Filed 12–3–04; 8:45 am] 

BILLING CODE 6210–01–P

FEDERAL RESERVE SYSTEM

Change in Bank Control Notices; 

Acquisition of Shares of Bank or Bank 

Holding Companies

The notificants listed below have 

applied under the Change in Bank 

Control Act (12 U.S.C. 1817(j)) and 

§ 225.41 of the Board’s Regulation Y (12 

CFR 225.41) to acquire a bank or bank 

holding company. The factors that are 

considered in acting on the notices are 

set forth in paragraph 7 of the Act (12 

U.S.C. 1817(j)(7)).

The notices are available for 

immediate inspection at the Federal 

Reserve Bank indicated. The notices 

also will be available for inspection at 

the office of the Board of Governors. 

Interested persons may express their 

views in writing to the Reserve Bank 

indicated for that notice or to the offices 

of the Board of Governors. Comments