[Federal Register Volume 74, Number 185 (Friday, September 25, 2009)]
[Notices]
[Pages 48955-48959]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-23208]



[[Page 48955]]

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FEDERAL DEPOSIT INSURANCE CORPORATION

FEDERAL RESERVE SYSTEM

[Docket No. OP-1369]

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

[Docket ID OCC-2009-0013]

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

[Docket ID OTS-2009-20016]


Correspondent Concentration Risks

AGENCY: Federal Deposit Insurance Corporation (FDIC); Board of 
Governors of the Federal Reserve System (the Board), Office of the 
Comptroller of the Currency, Treasury (OCC); and Office of Thrift 
Supervision, Treasury (OTS).

ACTION: Proposed guidance and request for comment.

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SUMMARY: The FDIC, Board, OCC, and OTS (the Agencies) request comment 
on proposed guidance on correspondent concentration risks (Proposed 
Guidance). The Proposed Guidance outlines the Agencies' expectations 
for financial institutions with respect to identifying, monitoring, and 
managing correspondent concentration risks between financial 
institutions, and performing appropriate due diligence on all credit 
exposures to and funding transactions with other financial 
institutions. The Agencies expect financial institutions to identify, 
monitor, and manage the totality of the institution's aggregate credit 
and funding exposures to other institutions on a standalone basis, and 
take into account exposures to other institutions' affiliates. In 
addition, the institution should be aware of exposures of its 
affiliates to other institutions and their affiliates.

DATES: Comments must be submitted on or before October 26, 2009.

ADDRESSES: Comments should be directed to:
    FDIC: You may submit comments by any of the following methods:
    <bullet> Agency Web Site: http://www.fdic.gov/regulations/laws/federal. Follow instructions for submitting comments on the Agency Web 
Site.
    <bullet> E-mail: <a href="/cdn-cgi/l/email-protection#6724080a0a020913142721232e2449000811"><span class="__cf_email__" data-cfemail="7635191b1b131802053630323f3558111900">[email protected]</span></a>. Include ``Proposed Guidance on 
Correspondent Concentration Risks'' in the subject line of the message.
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    <bullet> Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW., 
Washington, DC 20429.
    <bullet> Hand Delivery/Courier: Guard station at the rear of the 
550 17th Street Building (located on F Street) on business days between 
7 a.m. and 5 p.m. (EST).
    Public Inspection: All comments received will be posted without 
change to http://www.fdic.gov/regulations/laws/federal including any 
personal information provided. Comments may be inspected and 
photocopied in the FDIC Public Information Center, 3501 North Fairfax 
Drive, Room E-1002, Arlington, VA 22226, between 9 a.m. and 5 p.m. 
(EST) on business days. Paper copies of public comments may be ordered 
from the Public Information Center by telephone at (877) 275-3342 or 
(703) 562-2200.
    FRB: You may submit comments, identified by Docket No. [----------
----], by any of the following methods:
    <bullet> Agency Web site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
    <bullet> E-mail: <a href="/cdn-cgi/l/email-protection#10627577633e737f7d7d757e6463507675747562717c627563756266753e777f66"><span class="__cf_email__" data-cfemail="92e0f7f5e1bcf1fdfffff7fce6e1d2f4f7f6f7e0f3fee0f7e1f7e0e4f7bcf5fde4">[email protected]</span></a>. Include the 
docket number in the subject line of the message.
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    <bullet> Fax: (202) 452-3819 or (202) 452-3102.
    <bullet> Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    Public Inspection: All public comments are available from the 
Board's Web site at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, unless modified for technical reasons. 
Accordingly, your comments will not be edited to remove any identifying 
or contact information. Public comments may also be viewed in 
electronic or paper form in Room MP-500 of the Board's Martin Building 
(20th and C Streets, NW) between 9 a.m. and 5 p.m. on weekdays.
    OCC: You may submit comments by any of the following methods:
    <bullet> E-mail: <a href="/cdn-cgi/l/email-protection#c2b0a7a5b1eca1adafafa7acb6b182ada1a1ecb6b0a7a3b1eca5adb4"><span class="__cf_email__" data-cfemail="fa889f9d89d4999597979f948e89ba959999d48e889f9b89d49d958c">[email protected]</span></a>.
    <bullet> Fax: (202) 874-5274.
    <bullet> Mail: Office of the Comptroller of the Currency, 250 E 
Street, SW., Mail Stop 2-3, Washington, DC 20219.
    <bullet> Hand Delivery/Courier: 250 E Street, SW., Attn: Public 
Information Room, Mail Stop 2-3, Washington, DC 20219.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket ID OCC-2009-0013'' in your comment. In general, OCC will enter 
all comments received into the docket without change, including any 
business or personal information that you provide such as name and 
address information, e-mail addresses, or phone numbers. Comments, 
including attachments and other supporting materials, received are part 
of the public record and subject to public disclosure. Do not enclose 
any information in your comment or supporting materials that you 
consider confidential or inappropriate for public disclosure.
    You may review comments and other related materials by any of the 
following methods:
    Viewing Comments Personally: You may personally inspect and 
photocopy comments at the OCC, 250 E Street, SW., Washington, DC. For 
security reasons, the OCC requires that visitors make an appointment to 
inspect comments. You may do so by calling (202) 874-4700. Upon 
arrival, visitors will be required to present valid government-issued 
photo identification and submit to security screening in order to 
inspect and photocopy comments. You may also view or request available 
background documents and project summaries using the methods described 
above.
    OTS: You may submit comments, identified by docket number ID OTS-
2009-XXXX, by any of the following methods:
    <bullet> E-mail: <a href="/cdn-cgi/l/email-protection#65170002164b060a0808000b1116250a11164b11170004164b020a13"><span class="__cf_email__" data-cfemail="aedccbc9dd80cdc1c3c3cbc0daddeec1dadd80dadccbcfdd80c9c1d8">[email protected]</span></a>. Please include ID 
OTS-2009-XXXX [--------------] in the subject line of the message and 
include your name and telephone number in the message.
    <bullet> Fax: (202) 906-6518.
    <bullet> Mail: Regulation Comments, Chief Counsel's Office, Office 
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, 
Attention: ID OTS-2009-XXXX.
    <bullet> Hand Delivery/Courier: Guard's Desk, East Lobby Entrance, 
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention: 
Regulation Comments, Chief Counsel's Office, Attention: ID OTS-2009-
XXXX.
    Instructions: All submissions received must include the agency name 
and docket number for this notice. All comments received will be 
entered into

[[Page 48956]]

the docket without change, including any personal information provided. 
Comments including attachments and other supporting materials received 
are part of the public record and subject to public disclosure. Do not 
enclose any information in your comments or supporting materials that 
you consider confidential or inappropriate for public disclosure.
    Viewing Comments On-Site: You may inspect comments at the Public 
Reading Room, 1700 G Street, NW., by appointment. To make an 
appointment for access, call (202) 906-5922, send an e-mail to 
<a href="/cdn-cgi/l/email-protection#0b376a2b63796e6d36" http: public.info">public.info</a>@ots.treas.gov">public.info@ots.treas.gov</a>, or send a facsimile transmission to (202) 
906-6518. (Prior notice identifying the materials you will be 
requesting will assist us in serving you.) We schedule appointments on 
business days between 10 a.m. and 4 p.m. In most cases, appointments 
will be available the next business day following the date we receive a 
request.

FOR FURTHER INFORMATION CONTACT:
FDIC: Beverlea S. Gardner, Senior Examination Specialist, Division of 
Supervision and Consumer Protection, (202) 898-3640; or Mark G. 
Flanigan, Counsel, Legal Division, (202) 898-7426.
FRB: Barbara J. Bouchard, Associate Director, (202) 452-3072; or Craig 
A. Luke, Supervisory Financial Analyst, Supervisory Guidance and 
Procedures, 202-452-6409. For users of Telecommunications Device for 
the Deaf (``TDD'') only, contact (202) 263-4869.
OCC: Fred D. Finke, Liaison, Midsize-Community Bank Supervision, (202) 
874-4468; or Kurt S. Wilhelm, Director, Financial Markets Group, (202) 
874-4479.
OTS: Lori J. Quigley, Managing Director, Supervision, (202) 906-6265; 
or William J. Magrini, Senior Project Manager of Credit Policy, (202) 
906-5744.

SUPPLEMENTARY INFORMATION:

I. Background

    Concentration risks can occur in correspondent relationships when 
an institution engages in a significant volume of activities with 
another financial institution. A financial institution's relationship 
with a correspondent may result in credit (asset) and funding 
(liability) concentration risks.
    Credit risk is the potential that an obligation will not be paid in 
a timely manner or in full. Credit risk arises whenever an institution 
advances or commits funds to another financial institution, as the 
advancing institution's assets are at risk of loss if the recipient 
institution fails. Some institutions conceivably could have a credit 
concentration arising from the need to maintain large due from balances 
with the correspondent to facilitate account clearing activities.
    Funding risk arises when an institution depends heavily on the 
liquidity provided by a limited number of other institutions to meet 
its funding needs. Funding risk can create an immediate threat to an 
institution's viability if the advancing entity suddenly reduces the 
institution's access to liquid funds. Institutions might abruptly limit 
the availability of liquid funding sources as part of a prudent program 
for limiting credit exposure or as required by regulation when the 
financial condition of either counterparty declines rapidly.

II. Proposed Guidance

    The Agencies developed this Proposed Guidance to outline their 
expectations for financial institutions with respect to identifying, 
monitoring, and managing correspondent concentration risks between 
financial institutions; and for performing appropriate due diligence on 
all credit exposures to and funding transactions with other financial 
institutions. Correspondent concentrations represent a lack of 
diversification that adds a dimension of risk that management should 
consider when formulating strategic plans and internal risk limits. The 
Proposed Guidance focuses on the risks in credit and funding exposures 
inherent in interbank activities and how those exposures should be 
calculated.
    The Agencies generally consider credit exposures arising from 
direct and indirect obligations owed by individual borrowers, a small 
interrelated group of individuals, or a single repayment source greater 
than 25 percent of Tier 1 capital as concentrations. The Proposed 
Guidance clarifies that to assist management in assessing how 
significant economic events or abrupt deterioration in a 
correspondent's risk profile might affect their financial condition, 
institutions should identify the totality of the institution's 
aggregate credit and funding exposure to other institutions on a 
standalone basis, and take into account exposures to other 
institutions' affiliates.\1\ In addition, the institution should be 
aware of exposures of its affiliates to other institutions and their 
affiliates.
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    \1\ Institutions should monitor all direct or indirect 
relationships with the other institution and its subsidiaries, any 
parent bank holding companies of the other institution, and other 
entities controlled by that parent company. An institution should 
also take into account exposures of its own affiliates to the same 
institution (including that same institution's affiliates), and how 
those may affect the institution's exposure. While each institution 
is responsible for monitoring its own credit and funding exposures, 
bank holding companies with exposures in more than one entity should 
be managing the organization's concentration risk on a consolidated 
basis. In situations where there are no parent bank holding 
companies, institutions should monitor all direct or indirect 
relationships with that institution and its subsidiaries and any 
other entities that are under common control.
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    The credit exposure of the advancing institution and its 
organization represents a funding exposure to the recipient 
organization. While the Agencies have not established a liability 
concentration threshold, the Agencies have seen instances where funding 
exposures as low as 5 percent of an institution's total liabilities 
have posed an elevated risk to the recipient. An example of how these 
interbank correspondent risks can become concentrated is illustrated 
below:
    Respondent Institution (RI) has $500 million in total assets and is 
Well Capitalized with $40 million (8 percent) of Tier 1 capital. RI 
maintains $10 million in its due from account held at Correspondent 
Bank (CB) and sold $20 million in unsecured overnight Federal funds to 
CB. These relationships collectively result in RI having an aggregate 
risk exposure of 75 percent of its Tier 1 capital to CB. CB, which has 
$2 billion in total assets, $1.8 billion in total liabilities, and is 
Well Capitalized with $200 million (10 percent) Tier 1 capital, has 20 
respondent banks (RB) with the same credit exposures as RI. The 20 RBs' 
$600 million aggregate relationship represents one-third (33 percent) 
of CB's total liabilities. These relationships could create significant 
funding risk for CB if three or more of the RBs withdraw their funds in 
close proximity of each other.
    These relationships also could threaten the viability of the 20 
RBs. The loss of all or a significant portion of the RBs' due from 
balances and the unsecured Federal funds sold to CB could deplete a 
significant portion of their capital base, resulting in multiple 
failures. The RBs' viability also could be jeopardized if CB, in turn, 
had sold a significant portion of the Federal funds from the RBs to 
another financial institution that abruptly failed. In addition, the 
financial institutions that rely on CB for account clearing services 
may find it difficult to quickly transfer processing services to 
another provider.
    Although these interbank exposures may comply with regulations 
governing individual relationships, collectively they pose significant 
correspondent concentration risks that need to be

[[Page 48957]]

monitored and managed consistent with the institutions overall risk-
management policies and procedures. The following discussion summarizes 
the major components of the Proposed Guidance.

Identifying Correspondent Concentrations

    The Proposed Guidance details the Agencies' expectations that 
institutions implement procedures for identifying correspondent 
concentrations on a standalone basis, as well as taking into account 
exposures to the other institution's affiliates. These procedures 
should include all assets advanced or committed to another 
organization, as these credit exposures are at risk of loss. The 
Proposed Guidance specifies that institutions should calculate both 
gross and net credit exposures. Exposures are reduced to net positions 
to the extent they are secured by the net realizable proceeds from 
readily marketable collateral.

Monitoring Correspondent Concentrations

    The Board's Regulation F mandates that an institution's policies 
and procedures must require periodic reviews of a correspondent's 
financial condition and must take into account any deterioration in the 
correspondent's financial condition.\2\ In monitoring correspondent 
relationships, the Proposed Guidance details the Agencies' expectation 
that institutions specify what information, ratios, and trends 
management will review for each correspondent on an ongoing basis. The 
Proposed Guidance also stresses that an institution's policies should 
include procedures that ensure ongoing, timely reviews of correspondent 
relationships, establish documentation requirements for the reviews, 
and specify when relationships that meet or exceed internal criteria 
are to be reported to the Board of Directors or the appropriate 
management committee for an assessment of risk and risk reducing 
strategies.
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    \2\ 12 CFR Part 206. All depository institutions insured by the 
FDIC are subject to the Board's Limitation on Interbank Liabilities 
(Regulation F).
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Managing Correspondent Concentrations

    The Proposed Guidance discusses an institution's obligation to 
establish prudent correspondent concentration limits, as well as ranges 
or tolerances for each factor being monitored, consistent with the 
Board's Regulation F and sound banking practice. Prudent risk 
management of correspondent concentrations should include procedures 
for reducing concentrations that meet or exceed established limits, 
ranges, or tolerances in an orderly manner over reasonable timeframes. 
Contingency plans for managing risk when these limits, ranges, or 
tolerances are met or exceeded, either on an individual or collective 
basis, should provide for a variety of actions that can be considered 
relative to changes in the correspondent's financial condition.\3\ 
Contingency plans should not rely on temporary deposit insurance 
programs for mitigating concentration risk.
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    \3\ Regulation F requires institutions' policies and procedures 
to limit exposure to the correspondent, either by the establishment 
of internal limits or by other means, when the correspondent's 
financial condition and the form or maturity of the bank's exposure 
create a significant risk that payment will not be made in full or 
in a timely manner. Regulation F also requires institutions to 
reduce credit exposure to below 25 percent of total capital within 
120 days after the date when the current Report of Condition or 
other relevant report normally would be available if the 
correspondent is no longer at least adequately capitalized. More 
information on Regulation F is available at: http://www.federalreserve.gov/bankinforeg/reglisting.htm.
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Performing Appropriate Due Diligence

    The Proposed Guidance also reinforces the Agencies' ongoing 
expectation that financial organizations with credit or funding 
exposures to other financial organizations have effective risk 
management programs for these credit and funding activities. Credit or 
funding exposures may include, for example, due from bank accounts, 
Federal funds sold as principal, direct or indirect loans (including 
participations and syndications), and trust preferred securities, 
subordinated debt, and stock purchases of the correspondent, its 
holding company, or any affiliated entity. An institution that 
maintains or contemplates entering into any credit or funding 
transaction with another financial institution should have written 
investment, lending, and funding policies and procedures, including 
appropriate limits, that govern these activities. In addition, these 
procedures should ensure the institution conducts an independent 
analysis of credit transactions prior to committing to engage in the 
transactions. The terms for all such credit and funding transactions 
should strictly be on an arm's length basis, conform to sound 
investment, lending, and funding practices, and avoid potential 
conflicts of interest.

III. Request for Comment

    The Agencies are requesting public comment on all aspects of the 
Proposed Guidance. The Agencies also request comment on the 
appropriateness of aggregating all credit and funding exposures that an 
institution or its organization has advanced or committed to another 
financial institution or its affiliated entities when calculating 
concentrations. In particular, should some types of advances or 
commitments be excluded?
    The Agencies further request comment on the types of factors 
institutions should consider when assessing correspondents' financial 
condition. The Agencies also seek comment on the need to establish 
internal limits as well as ranges or tolerances for each factor being 
monitored. In addition, the Agencies request comment on the types of 
actions that should be considered for contingency planning and the 
timeframes for implementing those actions to ensure concentrations that 
meet or exceed organizations' established internal limits, ranges, or 
tolerances are reduced in an orderly manner. Finally, the Agencies seek 
comment on whether there are operational issues the Agencies should 
consider when finalizing the Proposed Guidance. For example, do 
institutions anticipate that operational issues will arise in light of 
the Board's policy to limit eligible institutions to participation in 
one excess balance account (EBA)? \4\ If so, identify the issues that 
could arise in managing correspondent concentration risks while subject 
to the single EBA limitation.
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    \4\ The Board recently amended its Regulation D (12 CFR Part 
204) to authorize Federal Reserve Banks to offer EBAs to eligible 
institutions. 74 FR 25620 (May 29, 2009). These accounts were 
intended to permit eligible institutions to earn interest on their 
excess balances without significantly disrupting established 
business relationships with their correspondents. Under the terms of 
the EBA account agreement, an eligible institution is permitted to 
participate in one EBA at a Federal Reserve Bank. Each EBA 
Participant, however, can choose each day whether to sell funds in 
the Federal funds market through any number of correspondent 
institutions, to place the funds at a Federal Reserve Bank through 
their single EBA agent, or to select a combination of the two. As a 
result, EBA Participants may maintain relationships with more than 
one correspondent notwithstanding the fact that an EBA Participant 
participates in only one EBA at a Reserve Bank.
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    The text of the Proposed Guidance, entitled Correspondent 
Concentration Risks, is as follows:

Correspondent Concentration Risks

    A financial institution's relationship with a correspondent may 
result in credit (asset) and funding (liability) concentrations. On the 
asset side, a credit concentration represents a significant volume of 
credit exposure that a financial institution has advanced or committed 
to one entity or affiliated group. On the liability side, a funding 
concentration exists when an institution

[[Page 48958]]

depends on one or a small group of institutions for a disproportionate 
share of its total funding. Correspondent concentrations represent a 
lack of diversification, which adds a dimension of risk that management 
should consider when formulating strategic plans and internal risk 
limits.
    The Agencies have generally considered credit exposures greater 
than 25 percent of Tier 1 capital as concentrations. While the Agencies 
have not established a liability concentration threshold, the Agencies 
have seen instances where funding exposures as low as 5 percent of an 
institution's total liabilities have posed an elevated liquidity risk 
to the recipient institution. The Agencies expect financial 
institutions to identify, monitor, and manage both asset and liability 
correspondent concentrations and implement procedures to perform 
appropriate due diligence on all credit exposures to and funding 
transactions with other financial institutions.\1\
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    \1\ The Agencies consist of the Federal Deposit Insurance 
Corporation (FDIC), Board of Governors of the Federal Reserve System 
(Board), Office of the Comptroller of the Currency, Treasury (OCC), 
and Office of Thrift Supervision, Treasury (OTS) (collectively, the 
Agencies).
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Identifying Correspondent Concentrations

    Institutions should implement procedures for identifying 
correspondent concentrations with other financial organizations. 
Accordingly, an institution should have procedures that encompass the 
totality of the institution's aggregate credit and funding exposures to 
the other institution on a standalone basis, as well as taking into 
account exposures to the other institution's affiliates. In addition, 
the institution should be aware of exposures of its affiliates to the 
other institution and its affiliates.\2\
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    \2\ Institutions should monitor all direct or indirect 
relationships with the other institution and its subsidiaries, any 
parent bank holding companies of the other institution, and other 
entities controlled by that parent company. An institution should 
also take into account exposures of its own affiliates to the same 
institution (including that same institution's affiliates), and how 
those may affect the institution's exposure. While each institution 
is responsible for monitoring its own credit and funding exposures, 
bank holding companies with exposures in more than one entity should 
be managing the organization's concentration risk on a consolidated 
basis. In situations where there are no parent bank holding 
companies, institutions should monitor all direct or indirect 
relationships with that institution and its subsidiaries and any 
other entities that are under common control.
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Credit Concentrations

    Credit exposures can consist of a variety of assets. For example, 
an institution (either a client bank or a correspondent) could have due 
from bank accounts, Federal funds sold on a principal basis, and direct 
or indirect loans to or investments in another institution, its holding 
company, or an affiliated entity. These assets represent credit 
exposures to the institution that advanced them, as they are at risk of 
loss. The Agencies realize some exposures meet certain business needs 
or purposes, such as a credit concentration arising from the need to 
maintain large due from balances to facilitate accounting clearing 
activities. In identifying credit concentrations, institutions should 
aggregate all exposures, including, but not limited to:
    <bullet> Due from bank accounts (demand deposit accounts (DDA) and 
certificates of deposit (CD)),
    <bullet> Federal funds sold on an as principal basis,
    <bullet> The over-collateralized amount on repurchase agreements,
    <bullet> The under-collateralized portion of reverse repurchase 
agreements,
    <bullet> Current positive fair value on derivatives contracts,
    <bullet> Unrealized gains on unsettled securities transactions,
    <bullet> Direct or indirect loans to or for the benefit of the 
correspondent, its holding company, or any affiliated entity, and
    <bullet> Investments, such as trust preferred securities, 
subordinated debt, and stock purchases, in the correspondent, its 
holding company, or any affiliated entity.

Funding Concentrations

    Conversely, asset accounts such as those noted above represent 
funding sources to the recipient institution or correspondent. The 
primary risk of a funding concentration is that an institution will 
have to replace those advances on short notice. This risk may be more 
pronounced if the funds are credit sensitive, and the advancing 
institution's financial condition has deteriorated.
    The percentage of liabilities or other measurements that may 
constitute a concentration of funding is likely to vary depending on 
the type and maturity of the funding, and the structure of the 
receiving institution's sources of funds. For example, a concentration 
in overnight unsecured funding from one institution likely would 
warrant a much lower concentration threshold than unsecured term 
funding, assuming compliance with covenants and diversification with 
short and long-term maturities. Similarly, assuming the same, term 
funding in the form of senior or subordinated debt may not present a 
funding concentration risk.

Calculating Credit and Funding Exposures

    When identifying credit and funding exposures, institutions should 
calculate both gross and net exposures. Exposures are reduced to net 
positions to the extent they are secured by the net realizable proceeds 
from readily marketable collateral. For example, $10 million in Federal 
funds sold to a correspondent with $3 million secured by U.S. Treasury 
notes represents a $10 million gross exposure, but a $7 million net 
exposure after consideration of the pledged collateral.

Monitoring Correspondent Relationships

    The Federal Reserve Board's Regulation F requires institutions to 
establish and maintain written policies and procedures to prevent 
excessive exposure to any individual correspondent in relation to the 
correspondent's financial condition.\3\ In cases where an institution's 
exposure to a correspondent is significant, Regulation F mandates that 
an institution's policies and procedures must require periodic reviews 
of the correspondent's financial condition and must take into account 
any deterioration in the correspondent's financial condition.\4\
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    \3\ 12 CFR part 206. All depository institutions insured by the 
FDIC are subject to the Board's Limitations on Interbank Liabilities 
(Regulation F).
    \4\ 12 CFR 206.3.
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    Regulation F provides that such monitoring efforts must take into 
account the correspondent's capital level, level of nonaccrual and 
past-due loans and leases, level of earnings, and other factors 
affecting its financial condition. While not specified, these other 
factors could include, but are not limited to:
    <bullet> Deteriorating trends in its capital base or asset quality.
    <bullet> Reaching certain target ratios established by management, 
e.g., aggregate of nonaccrual and past due loans and leases as a 
percentage of gross loans and leases.
    <bullet> Increasing level of other real estate owned.
    <bullet> Experiencing a downgrade in its credit rating, if publicly 
traded.
    <bullet> Being placed under a public enforcement action.
    In monitoring correspondent relationships for risk-management 
purposes as well as for compliance with Regulation F, institutions 
should specify what information, ratios, or trends will be reviewed for 
each correspondent on an ongoing basis. Institutions' policies should 
include procedures that ensure

[[Page 48959]]

ongoing, timely reviews of correspondent relationships. Such reviews 
should be conducted on a quarterly basis at a minimum and more 
frequently when appropriate. The procedures also should establish 
documentation requirements for the reviews conducted. In addition, the 
procedures should specify when relationships that meet or exceed 
internal criteria are to be brought to the attention of the Board of 
Directors or the appropriate management committee.

Managing Correspondent Concentrations

    Pursuant to Regulation F, institutions should establish prudent 
correspondent concentration limits, as well as ranges or tolerances for 
each factor being monitored. Institutions should develop plans for 
managing risk when these limits, ranges or tolerances are met or 
exceeded, either on an individual or collective basis. Consistent with 
the requirements of Regulation F, contingency plans should provide a 
variety of actions that can be considered relative to changes in the 
correspondent's financial condition.\5\
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    \5\ Regulation F requires institutions' policies and procedures 
to limit exposure to the correspondent, either by the establishment 
of internal limits or by other means, when the correspondent's 
financial condition and the form or maturity of the bank's exposure 
create a significant risk that payment will not be made in full or 
in a timely manner. Regulation F also requires institutions to 
reduce credit exposure to below 25 percent of total capital within 
120 days after the date when the current Report of Condition or 
other relevant report normally would be available if the 
correspondent is no longer at least Adequately Capitalized. More 
information on Regulation F is available at: http://www.federalreserve.gov/bankinforeg/reglisting.htm.
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    Contingency plans should not rely on temporary deposit insurance 
programs for mitigating concentration risk. Prudent risk management of 
correspondent concentrations should include procedures for reducing 
exposures that meet or exceed established limits, ranges, or tolerances 
in an orderly manner over reasonable timeframes. Such actions could 
include, but are not limited to:
    <bullet> Reducing the volume of uncollateralized/uninsured funds.
    <bullet> Transferring excess funds to other financial institutions 
rather than the correspondent after conducting appropriate reviews of 
their financial condition.
    <bullet> Requiring the correspondent to serve as agent rather than 
as principal for Federal funds sold.
    <bullet> Establishing limits on asset and liability purchases from 
and investments in correspondents.
    <bullet> Specifying reasonable timeframes to meet targeted 
reduction goals for different types of advances.
    Examiners will review correspondent relationships during 
examinations to ascertain whether an institution's policies and 
procedures identify and monitor correspondent concentrations on an 
organization-wide basis. Examiners also will review the adequacy and 
reasonableness of institutions' contingency plans to manage 
correspondent concentrations.

Performing Appropriate Due Diligence

    The Agencies expect financial organizations that maintain credit 
exposures in or provide funding to other financial organizations to 
have effective risk management programs for these activities. For this 
purpose, credit or funding exposures may include, but are not limited 
to, due from bank accounts, Federal funds sold as principal, direct or 
indirect loans (including participations and syndications), and trust 
preferred securities, subordinated debt, and stock purchases of the 
correspondent, its holding company, or any affiliated entity.
    An institution that maintains or contemplates entering into any 
credit or funding transactions with another financial institution 
should have written investment, lending, and funding polices and 
procedures, including appropriate limits, that govern these activities. 
In addition, these procedures should ensure the institution conducts an 
independent analysis of credit transactions prior to committing to 
engage in the transactions. The terms for all such credit and funding 
transactions should strictly be on an arm's length basis, conform to 
sound investment, lending, and funding practices, and avoid potential 
conflicts of interest.
    This concludes the text of the Proposed Guidance.

    Dated at Washington, DC, the 18th day of September 2009.

    By order of the Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
    By order of the Board of Governors of the Federal Reserve 
System, September 18, 2009.
Jennifer J. Johnson,
Secretary of the Board.
    Dated: September 8, 2009.

Office of the Comptroller of the Currency.
John C. Dugan,
Comptroller of the Currency.
    Dated: September 17, 2009.

    By the Office of Thrift Supervision.
John E. Bowman,
Acting Director.
[FR Doc. E9-23208 Filed 9-24-09; 8:45 am]
BILLING CODE 6714-01-P, 6210-01-P, 4810-33-P, 6720-01-P


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