Federal Register / Vol. 74, No. 185 / Friday, September 25, 2009 / Notices 48955 

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. 

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: 

• Agency Web Site: http:// 

www.fdic.gov/regulations/laws/federal. 

Follow instructions for submitting 

comments on the Agency Web Site. 

• E-mail: Comments@FDIC.gov. 

Include ‘‘Proposed Guidance on 

Correspondent Concentration Risks’’ in 

the subject line of the message. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Mail: Robert E. Feldman, Executive 

Secretary, Attention: Comments, Federal 

Deposit Insurance Corporation, 550 17th 

Street, NW., Washington, DC 20429. 

• 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: 

• Agency Web site: http:// 

www.federalreserve.gov. Follow the 

instructions for submitting comments at 

http://www.federalreserve.gov/ 

generalinfo/foia/ProposedRegs.cfm. 

• E-mail: 

regs.comments@federalreserve.gov. 

Include the docket number in the 

subject line of the message. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Fax: (202) 452–3819 or (202) 452– 

3102. 

• 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: 

• E-mail: 

regs.comments@occ.treas.gov. 

• Fax: (202) 874–5274. 

• Mail: Office of the Comptroller of 

the Currency, 250 E Street, SW., Mail 

Stop 2–3, Washington, DC 20219. 

• 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: 

• E-mail: 

regs.comments@ots.treas.gov. Please 

include ID OTS–2009–XXXX [_______] 

in the subject line of the message and 

include your name and telephone 

number in the message. 

• Fax: (202) 906–6518. 

• Mail: Regulation Comments, Chief 

Counsel’s Office, Office of Thrift 

Supervision, 1700 G Street, NW., 

Washington, DC 20552, Attention: ID 

OTS–2009–XXXX. 

• 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 


jlentini on DSKJ8SOYB1PROD with NOTICES
48956 Federal Register / Vol. 74, No. 185 / Friday, September 25, 2009 / Notices 

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. 

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 public.info@ots.treas.gov, 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, MidsizeCommunity 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. 

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 


jlentini on DSKJ8SOYB1PROD with NOTICES
Federal Register / Vol. 74, No. 185 / Friday, September 25, 2009 / Notices 48957 

2 12 CFR Part 206. All depository institutions 

insured by the FDIC are subject to the Board’s 

Limitation on Interbank Liabilities (Regulation F). 

3Regulation 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. 

4The 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. 

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. 

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. 

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. 

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 


jlentini on DSKJ8SOYB1PROD with NOTICES
48958 Federal Register / Vol. 74, No. 185 / Friday, September 25, 2009 / Notices 

1The 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). 

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. 

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. 

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

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

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: 

• Due from bank accounts (demand 

deposit accounts (DDA) and certificates 

of deposit (CD)), 

• Federal funds sold on an as 

principal basis, 

• The over-collateralized amount on 

repurchase agreements, 

• The under-collateralized portion of 

reverse repurchase agreements, 

• Current positive fair value on 

derivatives contracts, 

• Unrealized gains on unsettled 

securities transactions, 

• Direct or indirect loans to or for the 

benefit of the correspondent, its holding 

company, or any affiliated entity, and 

• 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

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: 

• Deteriorating trends in its capital 

base or asset quality. 

• 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. 

• Increasing level of other real estate 

owned. 

• Experiencing a downgrade in its 

credit rating, if publicly traded. 

• 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 


jlentini on DSKJ8SOYB1PROD with NOTICES
Federal Register / Vol. 74, No. 185 / Friday, September 25, 2009 / Notices 48959 

5Regulation 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. 

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

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: 

• Reducing the volume of 

uncollateralized/uninsured funds. 

• Transferring excess funds to other 

financial institutions rather than the 

correspondent after conducting 

appropriate reviews of their financial 

condition. 

• Requiring the correspondent to 

serve as agent rather than as principal 

for Federal funds sold. 

• Establishing limits on asset and 

liability purchases from and 

investments in correspondents. 

• 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 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

Notice of Agency Meeting 

Pursuant to the provisions of the 

‘‘Government in the Sunshine Act’’ (5 

U.S.C. 552b), notice is hereby given that 

the Federal Deposit Insurance 

Corporation’s Board of Directors will 

meet in open session at 10 a.m. on 

Tuesday, September 29, 2009, to 

consider the following matters: 

Summary Agenda: No substantive 

discussion of the following items is 

anticipated. These matters will be 

resolved with a single vote unless a 

member of the Board of Directors 

requests that an item be moved to the 

discussion agenda. 

Disposition of minutes of previous 

Board of Directors’ Meetings. 

Discussion Agenda: Memorandum 

and resolution re: Deposit Insurance 

Fund Restoration Plan, Assessments, 

and Funding. 

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. 

This Board meeting will be Webcast 

live via the Internet and subsequently 

made available on-demand 

approximately one week after the event. 

Visit http://www.vodium.com/goto/fdic/ 

boardmeetings.asp to view the event. If 

you need any technical assistance, 

please visit our Video Help page at: 

http://www.fdic.gov/video.html. 

The FDIC will provide attendees with 

auxiliary aids (e.g., sign language 

interpretation) required for this meeting. 

Those attendees needing such assistance 

should call (703) 562–6067 (Voice or 

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: September 22, 2009. 

Federal Deposit Insurance Corporation. 

Robert E. Feldman, 

Executive Secretary. 

[FR Doc. E9–23212 Filed 9–24–09; 8:45 am] 

BILLING CODE 6714–01–P 


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