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BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 20551 

DIVISION OF SUPERVISION

AND REGULATION

SR 18-7 

October 1, 2018 

Updated January 23, 2019 

Note: On December 28, 2018, the Board published in the Federal Register final rules that 

adopted without change interim final rules published on August 29, 2018. Like the interim final 

rules, the final rules were published jointly with the Office of the Comptroller of the Currency

and the Federal Deposit Insurance Corporation, both of which adopted similar changes to their 

respective regulations. For the final rules, see 83 Fed. Reg. 67033 (December 28, 2018), 

available at https://www.govinfo.gov/content/pkg/FR-2018-12-28/pdf/2018-28267.pdf. 

TO THE OFFICER IN CHARGE OF SUPERVISION

AT EACH FEDERAL RESERVE BANK 

SUBJECT: Updates to the Expanded Examination Cycle for Certain State Member Banks 

and U.S. Branches and Agencies of Foreign Banking Organizations

Applicability to Community Banking Organizations: This guidance applies to certain state 

member banks and U.S. branches and agencies of foreign banks with less than $3 billion in total 

assets meeting the criteria described in the letter.

The Federal Reserve is issuing this letter to provide an update on recent changes to the 

criteria for state member banks (SMB) and U.S. branches and agencies of foreign banks to be 

eligible for an expanded examination cycle of 18 months (as opposed to 12 months). 

Section 10(d) of the Federal Deposit Insurance Act (FDI Act) generally requires the 

appropriate federal banking agency for an insured depository institution (IDI) to conduct a fullscope, on-site examination at least once every 12 months, but permits a longer cycle—at least 

once every 18 months—for IDIs that meet certain criteria, including the requirement that the IDI 

must have total assets below a specified size limit.1 Section 210 of the Economic Growth, 

Regulatory Relief, and Consumer Protection Act (EGRRCPA) amends section 10(d) of the FDI 

Act to increase from $1 billion to $3 billion the total asset threshold below which an IDI may 

qualify for the 18-month examination cycle. 

 

1 12 U.S.C. 1820(d).
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On August 29, 2018, the Board published in the Federal Register an interim final rule

that amended Regulation H to raise the asset threshold for an SMB to be eligible for the 

18-month examination cycle from less than $1 billion in total assets to the new statutory 

maximum, which is less than $3 billion in total assets.

2

 The interim final rule also made parallel 

changes to Regulation K, which governs the on-site examination cycle for Board-supervised U.S. 

branches and agencies of foreign banks, consistent with section 7(c)(1)(C) of the International 

Banking Act of 1978.3

 The interim final rule was made effective August 29, 2018, and was 

published jointly with the Office of the Comptroller of the Currency (OCC) and the Federal 

Deposit Insurance Corporation (FDIC), both of which adopted similar changes to their 

regulations. 

Accordingly, a SMB with less than $3 billion in total assets may be eligible for an 

18-month examination cycle if it satisfies the following criteria:

1) The SMB is well capitalized;

2) At the most recent Federal Reserve or applicable state banking agency examination,

4

the Federal Reserve assigned a management component rating of “1” or “2” and a 

CAMELS composite rating of “1” or “2;”5

3) The SMB is currently not subject to a formal enforcement proceeding or order by the 

Federal Reserve or the FDIC; and

4) No person acquired control of the bank during the preceding 12-month period in 

which a full-scope, on-site examination would have been required but for the 18-

month examination cycle eligibility provision.6 

A U.S. branch or agency of a foreign bank with less than $3 billion in total assets may be 

eligible for an 18-month on-site examination cycle if it received, at its most recent examination, 

a composite condition rating of “1” or “2” under the supervisory rating system7 and it satisfies 

the following criteria:

1) Either: (a) the foreign bank’s most recently reported tier 1 and total risk-based capital 

ratios are at least 6 percent and 10 percent, respectively, on a consolidated basis; or

(b) the branch or agency has maintained on a daily basis, over the past three quarters, 

eligible assets in an amount not less than 108 percent of the preceding quarter’s 

average third-party liabilities (determined consistent with applicable federal and state 

 

2 See 83 Fed. Reg. 43961 (August 29, 2018), available at https://www.govinfo.gov/content/pkg/FR-2018-08-

29/pdf/2018-18685.pdf. 

3 12 U.S.C. 3105(c)(1)(C).

4 The Board is permitted to conduct on-site examinations of SMBs on alternating 12-month or 18-month periods 

with the institution’s State supervisor, if the Board determines that the alternating examination conducted by the 

State carries out the purposes of section 10(d) of the FDI Act. 12 U.S.C. 1820(d)(3).

5 For more information on safety-and-soundness examination ratings, see SR letter 96-38, “Uniform Financial 

Institutions Rating System.”

6 12 CFR 208.64. 

7 For more information on the ratings system for U.S. branches and agencies of foreign banks, see SR letter 00-14, 

“Enhancements to the Interagency Program for Supervising the U.S. Operations of Foreign Banking Organizations.” 
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law) and sufficient liquidity is currently available to meet its obligations to third 

parties;

2) The branch or agency is not subject to a formal enforcement action or order by the 

Board, FDIC, or OCC; and 

3) The branch or agency has not experienced a change in control during the preceding 

12-month period in which a full-scope, on-site examination would have been required 

but for the 18-month examination cycle eligibility provision.8

The Federal Reserve may consider additional factors when determining the eligibility of a

U.S. branch or agency of a foreign bank for an 18-month on-site examination cycle, including 

whether (1) any of the individual components of the supervisory rating system of a branch or 

agency of a foreign bank is rated “3” or worse; (2) the results of any off-site surveillance indicate 

a deterioration in the condition of the branch or agency; (3) the size, relative importance, and role 

of a particular branch or agency in the context of the foreign bank’s entire U.S. operations 

otherwise necessitate an annual examination; and (4) the condition of the foreign bank gives rise 

to such a need.9 

Implementation

The expanded 18-month examination cycle eligibility for SMBs and the U.S. branches 

and agencies of foreign banks that have total assets of less than $3 billion and that meet the other 

criteria of 12 CFR 208.64 or 211.26(c), as appropriate, was made effective August 29, 2018, the 

date of publication in the Federal Register. The Federal Reserve maintains the authority to 

examine SMBs and the U.S. branches and agencies of foreign banks more frequently as 

necessary or appropriate, and Reserve Banks should exercise this authority as necessary or 

appropriate. 

The Federal Reserve is required to complete a Bank Secrecy Act (BSA)/anti-money 

laundering (AML) compliance program review at each safety-and-soundness examination 

conducted at a SMB or U.S. branch or agency of a foreign bank, which is typically every 

12 months.10 However, Reserve Banks should conduct a BSA/AML compliance program review

every 18 months at each SMB or U.S. branch or agency of a foreign bank that is eligible for and 

is examined on the extended 18-month examination cycle. 

Reserve Banks are asked to distribute this letter to SMBs and Board-supervised U.S. 

branches and agencies of foreign banks that are within the scope of this guidance, as well as to 

appropriate supervisory and examination staff. Questions regarding this letter should be directed 

to the following staff in the Board’s Division of Supervision and Regulation: Jonathan Rono, 

Manager, at (202) 721-4568; and Alex Kobulsky, Supervisory Financial Analyst, at (202) 452-

2031. In addition, questions may be sent via the Board’s public website.11

 

8 12 CFR 211.26(c). 

9 12 CFR 211.26(c)(2)(ii).

10 12 U.S.C. 1818(s)(2) and 12 U.S.C. 1818(b)(4). 

11 See http://www.federalreserve.gov/apps/contactus/feedback.aspx. 
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Michael S. Gibson

Director

Cross references to:

• SR letter 00-14, “Enhancements to the Interagency Program for Supervising the U.S. 

Operations of Foreign Banking Organizations” 

• SR letter 96-38, “Uniform Financial Institutions Rating System”

Supersedes: 

• SR letter 17-2, “Updates to the Expanded Examination Cycle for Certain State Member 

Banks and U.S. Branches and Agencies of Foreign Banking Organizations”