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BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 20551

DIVISION OF BANKING

SUPERVISION AND REGULATION

SR 11-15

December 21, 2011

Revised February 26, 

2021

Clarification on the Responsibilities of the Board of Directors February 26, 2021: As 

described in SR letter 21-4 / CA letter 21-2, “Inactive or Revised SR Letters Related to Federal 

Reserve Expectations for Boards of Directors,” attachment A to this SR letter was revised as of 

February 26, 2021 to better reflect the Federal Reserve’s guidance for boards of directors in SR 

letter 21-3 / CA letter 21-1, “Supervisory Guidance on Board of Directors’ Effectiveness,” and 

SR letter 16-11, “Supervisory Guidance for Assessing Risk Management at Supervised 

Institutions with Total Consolidated Assets Less than $100 Billion.” No other material changes 

were made to this letter. 

TO THE OFFICER IN CHARGE OF SUPERVISION

 AT EACH FEDERAL RESERVE BANK

SUBJECT: Disposal of Problem Assets through Exchanges

Applicability to Community Banking Organizations: This letter applies to all state member 

banks, bank holding companies and their nonbank subsidiaries, and savings and loan holding 

companies that engage in asset exchange transactions, including those with $10 billion or less in 

consolidated assets.

Financial institutions are increasingly exploring strategies to dispose of or reduce 

nonperforming assets and other real estate owned (OREO). Some of these strategies include socalled “asset exchanges,” whereby third parties or marketing agents have offered to purchase 

problem assets from institutions and replace them with performing assets. While such 

transactions, if properly executed with reputable counterparties and subjected to the appropriate 

level of due diligence, could achieve the objective of reducing nonperforming assets on financial 

institutions’ balance sheets, Federal Reserve staff have been made aware of transactions that may 

present significant risk to institutions and could compromise their safety and soundness. To date,

these transactions have been encountered primarily at smaller community banks.
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The Federal Reserve is issuing the attached guidance, including an example of an asset 

exchange transaction, to highlight the potential risks associated specifically with transactions

which may reduce problem assets in the short term, but where a lack of appropriate, up-front due 

diligence may result in heightened risks over the longer term. In addition, inappropriate 

assumptions used in determining the fair value of the purchased assets may result in institutions 

being required to recognize losses shortly after inception of the transaction. 

For questions about credit and regulatory issues, please contact Donald Gabbai, Senior 

Supervisory Financial Analyst, Credit, Market & Liquidity Risk Policy, at (202) 452-3358, or 

Mary Aiken, Manager, Credit, Market & Liquidity Risk Policy, at (202) 452-4534; for questions 

about accounting treatment, please contact Matthew Kincaid, Senior Accounting Policy Analyst,

Accounting Policy & Disclosure, at (202) 452-2028. In addition, questions may be sent via the 

Board’s public website.1

Maryann F. Hunter

Deputy Director

Attachments:

A. Disposal of Problem Assets through Exchanges

B. Asset Exchange Example

1 See http://www.federalreserve.gov/apps/contactus/feedback.aspx.