[Federal Register Volume 74, Number 49 (Monday, March 16, 2009)]
[Notices]
[Pages 11102-11109]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-5584]


=======================================================================
-----------------------------------------------------------------------

FEDERAL RESERVE SYSTEM


Agency Information Collection Activities: Announcement of Board 
Approval Under Delegated Authority and Submission to OMB

SUMMARY: Background. Notice is hereby given of the final approval of 
the

[[Page 11103]]

proposed information collection by the Board of Governors of the 
Federal Reserve System (Board) under OMB delegated authority, as per 5 
CFR 1320.16 (OMB Regulations on Controlling Paperwork Burdens on the 
Public). Board-approved collections of information are incorporated 
into the official OMB inventory of currently approved collections of 
information. Copies of the Paperwork Reduction Act Submission, 
supporting statements and approved collection of information 
instrument(s) are placed into OMB's public docket files. The Federal 
Reserve may not conduct or sponsor, and the respondent is not required 
to respond to, an information collection that has been extended, 
revised, or implemented on or after October 1, 1995, unless it displays 
a currently valid OMB control number.

FOR FURTHER INFORMATION CONTACT: Federal Reserve Board Clearance 
Officer--Michelle Shore--Division of Research and Statistics, Board of 
Governors of the Federal Reserve System, Washington, DC 20551 (202-452-
3829).
    OMB Desk Officer--Shagufta Ahmed--Office of Information and 
Regulatory Affairs, Office of Management and Budget, New Executive 
Office Building, Room 10235, Washington, DC 20503.

Final Approval Under OMB Delegated Authority of the Revision, Without 
Extension of the Following Report

    1. Report Title: Consolidated Financial Statements for Bank Holding 
Companies, Parent Company Only Financial Statements for Small Bank 
Holding Companies.
    Agency Form Number: FR Y-9C, FR Y-9SP.
    OMB Control Number: 7100-0128.
    Frequency: FR Y-9C, quarterly; FR Y-9SP, semi-annually.
    Reporters: Bank holding companies (BHCs).
    Annual Reporting Hours: FR Y-9C, 162,602 hours; FR Y-9SP, 48,254 
hours.
    Estimated Average Hours per Response: FR Y-9C, 41.65 hours; FR Y-
9SP, 5.40 hours.
    Number of Respondents: FR Y-9C, 976; FR Y-9SP, 4,468.
    General Description of Report: This information collection is 
mandatory (12 U.S.C. 1844(c)). Confidential treatment is not routinely 
given to the data in these reports. However, confidential treatment for 
the reporting information, in whole or in part, can be requested in 
accordance with the instructions to the form, pursuant to sections 
(b)(4), (b)(6) and (b)(8) of the Freedom of Information Act (5 U.S.C. 
552(b)(4), (b)(6) and (b)(8)).
    Abstract: The FR Y-9C and FR Y-9SP are standardized financial 
statements for the consolidated BHC and its parent. The FR Y-9 family 
of reports historically has been, and continues to be, the primary 
source of financial information on BHCs between on-site inspections. 
Financial information from these reports is used to detect emerging 
financial problems, to review performance and conduct pre-inspection 
analysis, to monitor and evaluate capital adequacy, to evaluate BHC 
mergers and acquisitions, and to analyze a BHC's overall financial 
condition to ensure safe and sound operations.
    The FR Y-9C consists of standardized financial statements similar 
to the Federal Financial Institutions Examination Council (FFIEC) 
Consolidated Reports of Condition and Income (Call Reports) (FFIEC 031 
& 041; OMB No. 7100-0036) filed by commercial banks. The FR Y-9C 
collects consolidated data from BHCs. The FR Y-9C is filed by top-tier 
BHCs with total consolidated assets of $500 million or more. (Under 
certain circumstances defined in the General Instructions, BHCs under 
$500 million may be required to file the FR Y-9C.)
    The FR Y-9SP is a parent company only financial statement filed by 
smaller BHCs. Respondents include BHCs with total consolidated assets 
of less than $500 million. This form is a simplified or abbreviated 
version of the more extensive parent company only financial statement 
for large BHCs (FR Y-9LP). This report is designed to obtain basic 
balance sheet and income information for the parent company, 
information on intangible assets, and information on intercompany 
transactions.
    Current Actions: On November 13, 2008, the Federal Reserve 
published a notice in the Federal Register (73 FR 67159) requesting 
public comment for 60 days on the revision, without extension, of the 
FR Y-9C and FR Y-9 SP reports. The comment period for this notice 
expired on January 12, 2009. The Federal Reserve received two comment 
letters on this proposal addressing only changes proposed to the FR Y-
9C report. In addition, six comment letters were received by the 
Federal Reserve, Federal Deposit Insurance Corporation, and Office of 
the Comptroller of the Currency (the banking agencies) on proposed 
revisions to the Call Reports that parallel the proposed revisions to 
the FR Y-9C and are taken into consideration for this proposal. No 
comments were received on proposed changes to the FR Y-9SP.
    The Federal Reserve received two comment letters on proposed 
revisions to the FR Y-9C: One from a bankers' organization (which also 
submitted comparable comments on proposed changes to the Call Report) 
and one from a bank consulting firm. In addition, the banking agencies 
received comment letters from six organizations: Two banks, one bank 
holding company, two bankers' organizations, and a bank insurance 
consultant on proposed changes to the Call Report that parallel 
proposed changes to the FR Y-9C, and are taken into consideration for 
this proposal. No comments were received on proposed changes to the FR 
Y-9SP.
    None of the commenters addressed all of the aspects of the proposed 
changes to the FR Y-9C. Rather, individual comments addressed certain 
specific proposed changes. In two cases, commenters raised reporting 
matters that were not addressed in the Federal Reserve's proposal. The 
following is a summary of the general comments received on the proposed 
FR Y-9C revisions and on proposed changes to the Call Report that 
parallel proposed changes to the FR Y-9C.
    One bankers' organization stated that it believed that the proposed 
revisions would provide additional information that would be useful for 
the assessment of risk. This organization expressed general agreement, 
on balance, with the proposed revisions, but also offered several 
suggested changes for consideration.\1\ Another bankers' organization 
indicated its understanding of the need for more information on certain 
types of loans currently under stress, but noted that the proposed 
revisions would require many community banking institutions to submit 
significantly more data in their regulatory reports. This organization 
hoped that the increased staff time that would be needed to provide the 
proposed data would be offset by a reduction in on-site examination 
time through examiners' use of these data to better focus their 
examination priorities. In this regard, the intent in proposing the 
revisions to the FR Y-9C was to enhance risk-focused supervision, both 
from an off-site and an on-site perspective. The third bankers' 
organization commented on the amount of lead time necessary for 
institutions to implement systems changes to enable them to provide the 
requested additional data, recommending a

[[Page 11104]]

minimum of three months between the publication of final revisions in 
the Federal Register and the effective date of the reporting changes.
---------------------------------------------------------------------------

    \1\ On bank that is a member of this bankers' organization 
referred to the organization's comment letter and appeared to concur 
with the organization's comments, but also addressed one aspect of 
the proposal on which the bankers' organization did not specifically 
comment.
---------------------------------------------------------------------------

    Two commenters submitted comments on issues that were not addressed 
in the FR Y-9C proposal. One bank holding company sent a copy of 
separate correspondence that it had previously sent to three 
organizations suggesting a suspension of the accounting rules for 
other-than-temporary impairments on investment securities. By law, the 
accounting principles applicable to the FR Y-9C must be consistent with 
or, if certain conditions are met, no less stringent than generally 
accepted accounting principles (GAAP).\2\ Therefore, the suggested 
suspension of accounting rules cannot be implemented for FR Y-9C 
reporting purposes.
---------------------------------------------------------------------------

    \2\ See 12 U.S.C. 1831n(a).
---------------------------------------------------------------------------

    One bank consulting firm recommended revising the FR Y-9C to 
require fee income to be reported separately from interest income, and 
to add a new data item for the fair value changes to interest revenue. 
As stated in the FR Y-9C instructions (and noted by the commenter), 
FASB Statement No. 91, ``Accounting for Nonrefundable Fees and Costs 
Associated with Originating or Acquiring Loans and Initial Direct Costs 
of Leases,'' generally prescribes that fees associated with lending 
activities should be deferred and recognized over the life of the 
related loan as an adjustment of yield (interest income). Thus, GAAP 
guidance does not require separate disclosure of fee income. Regarding 
the request for a new data item for fair value changes to interest 
income, the commenter mistakenly concluded that fair value option 
revaluations (net change in the fair values of interest-bearing 
financial assets) is included with interest and fee income on loans, 
and thus wanted this amount reported separately from interest and fee 
income. However, such fair value option revaluations are included in 
other noninterest income on the income statement, not as part of 
interest income and fees on loans. Accordingly, the Federal Reserve 
will not implement either of the commenter's suggested revisions.
    After considering the comments received on the proposal, the 
Federal Reserve will move forward with the majority of the proposed 
revisions, with limited modifications in response to certain comments, 
on the phased-in basis as proposed. The Federal Reserve is continuing 
to evaluate certain other proposed revisions in light of the comments 
received thereon, and therefore will not implement these revisions 
until after it has fully reviewed the comments.\3\
---------------------------------------------------------------------------

    \3\ See section I.C of this notice on unused commitments, 
section II.B on past due and nonaccrual trading assets, and the 
portion of section II.C addressing the present value of unpaid 
premiums on sold credit protection.
---------------------------------------------------------------------------

    The Federal Reserve recognizes institutions' need for lead time to 
prepare for reporting changes, which was the rationale for proposing 
the phased-in implementation schedule for 2009. The data items that 
will be new or revised effective March 31, 2009, are limited in number 
and most are linked to changes in GAAP or changes in regulation. For 
the March 31, 2009, report date, bank holding companies may provide 
reasonable estimates for any new or revised data item initially 
required to be reported as of that date for which the requested 
information is not readily available. This same policy on the use of 
reasonable estimates will apply to the reporting of other new or 
revised data items when they are first implemented effective June 30 or 
later.
    Sections I and II of this memo identify the changes proposed to 
take effect March 31 and June 30, respectively; discuss the Federal 
Reserve's evaluation of the comments received on the proposed changes 
that the Federal Reserve will implement, as modified; and describe the 
proposed FR Y-9C revisions that will remain under review.

I. FR Y-9C Report Revisions Proposed for March 2009

    The Federal Reserve and the other banking agencies received either 
supportive comments or no comments on the following revisions that were 
proposed to take effect as of March 31, 2009, and therefore the Federal 
Reserve will implement these revisions as proposed:
    <bullet> New data items and revisions to existing data items on 
trading assets and liabilities,
    <bullet> New data items associated with the U.S. Department of the 
Treasury (Treasury) Capital Purchase Program (CPP) \4\,
---------------------------------------------------------------------------

    \4\ The Federal Reserve will also implement these new data items 
as proposed for the FR Y-9SP report, effective as of June 30, 2009.
---------------------------------------------------------------------------

    <bullet> New data items and revisions to existing data items on 
regulatory capital requirements,
    <bullet> Revisions to several FR Y-9C schedules in response to 
accounting changes applicable to noncontrolling (minority) interests in 
consolidated subsidiaries, and
    <bullet> Instructional guidance on quantifying misstatements.
    The Federal Reserve and other banking agencies received one or more 
substantive comments addressing each of the following proposed March 
31, 2009, revisions:
    <bullet> The addition of new data items in response to a revised 
accounting standard that will provide information on held-for-
investment loans and leases acquired in business combinations,
    <bullet> Clarifications of the definition of the term loan secured 
by real estate and of the instructions for reporting unused 
commitments, and
    <bullet> Exemptions from reporting certain existing data items for 
bank holding companies with less than $1 billion in total assets.
    The comments and the Federal Reserve's responses related to these 
proposed revisions are discussed below.

A. Loans and Leases Acquired in Business Combinations

    Banking institutions must apply Statement of Financial Accounting 
Standards No. 141 (Revised), Business Combinations (FAS 141(R)), which 
was issued in December 2007, prospectively to business combinations for 
which the acquisition date is on or after the beginning of their first 
annual reporting period beginning on or after December 15, 2008. Thus, 
for banking institutions with calendar year fiscal years, FAS 141(R) 
will apply to business combinations with acquisition dates on or after 
January 1, 2009. Compared to current accounting practice, FAS 141(R) 
significantly changes the accounting for those loans and leases 
acquired in business combinations that will be held for investment.\5\ 
In response to this accounting change, the Federal Reserve proposed to 
add new data items to the FR Y-9C loan and lease schedule (Schedule HC-
C) that would mirror the acquisition-date disclosures required by FAS 
141(R). These new data items would disclose the following information 
for four categories of loans (not subject to SOP 03-3) and leases that 
were acquired in each business combination that occurred during the 
year-to-date reporting period:
---------------------------------------------------------------------------

    \5\ This change in accounting treatment does not apply to 
acquired held-for-investment loans within the scope of American 
Institute of Certified Public Accountants Statement of Position 03-
3, Accounting for Certain Loans or Debt Securities Acquired in a 
Transfer (SOP 03-3).
---------------------------------------------------------------------------

    <bullet> The fair value of the loans and leases,
    <bullet> The gross contractual amounts receivable, and
    <bullet> The best estimate at the acquisition date of the 
contractual cash flows not expected to be collected.
    The four categories of acquired held-for-investment loans (not 
subject to SOP 03-3) and leases are:

[[Page 11105]]

    <bullet> Loans secured by real estate;
    <bullet> Commercial and industrial loans;
    <bullet> Loans to individuals for household, family, and other 
personal expenditures; and
    <bullet> All other loans and all leases.
    These new data items would be completed by banking institutions 
that have engaged in business combinations that must be accounted for 
in accordance with FAS 141(R) for transactions for which the 
acquisition date is on or after January 1, 2009. A banking institution 
that has completed one or more business combinations during the current 
calendar year would report these acquisition date data (as aggregate 
totals if multiple business combinations have occurred) in each FR Y-9C 
submission after the acquisition date during that year. The acquisition 
date data would not be reported in years after the year in which the 
acquisition occurs.
    One bankers' organization stated that it concurred with the 
proposal to require these additional disclosures for loans (not subject 
to SOP 03-3) and leases acquired in business combinations that occurred 
during the reporting period. No other commenter addressed these 
proposed additional disclosures. Accordingly, the Federal Reserve will 
implement these data items in the March 31, 2009, FR Y-9C, as proposed.
    In the FR Y-9C proposal, the Federal Reserve stated that it was 
considering whether banking institutions that have engaged in FAS 
141(R) business combinations should provide additional information in 
the FR Y-9C (beyond the disclosures described above) about acquired 
held-for-investment loans (not subject to SOP 03-3) and leases and the 
loss allowances established for them in periods after their 
acquisition. The proposal stated that the additional data items under 
consideration included the outstanding balance of these acquired loans 
and leases, their carrying amount, and the amount of allowances for 
post-acquisition credit losses on these loans and leases. The Federal 
Reserve indicated that this information would help the Federal Reserve 
as well as other report users to track management's judgments regarding 
the collectability of the acquired loans and leases in periods after 
the acquisition date and evaluate fluctuations in the level of the 
overall Allowance for Loan and Lease Losses (ALLL) as a percentage of 
the held-for-investment loan and lease portfolio in periods after a 
business combination. The Federal Reserve requested comment on the 
merits and availability of these post-acquisition loan and lease data 
and the period of time after a business combination that this 
information should be reported.
    Two bankers' organizations commented on these additional loan and 
lease disclosures. One organization did not specifically address the 
merits of this information, stating only that if banking institutions 
were required to report these additional data, they should report it 
only through the end of the calendar year of the business combination. 
The second organization agreed with the first organization concerning 
the reporting period for these additional data. However, this 
organization also stated its belief that the post-acquisition data on 
acquired loans and leases would often not be available because acquired 
performing loans and leases would tend to be combined with, rather than 
segregated from, a banking institution's other performing loans and 
leases.
    After considering these comments, the Federal Reserve will not add 
data items to the FR Y-9C for the outstanding balance of held-for-
investment loans (not subject to SOP 03-3) and leases acquired in FAS 
141(R) business combinations, their carrying amount, and the amount of 
allowances for post-acquisition credit losses on these loans and 
leases. The Federal Reserve will continue to monitor accounting and 
disclosure practices with respect to these acquired loans and leases 
and their post-acquisition allowances and assess their data needs in 
this area. Any future revisions to the FR Y-9C to collect data on 
acquired loans and leases and post-acquisition allowances will be 
subject to notice and comment.

B. Clarification of the Definition of Loan Secured by Real Estate

    The Federal Reserve has found that the definition of a loan secured 
by real estate in the Glossary section of the FR Y-9C instructions has 
been interpreted differently by report preparers and users. This has 
led to inconsistent reporting of loans collateralized by real estate in 
the loan schedule (Schedule HC-C) and other schedules of the FR Y-9C 
that collect loan data. As a result, the Federal Reserve proposed to 
clarify the definition by explaining that the estimated value of the 
real estate collateral must be greater than 50 percent of the principal 
amount of the loan at origination in order for the loan to be 
considered secured by real estate. Banking institutions would apply 
this clarified definition prospectively and they need not reevaluate 
and recategorize loans that they currently report as loans secured by 
real estate into other loan categories on the FR Y-9C loan schedules.
    One bankers' organization stated that it believes that the proposed 
definition of a loan secured by real estate is workable and provides 
additional clarity. One bank submitted examples involving loans with 
real estate as collateral and asked how they would be reported based on 
the revised definition. The Federal Reserve will implement the 
clarified definition of loan secured by real estate as proposed but, in 
response to this latter comment, also add examples to the definition to 
assist banking institutions in understanding how it should be applied.

C. Clarification of Instructions for Unused Commitments

    Banking institutions report unused commitments in Schedule HC-L, 
data item 1. The instructions for this data item identify various 
arrangements that should be reported as unused commitments, including 
but not limited to commitments for which the banking institution has 
charged a commitment fee or other consideration, commitments that are 
legally binding, loan proceeds that the banking institution is 
obligated to advance, commitments to issue a commitment, and revolving 
underwriting facilities. However, some banking institutions have not 
reported commitments that they have entered into until they have signed 
the loan agreement for the financing that they have committed to 
provide. Although these arrangements are considered to be within the 
scope of the existing instructions for reporting commitments in 
Schedule HC-L, the instructions may not be sufficiently clear. 
Therefore, the Federal Reserve proposed to revise the instructions for 
Schedule HC-L, data item 1, Unused commitments, to more clearly and 
completely explain the arrangements that should be reported in this 
data item.
    All three bankers' organizations submitting comments on the 
proposed FR Y-9C revisions specifically addressed the proposed 
instructional clarification pertaining to unused commitments. One 
organization agreed that clarification is needed, but recommended that 
commitments to issue a commitment in the future, including those 
entered into even though the related loan agreement has not yet been 
signed, should be removed from the list of types of arrangements that 
the instructions would direct banking institutions to report as unused 
commitments. The other two bankers' organizations also commented on the 
inclusion of this type of arrangement as an unused commitment. One 
organization expressed concern about reporting ``commitments that 
contain a

[[Page 11106]]

relatively high level of uncertainty until a loan agreement has been 
signed or the loan has been funded with a first advance'' and the 
reliability of data on such commitments. The other organization stated 
that because some banking institutions do not have systems for tracking 
such arrangements, the instructions should in effect permit banking 
institutions to exclude commitment letters with an expiration date of 
90 days or less. Finally, the first bankers' organization also 
recommended that the instructions for reporting unused commitments 
should state that amounts conveyed or participated to others that the 
conveying or participating banking institution is not obligated to fund 
should not be reported as unused commitments by the conveying or 
participating banking institution.
    The Federal Reserve is continuing to evaluate these 
recommendations. As a consequence, the Federal Reserve will not revise 
the instructions for Schedule HC-L, data item 1, Unused commitments, 
effective March 31, 2009, as proposed, leaving the existing 
instructions for this Schedule HC-L data item to remain in effect. Once 
deliberations on these recommendations are concluded and a 
determination is made on whether and how to revise the instructions for 
reporting Unused commitments in Schedule HC-L, data item 1, these 
conclusions will be published in a separate Federal Register notice. If 
the instructions to Schedule HC-L, data item 1, are subsequently 
revised, the clarifications to these instructions would take effect no 
earlier than December 31, 2009.

D. Exemptions From Reporting for Certain Existing FR Y-9C

    The Federal Reserve has identified certain data items for which the 
reported data are of lesser usefulness for banking institutions with 
less than $1 billion in total assets. Accordingly, the Federal Reserve 
proposed to exempt such banking institutions from completing the 
following data items effective March 31, 2009:
    <bullet> Schedule HI, Memorandum item 12, Income from the sale and 
servicing of mutual funds and annuities (in domestic offices),
    <bullet> Schedule HC-L, data item 2.a, Amount of financial standby 
letters of credit conveyed to others, and
    <bullet> Schedule HC-L, data item 3.a, Amount of performance 
standby letters of credit conveyed to others.
    One commenter, a bank insurance consultant, objected to the 
proposal to exempt banking institutions with less than $1 billion in 
total assets from reporting the data item, Income from the sale and 
servicing of mutual funds and annuities (in domestic offices), stating 
that this data item should be preserved in the regulatory reports. This 
commenter also stated that the proposal did not explain how the 
determination was made that the collection of this data item from 
banking institutions in this size range is of lesser usefulness. This 
commenter added that by eliminating the reporting of this income 
information for these banking institutions, ``we will lose our sole 
window into community banks' mutual fund and annuity activities.''
    Memorandum item 12 was added to Schedule HI of the FR Y-9C in 1995. 
At that time, the Federal Reserve collected limited information on 
banking institutions' noninterest income. However, since 2001, the 
Federal Reserve has significantly expanded the amount of detailed 
information collected on noninterest income in recognition of the 
increasing importance of such income to banking institutions' earnings. 
As a result, all respondents, regardless of size, currently report the 
amount of Fees and commissions from securities brokerage and Fees and 
commissions from annuity sales in Schedule HI, data items 5.d.(1) and 
5.d.(3), each quarter. Data item 5.d.(1) specifically includes income 
from the sale and servicing of mutual funds. Thus, in general, the 
income that a banking institution reports in Schedule HI, Memorandum 
item 12, will have been included in these two noninterest income data 
items in the body of Schedule HI. However, although the bank insurance 
consultant stated that as of ``June 30, 2008, more banks with less than 
$1 billion in assets reported mutual fund and annuity income'' than 
reported eight other types of noninterest income in the body of the 
income statement, the consultant did not provide comparative data for 
the number of such banks reporting ``Fees and commissions from 
securities brokerage'' or ``Fees and commissions from annuity sales.''
    In addition, the Federal Reserve will continue to use the FR Y-9C 
to identify banking institutions that sell private label or third party 
mutual funds and annuities (Schedule HC-M, data item 15) as well as 
banking institutions managing assets held in proprietary mutual funds 
and annuities (Schedule HC-M, data item 16). Furthermore, FR Y-9C users 
have indicated that Schedule HI, Memorandum item 12, Income from the 
sale and servicing of mutual funds and annuities is regarded as being 
of lesser usefulness than the noninterest income data items with which 
it overlaps (data items 5.d.(1) and 5.d.(3) of Schedule HI). 
Accordingly, after considering the views expressed by the bank 
insurance consultant, the Federal Reserve believes that the existing 
income statement data items for Fees and commissions from securities 
brokerage and Fees and commissions from annuity sales are sufficient to 
meet ongoing needs for income data on these types of activities from 
banking institutions with less than $1 billion in total assets and 
recommends that such banking institutions should be exempt from 
separately reporting Income from the sale and servicing of mutual funds 
and annuities beginning March 31, 2009, as proposed.
    The Federal Reserve received no comments specifically addressing 
the other data items for which banking institutions with less than $1 
billion in assets would be exempt from continued reporting and the 
Federal Reserve will implement these exemptions as of March 31, 2009, 
as proposed.

II. FR Y-9C Revisions Proposed for June 2009

    The Federal Reserve and other banking agencies received either 
supportive comments or no comments on the following revisions to the FR 
Y-9C that were proposed to take effect as of June 30, 2009, and 
therefore the Federal Reserve will implement these revisions as 
proposed:
    <bullet> Holdings of collateralized debt obligations and other 
structured financial products by type of product and underlying 
collateral,
    <bullet> Holdings of commercial mortgage-backed securities,
    <bullet> Unused commitments with an original maturity of one year 
or less to asset-backed commercial paper conduits,
    <bullet> Pledged loans and pledged trading assets,
    <bullet> Collateral held against over-the-counter (OTC) derivative 
exposures by type of collateral and type of counterparty as well as the 
current credit exposure on OTC derivatives by type of counterparty (for 
banking institutions with $10 billion or more in total assets),
    <bullet> Fair value measurements by level for asset and liability 
categories reported at fair value on a recurring basis (banking 
institutions that apply a fair value option, or are required to 
complete the FR Y-9C trading schedule), and
    <bullet> Investments in real estate ventures.
    The agencies received one or more substantive comments addressing 
each of the following proposed June 30, 2009, revisions:

[[Page 11107]]

    <bullet> Real estate construction and development loans outstanding 
with capitalized interest and the amount of such interest included in 
income for the quarter (for banking institutions with construction and 
development loan concentrations),
    <bullet> Past due and nonaccrual trading assets, and
    <bullet> Credit derivatives by credit quality and remaining 
maturity and by regulatory capital treatment.
    The comments and the Federal Reserve's responses related to these 
proposed revisions are discussed below.

A. Construction and Development Loans With Interest Reserves

    In December 2006, the agencies issued final guidance on commercial 
real estate (CRE) loans, including construction, land development, and 
other land (C&D) loans, entitled Concentrations in Commercial Real 
Estate Lending, Sound Risk Management Practices (CRE Guidance).\6\ This 
guidance was developed to reinforce sound risk management practices for 
institutions with high and increasing concentrations of commercial real 
estate loans on their balance sheets. It provides a framework for 
assessing CRE concentrations; risk management, including board and 
management oversight, portfolio management, management information 
systems, market analysis and stress testing, underwriting and credit 
risk review; and supervisory oversight, including CRE concentration 
management and an assessment of capital adequacy.
---------------------------------------------------------------------------

    \6\ 71 FR 74580, December 12, 2006.
---------------------------------------------------------------------------

    In issuing the CRE Guidance, the agencies noted that CRE 
concentrations had been rising over the past several years and had 
reached levels that could create safety and soundness concerns in the 
event of a significant economic downturn. As a consequence, the CRE 
Guidance explains that, as part of their ongoing supervisory monitoring 
processes, the agencies would use certain criteria to identify 
institutions that are potentially exposed to significant CRE 
concentration risk. Thus, the CRE Guidance states in part that an 
institution whose total reported C&D loans is approaching or exceeds 
100 percent or more of the institution's total risk-based capital may 
be identified for further supervisory analysis of the level and nature 
of its CRE concentration risk. As of March 31, 2008, approximately 51 
percent of all FR Y-9C respondents held C&D loans in excess of 100 
percent of their total risk-based capital.
    A practice that is common in C&D lending is the establishment of an 
interest reserve as part of the original underwriting of a C&D loan. 
The interest reserve account allows the lender to periodically advance 
loan funds to pay interest charges on the outstanding balance of the 
loan. The interest is capitalized and added to the loan balance. 
Frequently, C&D loan budgets will include an interest reserve to carry 
the project from origination to completion and may cover the project's 
anticipated sell-out or lease-up period. Although potentially 
beneficial to the lender and the borrower, the use of interest reserves 
carries certain risks. Of particular concern is the possibility that an 
interest reserve could disguise problems with a borrower's willingness 
and ability to repay the debt consistent with the terms and conditions 
of the loan agreement. For example, a C&D loan for a project on which 
construction ceases before it has been completed or is not completed in 
a timely manner may appear to be performing if the continued 
capitalization of interest through the use of an interest reserve keeps 
the troubled loan current. This practice can erode collateral 
protection and mask loans that should otherwise be reported as 
delinquent or in nonaccrual status.
    Since the CRE Guidance was issued, market conditions have weakened, 
most notably in the C&D sector. As this weakening has occurred, 
examiners have been encountering C&D loans on projects that are 
troubled, but where interest has been capitalized inappropriately, 
resulting in overstated income and understated volumes of past due and 
nonaccrual C&D loans. Therefore, to assist in the monitoring of C&D 
lending activities at those banking institutions with a concentration 
of such loans, i.e., C&D loans (in domestic offices) that exceeded 100 
percent of total risk-based capital as of the previous calendar year-
end, the Federal Reserve proposed to add two new data items. First, 
banking institutions with such a concentration would report the amount 
of C&D loans (in domestic offices) included in the FR Y-9C loan 
schedule (Schedule HC-C) on which the use of interest reserves is 
provided for in the loan agreement. Second, these banking institutions 
would report the amount of capitalized interest included in the 
interest and fee income on loans during the quarter. These data, 
together with information that banking institutions currently report on 
the amount of past due and nonaccrual C&D loans, would assist in 
identifying respondents with C&D loan concentrations that may be 
engaging in questionable interest capitalization practices for 
supervisory follow-up.
    One bank expressed agreement with concerns about the disguising of 
problems with a borrower's willingness and ability to repay the debt 
consistent with the terms and conditions of the loan agreement through 
the improper use of interest reserves on C&D loans. The bank also 
acknowledged that real estate market conditions have weakened in its 
market area since the agencies issued the CRE Guidance in December 
2006. Although the bank stated that it has a concentration of C&D 
loans, as defined above, it reported that a recent review of its 
portfolio revealed that only a modest number of its C&D loan agreements 
included interest reserves. The bank also described its lending 
policies and controls over the approval of interest reserves in the 
original underwriting of a C&D loan and in the limited cases when the 
original loan had matured or was otherwise recast. It then stated that 
both the bank lender and its supervisory agency should focus their 
attention--and any regulatory reporting requirements--on situations 
when interest reserves are added to a loan after a development project 
is completed or ``when a project goes over budget or otherwise has 
completion issues.'' With respect to the two proposed data items 
pertaining to C&D loans with interest reserves, the bank noted that its 
loan system does not currently capture the required data and adding 
this capability to the loan system by the proposed June 30, 2009, 
effective date would likely be difficult, which would mean that the 
data would have to be compiled manually until system changes are in 
place.
    After further review, the Federal Reserve has decided it will not 
collect the two proposed items related to the use of interest reserves 
at this time.

B. Trading Assets That Are Past Due or in Nonaccrual Status

    Currently, the FR Y-9C does not distinguish past due and nonaccrual 
trading assets from other assets on Schedule HC-N, Past Due and 
Nonaccrual Loans, Leases, and Other Assets. The Federal Reserve 
proposed to replace Schedule HC-N, data item 9, Debt securities and 
other assets, that are past due 30 days or more or in nonaccrual status 
with two separate data items: Data item 9.a, Trading assets, and data 
item 9.b, All other assets (including available-for-sale and held-to-
maturity securities). These data items would follow the existing three 
column breakdown on Schedule HC-N that respondents utilize to report 
assets past

[[Page 11108]]

due 30 through 89 days and still accruing, past due 90 days or more and 
still accruing, and in nonaccrual status. Data item 9.a would include 
all assets held for trading purposes, including loans held for trading. 
Collection of this information would allow the Federal Reserve to 
better assess the quality of assets held for trading purposes, and 
generally enhance surveillance and examination planning efforts.
    The Federal Reserve also proposed to expand the scope of Schedule 
HC-D, Trading Assets, Memorandum item 3, Loans measured at fair value 
that are past due 90 days or more, to include loans held for trading 
and measured at fair value that are in nonaccrual status. This change 
was intended to provide for more consistent treatment with the 
information that would be collected on Schedule HC-N and with the 
disclosure requirements in FASB Statement No. 159, The Fair Value 
Option for Financial Assets and Financial Liabilities.
    One bankers' organization stated that it believed that disclosure 
requirements regarding the delinquency and nonaccrual status of trading 
securities is not particularly meaningful given that these securities 
are marked to market through earnings. As a consequence, credit risk is 
already incorporated into the market price of each trading security. 
The organization further stated that the nonaccrual concept 
traditionally has not been applied to trading securities, which makes 
the proposed reporting of such data costly and difficult to implement. 
Accordingly, this commenter recommended against adding the proposed 
disclosure requirements regarding the delinquency and nonaccrual status 
of trading securities.
    The Federal Reserve is continuing to evaluate this commenter's 
recommendation. Therefore, the Federal Reserve will not implement the 
revisions to Schedule HC-N, data item 9, and Schedule HC-D, Memorandum 
item 3, effective June 30, 2009, as proposed. The Federal Reserve will 
retain the current data items while it considers the proposed reporting 
changes in light of this comment. Once deliberations on these proposed 
disclosure requirements are concluded and a determination is made on 
whether and how to proceed with them, these conclusions will be 
published in a separate Federal Register notice. If Schedule HC-N, data 
item 9, and Schedule HC-D, Memorandum item 3, are subsequently revised, 
these reporting changes would take effect no earlier than December 31, 
2009.

C. Enhanced Information on Credit Derivatives

    Effective for the March 2006 FR Y-9C, the Federal Reserve revised 
the information collected on credit derivatives in Schedules HC-L, 
Derivatives and Off-Balance Sheet Items, and HC-R, Regulatory Capital, 
to gain a better understanding of the nature and trends of banking 
institutions' credit derivative activities. Since that time, the volume 
of credit derivative activity in the banking industry, as measured by 
the notional amount of these contracts, increased steadily through 
March 31, 2008, rising to an aggregate notional amount of over $16 
trillion as of that date. The aggregate notional amount has since 
declined slightly. Reported data further indicate that the credit 
derivative activity in the industry is highly concentrated in banking 
institutions with total assets in excess of $10 billion. For these 
banking institutions, credit derivatives function as a risk mitigation 
tool for credit exposures in their operations as well as a financial 
product that is sold to third parties for risk management and other 
purposes.
    The Federal Reserve's safety and soundness efforts continue to 
place emphasis on understanding and assessing the role of credit 
derivatives in bank risk management practices. In addition, the Federal 
Reserve's monitoring of credit derivative activities at certain banking 
institutions has identified differences in interpretation as to how 
credit derivatives are treated under the Federal Reserve's risk-based 
capital standards. To further the Federal Reserve's safety and 
soundness efforts concerning credit derivatives and to improve 
transparency in the treatment of credit derivatives for regulatory 
capital purposes, the Federal Reserve proposed to revise the 
information pertaining to credit derivatives that is collected on 
Schedules HC-L, HC-N (Past Due and Nonaccrual Loans, Leases, and Other 
Assets), and HC-R.
    In Schedule HC-L, data item 7, Credit derivatives, the Federal 
Reserve proposed to change the column A caption, Guarantor, to Sold 
Protection and the column B caption, Beneficiary, to Purchased 
Protection to eliminate confusion surrounding the meaning of Guarantor 
and Beneficiary that commonly occurs between the users and preparers of 
these data. The Federal Reserve also proposed to add a new data item 
7.c to Schedule HC-L to collect information on the notional amount of 
credit derivatives by regulatory capital treatment. For credit 
derivatives that are subject to the Federal Reserve's market risk 
capital standards, the Federal Reserve proposed to collect the notional 
amount of sold protection and the amount of purchased protection. For 
all other credit derivatives, the Federal Reserve proposed to collect 
the notional amount of sold protection, the notional amount of 
purchased protection that is recognized as a guarantee under the risk-
based capital guidelines, and the notional amount of purchased 
protection that is not recognized as a guarantee under the risk-based 
capital standards.
    The Federal Reserve also proposed to add a new data item 7.d to 
Schedule HC-L to collect information on the notional amount of credit 
derivatives by credit rating and remaining maturity. The data item 
would collect the notional amount of sold protection broken down by 
credit ratings of investment grade and subinvestment grade for the 
underlying reference asset and by remaining maturities of one year or 
less, over one year through five years, and over five years. The same 
information would be collected for purchased protection.
    In Schedule HC-N, the Federal Reserve proposed to change the scope 
of Memorandum item 6, Past due interest rate, foreign exchange rate, 
and other commodity and equity contracts, to include credit 
derivatives. The fair value of credit derivatives where the banking 
institution has purchased protection increased significantly to over 
$500 billion at March 31, 2008, as compared to below negative $10 
billion at March 31, 2007. Thus, the performance of credit derivative 
counterparties has increased in importance. The expanded scope of 
Memorandum item 6 on Schedule HC-N would include the fair value of 
credit derivatives carried as assets that are past due 30 through 89 
days and past due 90 days or more.
    In Schedule HC-R the Federal Reserve proposed to change the scope 
of the information collected in Memorandum items 2.g.(1) and (2) on the 
notional principal amounts of Credit derivative contracts that are 
subject to risk-based capital requirements to include only (a) the 
notional principal amount of purchased protection that is defined as a 
covered position under the market risk capital guidelines and (b) the 
notional principal amount of purchased protection that is not a covered 
position under the market risk capital guidelines and is not recognized 
as a guarantee for risk-based capital purposes. The scope of Memorandum 
item 1, Current credit exposure across all derivative contracts covered 
by the risk-based capital standards, would be

[[Page 11109]]

similarly revised to include the current credit exposure arising from 
credit derivative contracts that represent (a) purchased protection 
that is defined as a covered position under the market risk capital 
guidelines and (b) purchased protection that is not a covered position 
under the market risk capital guidelines and is not recognized as a 
guarantee for risk-based capital purposes. The Federal Reserve also 
proposed to add new Memorandum items 3.a and 3.b to Schedule HC-R to 
collect the present value of unpaid premiums on sold credit protection 
that is defined as a covered position under the market risk capital 
guidelines. Consistent with the information currently reported in 
Memorandum item 2.g, the Federal Reserve proposed to collect this 
present value information with a breakdown between investment grade and 
subinvestment grade for the rating of the underlying reference asset 
and with the same three remaining maturity breakouts.
    No comments were received on any of the proposed reporting 
revisions pertaining to credit derivatives described above, except for 
a comment from a bankers' organization on the proposal to collect data 
on Schedule HC-R relating to the present value of unpaid premiums on 
sold credit protection that is defined as a covered position under the 
market risk capital guidelines. Accordingly, the Federal Reserve will 
implement all of the proposed credit derivative reporting changes--
other than the proposed new Schedule HC-R data items for present value 
data--as of June 30, 2009, as proposed. With respect to the present 
value data, the bankers' organization requested clarification of the 
impact of this proposed reporting requirement on a banking 
institution's risk-based capital calculations. The Federal Reserve is 
continuing to consider this comment and the proposed collection of 
present value data for certain credit derivatives. Therefore, the 
Federal Reserve will not add Memorandum items 3.a and 3.b to Schedule 
HC-R to collect this present value information effective June 30, 2009, 
as proposed. Once deliberations on the comment and the proposed present 
value data items have been concluded, conclusions will be published in 
a separate Federal Register notice. If Memorandum items 3.a and 3.b are 
subsequently added to Schedule HC-R, this new reporting requirement 
would take effect no earlier than December 31, 2009.

    Board of Governors of the Federal Reserve System, March 11, 
2009.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. E9-5584 Filed 3-13-09; 8:45 am]
BILLING CODE 6210-01-P