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Circular Letters

Circular Letter 5632

July 29, 2004

To: All Member Banks and Others Concerned in the Third Federal Reserve District

Attention: Chief Executive Officer and Chief Compliance Officer

Subject: PROPOSED REVISED BANK HOLDING COMPANY RATING SYSTEM: NOTICE AND REQUEST FOR COMMENT

Summary:

The Board of Governors of the Federal Reserve System requests public comment on proposed revisions that would better align the bank holding company rating system with current supervisory practices. The proposed rating system incorporates an increased emphasis on risk management, a more flexible and comprehensive evaluation of financial condition, and an explicit determination of the likelihood that the nondepository entities of a holding company will have a significant negative impact on the depository subsidiaries.

Under the revised rating system, each holding company would be assigned a composite rating (C) based on an evaluation and rating of three essential components of an institution’s financial condition and operations: risk management (R); financial condition (F); and potential impact (I) of the parent company and nondepository subsidiaries on the subsidiary depository institutions. A fourth component in the rating system, (D), would generally mirror the primary supervisors’ assessment of the subsidiary depository institutions. (A simplified version of the rating system would be applied to noncomplex bank holding companies with assets of less than $1 billion.)

To provide a consistent framework for assessing risk management, the risk management component is supported by four qualitatively rated subcomponents: competence of board and senior management; policies, procedures, and limits; risk monitoring and management information systems; and internal controls. The financial condition component is supported by four numerically rated subcomponents: capital adequacy; asset quality; earnings; and liquidity. The proposal also contains guidance on implementation of the revised rating system based on holding company size and complexity.

The Federal Register notice, published July 23, 2004, is available here PDF Icon (320 KB, 26 pages).

Date: Comments must be submitted by September 21, 2004.

For Further Information: Deborah Bailey, Associate Director, (202-452-2634), Barbara Bouchard, Deputy Associate Director, (202-452-3072), Molly Mahar, Senior Supervisory Financial Analyst, (202-452-2568), or Anna Lee Hewko, Supervisory Financial Analyst, (202-530-6260). For users of Telecommunications Device for the Deaf (“TDD”) only, contact (202) 263-4869.