Appendix A to Part 30 - Interagency Guidelines Establishing Standards for Safety and Soundness
12:1.0.1.1.27.0.28.7.13 : Appendix A
Appendix A to Part 30 - Interagency Guidelines Establishing
Standards for Safety and Soundness Table of Contents I.
Introduction
A. Preservation of existing authority.
B. Definitions.
II. Operational and Managerial Standards
A. Internal controls and information systems.
B. Internal audit system.
C. Loan documentation.
D. Credit underwriting.
E. Interest rate exposure.
F. Asset growth.
G. Asset quality.
H. Earnings.
I. Compensation, fees and benefits.
III. Prohibition on Compensation That Constitutes an Unsafe and
Unsound Practice
A. Excessive compensation.
B. Compensation leading to material financial loss.
I. Introduction
i. Section 39 of the Federal Deposit Insurance Act 1 (FDI Act)
requires each Federal banking agency (collectively, the agencies)
to establish certain safety and soundness standards by regulation
or by guideline for all insured depository institutions. Under
section 39, the agencies must establish three types of standards:
(1) Operational and managerial standards; (2) compensation
standards; and (3) such standards relating to asset quality,
earnings, and stock valuation as they determine to be
appropriate.
1 Section 39 of the Federal Deposit Insurance Act (12 U.S.C.
1831p-1) was added by section 132 of the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA), Pub. L. 102-242, 105
Stat. 2236 (1991), and amended by section 956 of the Housing and
Community Development Act of 1992, Pub. L. 102-550, 106 Stat. 3895
(1992) and section 318 of the Riegle Community Development and
Regulatory Improvement Act of 1994, Pub. L. 103-325, 108 Stat. 2160
(1994).
ii. Section 39(a) requires the agencies to establish operational
and managerial standards relating to: (1) Internal controls,
information systems and internal audit systems, in accordance with
section 36 of the FDI Act (12 U.S.C. 1831m); (2) loan
documentation; (3) credit underwriting; (4) interest rate exposure;
(5) asset growth; and (6) compensation, fees, and benefits, in
accordance with subsection (c) of section 39. Section 39(b)
requires the agencies to establish standards relating to asset
quality, earnings, and stock valuation that the agencies determine
to be appropriate.
iii. Section 39(c) requires the agencies to establish standards
prohibiting as an unsafe and unsound practice any compensatory
arrangement that would provide any executive officer, employee,
director, or principal shareholder of the institution with
excessive compensation, fees or benefits and any compensatory
arrangement that could lead to material financial loss to an
institution. Section 39(c) also requires that the agencies
establish standards that specify when compensation is
excessive.
iv. If an agency determines that an institution fails to meet
any standard established by guideline under subsection (a) or (b)
of section 39, the agency may require the institution to submit to
the agency an acceptable plan to achieve compliance with the
standard. In the event that an institution fails to submit an
acceptable plan within the time allowed by the agency or fails in
any material respect to implement an accepted plan, the agency
must, by order, require the institution to correct the deficiency.
The agency may, and in some cases must, take other supervisory
actions until the deficiency has been corrected.
v. The agencies have adopted amendments to their rules and
regulations to establish deadlines for submission and review of
compliance plans. 2
2 For the Office of the Comptroller of the Currency, these
regulations appear at 12 CFR part 30; for the Board of Governors of
the Federal Reserve System, these regulations appear at 12 CFR part
263; and for the Federal Deposit Insurance Corporation, these
regulations appear at 12 CFR part 308, subpart R and 12 CFR part
391, subpart B.
vi. The following Guidelines set out the safety and soundness
standards that the agencies use to identify and address problems at
insured depository institutions before capital becomes impaired.
The agencies believe that the standards adopted in these Guidelines
serve this end without dictating how institutions must be managed
and operated. These standards are designed to identify potential
safety and soundness concerns and ensure that action is taken to
address those concerns before they pose a risk to the deposit
insurance funds.
A.
Preservation of Existing Authority
Neither section 39 nor these Guidelines in any way limits the
authority of the agencies to address unsafe or unsound practices,
violations of law, unsafe or unsound conditions, or other
practices. Action under section 39 and these Guidelines may be
taken independently of, in conjunction with, or in addition to any
other enforcement action available to the agencies. Nothing in
these Guidelines limits the authority of the FDIC pursuant to
section 38(i)(2)(F) of the FDI Act (12 U.S.C. 1831(o)) and part 325
of title 12 of the Code of Federal Regulations.
B.
Definitions
1. In general. For purposes of these Guidelines, except
as modified in the Guidelines or unless the context otherwise
requires, the terms used have the same meanings as set forth in
sections 3 and 39 of the FDI Act (12 U.S.C. 1813 and 1831p-1).
2. Board of directors, in the case of a state-licensed
insured branch of a foreign bank and in the case of a Federal
branch of a foreign bank, means the managing official in charge of
the insured foreign branch.
3. Compensation means all direct and indirect payments or
benefits, both cash and non-cash, granted to or for the benefit of
any executive officer, employee, director, or principal
shareholder, including but not limited to payments or benefits
derived from an employment contract, compensation or benefit
agreement, fee arrangement, perquisite, stock option plan,
postemployment benefit, or other compensatory arrangement.
4. Director shall have the meaning described in 12 CFR
215.2(c). 3
3 In applying these definitions for savings associations,
pursuant to 12 U.S.C. 1464, savings associations shall use the
terms “savings association” and “insured savings association” in
place of the terms “member bank” and “insured bank”.
5. Executive officer shall have the meaning described in
12 CFR 215.2(d). 4
4 See footnote 3 in section I.B.4. of this appendix.
6. Principal shareholder shall have the meaning described
in 12 CFR 215.2(l). 5
5 See footnote 3 in section I.B.4. of this appendix.
II. Operational and Managerial Standards
A. Internal controls and information systems. An
institution should have internal controls and information systems
that are appropriate to the size of the institution and the nature,
scope and risk of its activities and that provide for:
1. An organizational structure that establishes clear lines of
authority and responsibility for monitoring adherence to
established policies;
2. Effective risk assessment;
3. Timely and accurate financial, operational and regulatory
reports;
4. Adequate procedures to safeguard and manage assets; and
5. Compliance with applicable laws and regulations.
B. Internal audit system. An institution should have an
internal audit system that is appropriate to the size of the
institution and the nature and scope of its activities and that
provides for:
1. Adequate monitoring of the system of internal controls
through an internal audit function. For an institution whose size,
complexity or scope of operations does not warrant a full scale
internal audit function, a system of independent reviews of key
internal controls may be used;
2. Independence and objectivity;
3. Qualified persons;
4. Adequate testing and review of information systems;
5. Adequate documentation of tests and findings and any
corrective actions;
6. Verification and review of management actions to address
material weaknesses; and
7. Review by the institution's audit committee or board of
directors of the effectiveness of the internal audit systems.
C. Loan documentation. An institution should establish
and maintain loan documentation practices that:
1. Enable the institution to make an informed lending decision
and to assess risk, as necessary, on an ongoing basis;
2. Identify the purpose of a loan and the source of repayment,
and assess the ability of the borrower to repay the indebtedness in
a timely manner;
3. Ensure that any claim against a borrower is legally
enforceable;
4. Demonstrate appropriate administration and monitoring of a
loan; and
5. Take account of the size and complexity of a loan.
D. Credit underwriting. An institution should establish
and maintain prudent credit underwriting practices that:
1. Are commensurate with the types of loans the institution will
make and consider the terms and conditions under which they will be
made;
2. Consider the nature of the markets in which loans will be
made;
3. Provide for consideration, prior to credit commitment, of the
borrower's overall financial condition and resources, the financial
responsibility of any guarantor, the nature and value of any
underlying collateral, and the borrower's character and willingness
to repay as agreed;
4. Establish a system of independent, ongoing credit review and
appropriate communication to management and to the board of
directors;
5. Take adequate account of concentration of credit risk;
and
6. Are appropriate to the size of the institution and the nature
and scope of its activities.
E. Interest rate exposure. An institution should:
1. Manage interest rate risk in a manner that is appropriate to
the size of the institution and the complexity of its assets and
liabilities; and
2. Provide for periodic reporting to management and the board of
directors regarding interest rate risk with adequate information
for management and the board of directors to assess the level of
risk.
F. Asset growth. An institution's asset growth should be
prudent and consider:
1. The source, volatility and use of the funds that support
asset growth;
2. Any increase in credit risk or interest rate risk as a result
of growth; and
3. The effect of growth on the institution's capital.
G. Asset quality. An insured depository institution
should establish and maintain a system that is commensurate with
the institution's size and the nature and scope of its operations
to identify problem assets and prevent deterioration in those
assets. The institution should:
1. Conduct periodic assetquality reviews to identify problem
assets;
2. Estimate the inherent losses in those assets and establish
reserves that are sufficient to absorb estimated losses;
3. Compare problem asset totals to capital;
4. Take appropriate corrective action to resolve problem
assets;
5. Consider the size and potential risks of material asset
concentrations; and
6. Provide periodic asset reports with adequate information for
management and the board of directors to assess the level of asset
risk.
H. Earnings. An insured depository institution should
establish and maintain a system that is commensurate with the
institution's size and the nature and scope of its operations to
evaluate and monitor earnings and ensure that earnings are
sufficient to maintain adequate capital and reserves. The
institution should:
1. Compare recent earnings trends relative to equity, assets, or
other commonly used benchmarks to the institution's historical
results and those of its peers;
2. Evaluate the adequacy of earnings given the size, complexity,
and risk profile of the institution's assets and operations;
3. Assess the source, volatility, and sustainability of
earnings, including the effect of nonrecurring or extraordinary
income or expense;
4. Take steps to ensure that earnings are sufficient to maintain
adequate capital and reserves after considering the institution's
asset quality and growth rate; and
5. Provide periodic earnings reports with adequate information
for management and the board of directors to assess earnings
performance.
I. Compensation, fees and benefits. An institution should
maintain safeguards to prevent the payment of compensation, fees,
and benefits that are excessive or that could lead to material
financial loss to the institution.
III. Prohibition on Compensation That Constitutes an Unsafe and
Unsound Practice A. Excessive Compensation
Excessive compensation is prohibited as an unsafe and unsound
practice. Compensation shall be considered excessive when amounts
paid are unreasonable or disproportionate to the services performed
by an executive officer, employee, director, or principal
shareholder, considering the following:
1. The combined value of all cash and non-cash benefits provided
to the individual;
2. The compensation history of the individual and other
individuals with comparable expertise at the institution;
3. The financial condition of the institution;
4. Comparable compensation practices at comparable institutions,
based upon such factors as asset size, geographic location, and the
complexity of the loan portfolio or other assets;
5. For postemployment benefits, the projected total cost and
benefit to the institution;
6. Any connection between the individual and any fraudulent act
or omission, breach of trust or fiduciary duty, or insider abuse
with regard to the institution; and
7. Any other factors the agencies determines to be relevant.
B. Compensation Leading to Material Financial Loss
Compensation that could lead to material financial loss to an
institution is prohibited as an unsafe and unsound practice.
[60 FR 35678, 35682, July 10, 1995, as amended at 61 FR 43950, Aug.
27, 1996; 79 FR 54544, Sept. 11, 2014]