Annual Report 2002 - ffiec

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a 60-day comment period in the Federal Register. Task Force on Supervision The Task Force on Supervision has oversight responsibility for matters relating to the supervision and examination of depository institutions. It provides a forum for the agencies that supervise banks, thrifts, and credit unions to promote quality, consistency, and effectiveness in examination and supervisory practices to minimize regulatory burden. While significant issues are referred, with recommendations, to the Council for action, the Council has delegated to the task force the authority to make certain decisions and recommendations, provided all task force members agree. Task force members are the senior supervisory officials of the constituent agencies. Meetings are held regularly to address and resolve common supervisory issues. The task force has a standing subcommittee to address information system and technology issues as they relate to financial institution supervision. Another task force sub- Task Force on Supervision meeting. committee reviews issues pertaining to regulatory capital. In addition, ad hoc working groups are created to handle particular projects and assignments. In 2002, the task force dealt with some difficult and complex issues associated with certain lending and asset backed securitization activities. At the outset of 2002, the task force established a comprehensive action plan to address and make more transparent the primary risks facing institutions in these areas. As detailed below, the task force had several notable accomplishments in 2002 and was able to complete its primary objectives. In completing its charge for 2002, the Task Force on Supervision is well positioned for meeting its 2003 objectives. Initiatives Addressed in 2002 Asset Securitization Through the Task Force on Supervision, the agencies continued to coordinate their regulatory and supervisory approach to the asset securitization practices of the institutions they supervise. In May 2002, the federal banking agencies issued the following supervisory guidance related to the appropriate regulatory capital treatment for banking organizations’ asset securitization activities. Interagency Guidance on Implicit Recourse in Asset Securitizations: This document describes certain postsale actions that banking organizations have taken regarding securitized assets and provides guidance on whether these actions would be deemed implicit recourse. The document also discusses the riskbased capital implications of conduct deemed to constitute implicit recourse. It provides practical interpretative guidance on noncontractual recourse determinations and supplements previously issued guidance and regulations. Interagency Questions and Answers on the Capital Treatment of Recourse, Direct Credit Substitutes, and Residual Interests in Asset Securitizations: The federal banking agencies published a final rule on the capital treatment of recourse, direct credit substitutes, and residual interests in asset securitizations in November 2001. The rule became effective January 1, 2002. This question-and-answer document provides interpretative guidance on issues raised by the final rule. Interagency Advisory on the Regulatory Capital Treatment of Accrued Interest Receivable Related to Credit Card Securitizations: The advisory clarifies the appropriate risk-based capital treatment for banking organizations that securitize credit card receivables and record an on-balance-sheet asset commonly referred to as an accrued interest receivable. In May 2002, the federal banking agencies also issued the Interagency Advisory on the Unsafe and Unsound Use of Covenants Tied to Supervisory Actions in Securitization Documents. The purpose of the guidance is to alert institutions and examiners to the safety and 13
soundness implications of certain covenants included in some securitization documents. In December 2002, the agencies issued additional guidance to clarify the appropriate accounting treatment for depository institutions that securitize credit card receivables and record an accrued interest receivable amount. Crisis Management Measures In response to the events of September ll, 2001, the Task Force on Supervision established a working group to update interagency emergency preparedness procedures and processes. During 2002, as a result of this group’s efforts, the agencies updated their supervisory communication protocols to be used in emergencies. These protocols will be updated quarterly. They cover three general areas: communication among the banking agencies during emergencies; communication with regulated institutions; and coordination of communications with the public. Credit Card and Subprime Lending Monitoring and assessing the risks in subprime and credit card lending programs continued to be a major focus of the Task Force on Supervision in 2002. The task force formed a working group to identify and coordinate on various accounting, policy, and examination issues related to assessing the risks in subprime and credit card lending programs. In response to some of the deficiencies examiners have found in credit card lending account management, risk management, and loss allowance practices, the FFIEC agencies developed and issued, for informal industry comment credit card account management and loss allowance guidance. The purpose of the guidance is to assist financial institutions in conducting credit card lending activities in a safe and sound manner, while meeting the needs of their customers. The guidance outlines the agencies’ expectations for prudent risk management, 14 income recognition, and loss allowance practices. The agencies issued the guidance in early January 2003. Corporate Governance and Audit During 2002, the task force focused on the critical roles of effective corporate governance and audit procedures in the continued safe and sound operations of insured depository institutions. In December 2002, the federal banking agencies approved a notice of proposed rulemaking that would strengthen their authorities to take disciplinary actions against independent public accountants and accounting firms that perform audit and attestation services required by section 36 of the Federal Deposit Insurance Act. The proposed rules would establish procedures under which the agencies could, for good cause, remove, suspend, or bar an accountant or firm from performing audit and attestation services for insured depository institutions with assets of $500 million or more. The agencies published the notice of proposed rulemaking for comment in early January 2003. An interagency working group that reports through the task force is in the process of reviewing the agencies’ policies and regulations pertaining to corporate governance standards to incorporate the applicable provisions of the Sarbanes- Oxley legislation and to determine if any additional actions are needed. Capital Standards Although each of the four federal banking agencies has its own capital regulations, the task force and several of its working groups coordinate efforts among the agencies to promote joint issuance of capital rules and related interpretative guidance, thereby minimizing interagency differences and reducing the potential burden on the banking industry. During 2002, the federal banking agencies issued supervisory guidance to address the appropriate capital treatment of certain asset securitization activities. (See ‘Asset Securitization’ above.) Through the task force’s capital subcommittee, the agencies continue to work together to discuss and coordinate on complex capital rulings and interpretations. In April 2002, the agencies lowered the risk weight for claims on certain qualifying securities firms. The subcommittee’s work also focused on various issues related to the proposed revisions to the Basel Capital Accord. The agencies will continue to coordinate Basel-related activities in 2003, emphasizing the various domestic supervisory, examination, and training efforts that would be needed to implement the proposed changes to the Accord. Concurrent with these efforts, the agencies are working to harmonize their regulatory formats. Information Technology The agencies continue to coordinate on issues related to information technology (IT). The Task Force on Supervision has a subcommittee that meets monthly to discuss and coordinate interagency policies, technology-related examination issues, and interagency examination procedures and to provide interagency IT training. In 2002, the subcommittee continued to focus resources on a major project to update and revise the FFIEC’s 1996 Information Systems Examination Handbook. The revised handbook will be issued as a series of webbased booklets that cover a range of topics. The first booklet, Information Security, was issued in January 2003. The examination booklets on the supervision of technology service providers, business continuity planning, electronic banking and IT audit are expected to be issued in the first quarter of 2003. Work on remaining booklets that address payment systems, outsourcing, IT management, computer operations, and systems development and acquisition will continue throughout 2003.
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Page 3 and 4: Susan Schmidt Bies Member Board of
Page 5 and 6: vii Message from the Chairman TABLE
Page 7 and 8: OVERVIEW OF THE FEDERAL FINANCIAL I
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Page 11 and 12: The State Liaison Committee (SLC) c
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Page 17: Long-term management of the CDR fac
Page 21 and 22: Projects Currently Under Way Review
Page 23 and 24: evenue it generates principally fro
Page 25 and 26: the FDIC and the Neighborhood Reinv
Page 27 and 28: INCOME AND EXPENSES of U.S. Commerc
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Page 39 and 40: 34 THE FEDERAL RESERVE SYSTEM DISTR
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