Financial Update (July-September 1996)

The Docket

The following is a summary of recent Federal Reserve actions. To obtain a copy of any of these announcements, contact the Atlanta Fed Service Department at (404) 498-8474. Please give the docket number or circular letter number (if applicable) when calling to request a copy. Information regarding the submission of public comment is included in the announcements.

On April 23, the Board announced a final rule to simplify and update Regulation E, Electronic Fund Transfers. The revisions focus on ways to ease compliance burdens for financial institutions without diminishing the consumer protections established by the act. The revised rule became effective May 1. Mandatory compliance begins Jan. 1, 1997.

On April 25, the Board announced a new cash access policy for Federal Reserve Banks. The new policy, which becomes effective May 1, 1998, provides for a base level of free currency access to all depository institutions but restricts the number of offices served and the frequency of access.

On April 26, the Board announced a final rule amending the Board's margin regulations. The amendments eliminate restrictions on broker-dealers to arrange credit, increase the type and number of domestic and foreign securities that may be bought on margin, increase the loan value of some securities that are already marginable, delete Board rules regarding options transactions in favor of the rules of the options exchanges, and reduce restrictions on transactions involving foreign persons, foreign securities, and foreign currency.

On May 8, the Board announced a final rule to reduce the regulatory burden for member banks and other insured depository institutions monitoring lending to their affiliates. The final rule adopts a definition of capital stock and surplus for purposes of section 23A of the Federal Reserve Act that conforms to the definition of unimpaired capital and unimpaired surplus used by the Board in calculating the limits in Regulation O for insider lending and by the Office of the Comptroller of the Currency (OCC) in calculating the limit on loans by a national bank to a single borrower. The final rule came into effect on July 1, 1996. Circular Letter: 528-96.

On May 16, the Office of Foreign Assets Control (OFAC) announced that sanctions with regard to Bosnian Serb Forces and areas of the Republic of Bosnia and Herzegovina they control were suspended. Transactions with entities listed as "SRBH" on OFAC's alphabetical master list of specially-designated nationals/blocked persons are no longer banned. However, property and interests blocked before May 10, 1996, must remain blocked as authorized by OFAC.

Further information is available on OFAC's internet home page, through OFAC's fax-on-demand service at (202) 622-0077, or by calling OFAC at (800) 540-6322. Circular Letter: 532-96.

On June 3, the Board announced the adoption of a State/Federal Advisory Protocol for coordinated supervision of state-chartered banks that operate across state lines. The protocol aims to reduce regulatory burdens while improving the efficiency of bank examinations. The Federal Deposit Insurance Corporation (FDIC) and the Conference of State Bank Supervisors have adopted the protocol. Circular Letter: 109-96.

On June 7, the Board approved a Joint Agency Policy Statement that offers guidance to banks on sound practice for managing interest rate risk. The policy statement has also been approved by the FDIC and the OCC for banks under their jurisdiction. The assessment of interest rate risk management made by examiners in accordance with the Joint Agency Policy Statement will be incorporated into a bank's overall risk-management rating. Last year, the Board announced that Federal Reserve examiners will assign a formal rating of the risk-management profile of state member banks and bank holding companies, which will be given significant weight in determining overall management effectiveness. Circular Letter: 110-96.

On July 23, the Board announced its final rule amending Regulation K (international banking operations) regarding the management of offshore offices by U.S. branches and agencies of foreign banks. The rule implements a provision of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 that amended the International Banking Act of 1978 to prohibit foreign banks from using their U.S. branches or agencies to manage types of activities through offshore offices that could not be managed by a U.S. bank at its foreign branches or subsidiaries. The final rule became effective on Aug. 28. Circular Letter: 548-96.

On Aug. 26, the Board announced adoption of a final amendment to the Board's interpretive ruling regarding investment adviser activities contained in Regulation Y (12 C.F.R. 225.125), effective Sept. 30, 1996. The amendment permits a bank holding company (and its bank and nonbank subsidiaries) to purchase, in a fiduciary capacity, securities of an investment company advised by the bank holding company if the purchase is specifically authorized by the terms of the instrument creating the fiduciary relationship, by court order, or by the law of the jurisdiction under which the trust is administered.

On Aug. 29, the Board, the OCC, and the FDIC issued a final rule amending risk-based capital standards to incorporate a measure for market risk. The final rule implements an amendment to the Basle Capital Accord that sets forth a supervisory framework for measuring market risk to cover debt and equity positions located in an institution's trading account, foreign exchange, and commodity positions. Any bank or bank holding company regulated by the Board, the OCC, or the FDIC with significant exposure to market risk must measure that risk using its own internal value-at-risk model, subject to the boundaries contained in the final rule, and hold a commensurate amount of capital. The rule is effective Jan. 1, 1997, and compliance is mandatory by Jan. 1, 1998. Circular Letter: 122-96.

On Sept. 11, the Board adopted a change in the manner in which interest earned on certain securities held by a company in an underwriting or dealing capacity is treated in determining whether the company is engaged principally in underwriting and dealing in securities for purposes of section 20 of the Glass-Steagall Act. The Board's amendment to its section 20 orders specifies that interest earned on the types of debt securities that a member bank may hold for its own account is not to be treated as revenue from underwriting or dealing in securities for purposes of section 20. Interest on these securities will continue to be included in total revenue. The amendment is effective Nov. 12, 1996. Docket: R-0932.

On Sept. 16, the Board announced the adoption of a final rule amending Regulation Z, Truth in Lending. This rule is effective Oct. 21, 1996. The revisions to Regulation Z incorporate changes made by the Truth in Lending Act amendments of 1995. The amendments establish new creditor-liability rules for closed-end loans secured by real property or dwellings and consummated on or after Sept. 30, 1995. The amendments also clarify how lenders must disclose certain fees connected with mortgage loans. Docket: R-0927.

Comment requested:
On July 23, the Federal Financial Institutions Examination Council announced that it is soliciting comment on proposed revisions to the existing Uniform Financial Rating System (commonly referred to as CAMEL). Two major revisions are being considered: language emphasizing the importance of quality of risk-management processes in composite ratings and each of the rating components, particularly in the management component and the addition of a sixth rating component addressing sensitivity to market risks, including interest rate, price, and forex risks. Circular Letter: 112-96.

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