Regulatory Roundup

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OPEN FOR COMMENT

Basel Committee

The Basel Committee on Banking Supervision on July 30 issued a working paper on the capital treatment of expected losses and future margin income. The paper addresses some of the most controversial elements of the committee's proposal to rewrite international capital standards. There is no deadline for comment, but the Basel Committee is expected to produce its next version of the proposal for comment in early 2002. Available at www.bis.org.

Community Reinvestment Act

A proposal by bank and thrift regulators seeking comments in advance of next year's scheduled review of Community Reinvestment Act compliance rules. Regulators are considering, among other things, whether to: make examinations of lending practices at nonbank affiliates mandatory; more thoroughly scrutinize CRA loans for predatory terms; permit more banks to qualify for streamlined exams; revamp the investment test; and redefine assessment areas to account for Internet banks. Published July 19. Comments due Oct. 17.

Additionally, the regulators have revised their "Questions and Answers on Community Reinvestment" document. The new version amends several questions and adds new ones. Published July 12.

RECENT ACTIONS

Lending Limits

A rule took effect Monday that established a three-year pilot program under which national banks in 36 states can raise lending limits for individual borrowers for one-to-four-family residential real estate and small businesses. They could lend as much as 25% of capital, compared with the current 15% cap.

Internal Audit Practices

The Basel Committee on Banking Supervision issued a set of best practices Aug. 28 for banks' internal audit departments, outlining the departments' proper roles within their own companies and in dealings with bank regulators. The full paper is available at the Basel Committee's Web site at www.bis.org.

Asset Management

The Office of Thrift Supervision updated its guidelines on Aug. 25 for examiners of trust management operations at thrifts. The handbook gives officials an overview of the products and services, laws and regulations, and risks and fiduciary duties applicable to institutions that engage in trust and asset management activities.

Bank Units

The Federal Reserve Board on Aug. 13 completed a regulation governing financial subsidiaries. The rule, required by the Gramm-Leach-Bliley Act of 1999, lets state-chartered banks that are members of the Federal Reserve System own subsidiaries that engage in certain financial activities, such as general insurance, securities, and travel agency sales. It is intended to establish parity between state member banks and national banks, which were given similar powers last year by the Office of the Comptroller of the Currency.

"Canary" Program

The Office of the Comptroller of the Currency updated last month its 1998 community bank supervision booklet to incorporate its "canary" early warning process and to make the assessment of a small bank's information technology part of its safety and soundness exam. Canary is a computer system that rates national banks against 15 benchmarks in three categories: credit, liquidity, and interest rate risk.

ACTIONS EXPECTED SOON

Merchant Banking Capital

The Fed is expected to release a rule this fall that will finalize the regulatory capital treatment of banks' equity investments. The rule is required because the Gramm-Leach-Bliley Act eased restrictions on banking company investments in nonfinancial companies.

Subprime Residuals

The banking and thrift agencies are expected to issue a final rule next month that would impose higher capital requirements on subprime residual assets, the interest retained after subprime loans are bundled and sold. A year ago the agencies proposed requiring banks to hold $1 of capital for each $1 of their residual interest in these loan pools, and limiting banks' holdings of such assets to no more than 25% of Tier I capital. …