Board of Governors requests comment.

Proposed Revision to Policy Statement on Payments' System Risk

The Federal Reserve Board on April 21, 2004, requested comment on proposed revisions to Part II of its Policy Statement on Payments System Risk (PSR Policy), which addresses risk management in payments and securities settlement systems.

The proposed revisions update the policy in light of current industry and supervisory risk management approaches and new international risk management standards for payments and securities settlement systems. In addition, they provide further clarification regarding the policy's objectives, scope, and application.

The key revisions include an expansion of the policy's scope to include those Federal Reserve Bank payments and securities settlement systems that meet the policy's application criteria, revised general risk management expectations for systems subject to the policy, and the incorporation of both the Core Principles for Systemically Important Payment Systems (Core Principles) and the Recommendations for Securities Settlement Systems (Recommendations).

The Core Principals were developed by the Committee on Payment and Settlement Systems (CPSS) of the central banks of the Group of Ten countries. The Recommendations were developed by the CPSS and the Technical Committee of the International Organization of Securities Commissions.

Proposed Rule to Retain Trust Preferred Securities

The Federal Reserve Board on May 6, 2004, requested public comment on a proposed rule that would retain trust preferred securities in the tier 1 capital of bank holding companies (BHCs), but with stricter quantitative limits and clearer qualitative standards.

Under the proposal, after a three-year transition period, the aggregate amount of trust preferred securities and certain other capital elements would be limited to 25 percent of tier 1 capital elements, net of goodwill. The amount of trust preferred securities and certain other elements in excess of the limit could be included in tier 2 capital, subject to restrictions. Internationally active BHCs would generally be expected to limit trust preferred securities and certain other capital elements to 15 percent of tier 1 capital elements, net of goodwill.

Comments were requested by July 11, 2004.

The proposed revisions address supervisory concerns, competitive equity considerations, and recent changes in accounting for trust preferred securities under generally accepted accounting principles (GAAP). The proposal also would strengthen the definition of regulatory capital by incorporating longstanding policies that are not explicitly set forth in the Board's current capital guidelines.

However, the proposal would not affect the way BHCs account for trust preferred securities on their regulatory reports filed with the Federal Reserve. Consistent with longstanding Federal Reserve direction, BHCs follow GAAP in accounting for these instruments for regulatory reporting purposes.

Adequacy of Existing Disclosures of Debit Card Fees

The Federal Reserve Board on May 18, 2004, announced that it will conduct a study on debit card fees and requested public comment on the adequacy of existing disclosures of such fees to consumers.

Members of the Senate Banking, Housing, and Urban Affairs Committee asked the Board to study debit card fees imposed by financial institutions when their customers complete a point-of-sale debit transaction by providing their personal identification number, or PIN. This request reflected their concern that consumers may be unaware, or not adequately informed, that their bank may impose fees when the consumer chooses to use a PIN, rather than a signature, to authorize a transaction at point-of-sale.

The Electronic Fund Transfers Act (EFTA) sets forth the existing disclosure requirements governing electronic fund transfers (EFTs), and provides a basic framework for establishing the rights, liabilities, and responsibilities of participants in EFT systems. The types of transfers covered by the EFTA include transfers initiated through point-of-sale terminals, automated teller machines, and others. The statute and its implementing regulation (Regulation E, Electronic Fund Transfers) require the initial disclosure of specified terms and conditions of an EFT service, including fees, and further require terminal receipts and periodic account activity statements.

In connection with the study, the Board is soliciting comment on whether the existing disclosures required by the EFTA effectively make consumers aware of the imposition of debit card transaction fees by their financial institution when they choose to use a PIN. The Board also seeks the public's views on the need for, and the potential benefits of, requiring additional disclosures in each periodic account activity statement to reflect such debit card fees.

This Federal Register solicitation of comment is one element of the broader study requested, in which the Board has also been asked to study the prevalence of debit card PIN-use fees being imposed, and the feasibility of requiring real-time disclosure of such fees at the point of sale, among other issues.

Public comment on the specific issues identified will assist the Board in preparing the study and report that will be submitted to members of the Congress in November 2004.

Prescreened Solicitations for Credit or Insurance

The Federal Reserve Board on May 18, 2004, requested public comment on a Board study and a report to the Congress on prescreened solicitations for credit or insurance.

The Fair and Accurate Credit Transactions Act of 2003 (FACT Act), which generally amends the Fair Credit Reporting Act (FCRA), requires the Board to conduct a study concerning prescreened solicitations. Under the FCRA, creditors and insurers in specific circumstances may use certain consumer reports as the basis for sending unsolicited offers of credit or insurance to consumers who meet certain criteria for credit worthiness or insurability (so-called prescreened solicitations).

The FCRA provides a mechanism by which consumers can elect not to receive these prescreened solicitations, by directing consumer reporting agencies to exclude the consumer's name and address from lists provided by these agencies to creditors or insurers for use in sending prescreened solicitations. Section 213(e) of the FACT Act requires the Board to conduct a study of the ability of consumers to avoid receiving these prescreened solicitations (including using the mechanism described above), and the potential effect of any further restrictions on providing consumers with such prescreened solicitations.

The Board is requesting public comment on a number of issues to assist in preparation of the study and a report that the Board must submit to the Congress by December 4, 2004.

Proposed Revisions to Bank Holding Company Rating System

The Federal Reserve on July 23, 2004, requested 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 effect 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.