PUBLICATION OF THE JUNE 2000 UPDATE TO THE BANK HOLDING COMPANY SUPERVISION MANUAL.

The June 2000 update to the Bank Holding Company Supervision Manual, Supplement No. 18, has been published and is now available. The Manual comprises the Federal Reserve System's bank holding company supervisory and inspection guidance. The supplement includes new or revised supervisory information and examiner guidance on the following topics:

1. Financial Holding Companies (FHCs). New supervisory guidance is provided for U.S. bank holding companies (BHCs) and qualifying foreign banks that desire to become FHCs, as authorized by the Gramm-Leach-Bliley Act (GLB Act). This section includes acquisition, control, and other requirements with respect to engaging in activities that the Board deems "financial in nature." See SR letter 00-01. The general and more detailed sections include the following:

* Written declaration requirements for becoming an FHC 

* "Well managed" and "well capitalized" standards and resources required for certification as an FHC

* Activities deemed to be "financial in nature" under section 4(k)(4) of the BHC Act and therefore permissible for FHCs -- these include activities previously determined to be closely related to banking, either by regulation or order issued under section 4(c)(8), activities that are usual in conducting banking or other services abroad under section 4(c)(13) or by interpretation in section 211.5(d) of Regulation K, and activities determined by statute to be financial in nature

* Divestiture requirements with respect to impermissible activities that are acquired together with permissible activities

* Applicable notice procedures.

2. Retained Interests. Retained interests arise from assets sold to a securitization vehicle that, in turn, issues bonds to investors. Supervisory concerns exist about the methods and models that are used to value these interests and the difficulties involved in managing the risk of such volatile assets. Generally accepted accounting principles (GAAP) require recognition of an immediate gain (or loss) on the sale of assets by recording its retained interest at fair value. The fair value of retained interests should be supported by verifiable documentation. See SR letter 99-37.

3. Credit Derivatives. Supervisory guidance is provided on the risk-based capital treatment for credit derivatives that are used to synthetically replicate collateralized loan obligations (CLOs). The capital treatment for three different synthetic CLO transactions is discussed: (1) when the entire amount of the referenced portfolio is hedged, (2) when a high-quality senior risk position in the reference portfolio is retained, or (3) when a first-loss position is retained. Minimum conditions are included for sponsoring institutions wishing to obtain the synthetic securitization capital treatment for type two transactions. See SR letter 99-32.

4. Nonbanking Activities of Bank Holding Companies. General and more detailed sections describe nonbanking activities approved for BHCs that are not FHCs, under section 4(a)(2) or under section 4(c)(8) of the BHC Act pursuant to the Board's Regulation Y or Board order. The GLB Act prohibits the approval of any new nonbanking activities under these provisions by regulation or order. The general section describes the current sixty-day notice procedure for BHCs, as well as changes resulting from the GLB Act. New nonbanking activity summaries are provided for activities that were approved for BHCs by Board order before the passage of the GLB Act. They are (1) operating a securities exchange and (2) acting as a certification authority for digital signatures.

5. Nonbank Banks. Section 4(f) of the BHC Act was amended by section 107 of the GLB Act. Cross marketing, growth, and certain activity limitations and other provisions were eliminated to allow BHCs to affiliate with securities firms and insurance companies. The general overdraft prohibitions of section 4(f)(3) of the BHC Act are discussed for controlled subsidiary banks of grandfathered holding companies of nonbank banks (those existing on March 5, 1987), including when certain overdrafts are permissible.

A more detailed summary of changes is included with the update package. The Manual and updates, including pricing information, are available from Publications Services, Mail Stop 127, Board of Governors of the Federal Reserve System, Washington, DC 20551 (or charge by facsimile: 202-728-5886). The Manual is also available on the Board's public web site at www.federalreserve.gov/boarddocs/ supmanual/.