Publication of the December 2001 update to the Bank Holding Company Supervision Manual. (Announcements).

The December 2001 update to the Bank Holding Company Supervision Manual, Supplement No. 21, 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:

1. FFIEC Interagency Policy Statement on the Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions. The policy statement, issued on July 2, 2001, is briefly summarized. It clarifies the agencies' expectations for the documentation that supports the allowance for loan and lease losses (ALLL) methodology. The statement supplements existing guidance and emphasizes the need for appropriate ALLL policies and procedures, including an effective loan-review system. The statement provides examples of appropriate supporting documentation and illustrations on how to implement this guidance. See Supervision and Regulation (SR) Letter 01-17 and its attachment. (SR Letters are the Federal Reserve's primary means of communicating key policy directives to its examiners, supervisory staff, and the banking industry. SR Letters can be viewed on the Board's public web site at www.federalreserve.gov/board/docs/ srletters.)

2. Interagency Guidance on Leveraged Financing. This federal bank supervisory guidance, issued on April 9, 2001, emphasized the sound risk management of leveraged financing by depository institutions. It focuses on risk rating of leveraged-finance loans and how the imputed value of a business (enterprise value) should be evaluated in the risk-rating process. Institutions must use sound valuation methodologies in addition to ongoing stress testing and monitoring of those values. The holding company's board of directors and senior management should consider the guidance as they oversee the holding company's depository institution subsidiaries and as they supervise the leveraged-financed lending activities of nonbank subsidiaries. (See SR Letter 01-9.)

3. Intercompany Transactions with Affiliates. Several new interim and final rules, exemptions, and interpretations are discussed that pertain to the limitations imposed on intercompany transactions by sections 23A and 23B of the Federal Reserve Act. The interpretations and exemptions involve derivatives, intraday extensions of credit, and transactions involving depository institution loans made to a customer who uses the loan's proceeds (1) to purchase a security or other asset through a depository institution broker-dealer affiliate that acts as a riskless principal or (2) to purchase a security from a depository institution broker-dealer affiliate when the loan was made pursuant to a pre-existing line of credit that was not entered into in contemplation of the purchase of securities from the depository institution affiliate. Another final rule expands the types of securities that are eligible for a bank to purchase from its registered broker-dealer affiliates under section 23A(d)(6) of the act, consistent with safe and sound banking practices.

4. Consequences of U.S. Depository Institutions of Financial Holding Companies Failing to Comply with Well-Capitalize, Well-Manage, and CRA Rating Requirements. This update revises the discussion of the December 2000 Regulation Y standards for U.S. BHCs that are electing to operate as FHCs. The update discusses the consequences when an FHC controls a depository institution subsidiary that fails to continue meeting the well-capitalized and well-managed requirements. It also includes the consequences when an FHC controls a depository institution subsidiary that fails to maintain a satisfactory or better Community Reinvestment Act rating. See Regulation Y, sections 225.83 and 225.84. For additional related statutory, regulatory, and supervisory procedures and guidance, see SR Letter 00-01.

5. Standards for Safeguarding Customer Information. The federal banking agencies, in implementing sections 501 and 505 of the Gramm-Leach-Bliley Act, jointly issued guidelines, effective July 1, 2001, establishing standards for safeguarding customer information. The standards pertain to administrative, technical, and physical safeguards for customer records and information. The Federal Reserve's guidelines require FHCs and BHCs to establish written information security programs to assess and control the risks to customer information. The programs must be appropriate for the institution's size, complexity, nature, and the scope of its operations. (See SR Letter 01-15.)

6. Risk-Based Capital Treatment for Forward Equity Transactions Involving a Banking Organization's Common Stock. Some banking organization's common stock, covered by forward equity transaction agreements, has been treated as tier 1 capital. The Federal Reserve determined that any banking organization's common stock that is covered by forward equity transactions entered into after November 9, 2001, must be excluded from tier 1 capital (of a bank holding company or state member bank), other than those specified for deferred compensation or other employee benefit plans. (See SR Letter 01-27.)

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 (www.federalreserve.gov/boarddocs/ supmanual).