Circular

Saftey and Soundness Guidelines for Asset Quality and Earnings

September 17, 1996
Circular No. 10875

To All State Member Banks in the Second Federal Reserve District:

The following statement was issued by the Board of Governors of the Federal Reserve System:

The Federal Reserve Board, along with the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision, has issued final interagency guidelines prescribing safety and soundness standards for asset quality and earnings, thus completing the requirements of section 132 of the Federal Deposit Insurance Corporation Improvement Act of 1991.

    The guidelines are effective October 1, 1996.

    The guidelines prescribe that insured depository institutions establish and maintain systems that are commensurate with the institution's size and the nature and scope of its operations to:

    • identify problem assets and prevent deterioration in those assets; and
    • evaluate and monitor earnings and ensure that earnings are sufficient to maintain adequate capital and reserves.

    The guidelines are general in nature and focus on what proper management should achieve, while leaving the methods for achieving those objectives to each institution. Since the guidelines are consistent with existing sound practices at banks, the Board believes that well managed banks will not need to alter their operations to comply with the guidelines.

    The final guidelines are substantially the same as those proposed in 1995.

The text of the interagency notice and Board's standards for state member banks, as published in the Federal Register of August 27 is available. Questions on this matter may be directed to your portfolio manager in the Bank Supervision Group or to Maureen F. LeBlanc, Bank Supervision Officer.

William J. McDonough
President