Examination of Holding Companies

In General

Pursuant to section 5(c)(2) of the Bank Holding Company Act BHCA the FRB is responsible for examining bank holding companies and their subsidiaries 12 USC 1844(c)(2)

Pursuant to section 10(b)(4) of the Savings and Loan Holding Company Act the OTS is responsible for examining S&L Holding companies, but with two exceptions 12 USC 1467a(b)(4)

If a company has both a bank and a savings association subsidiary, it is a bank holding company, not a S&L holding company and it is, therefore, examined by the FRB
If a S&L holding company has functionally regulated subsidiaries or is itself functional regulated, the OTS will coordinate exams with the functional regulator

"Functionally regulated" subsidiaries include investment companies and investment advisors, registered broker-dealers, insurance companies and agencies and entities regulated by the Commodity Futures Trading Commission

BHC Exam Ratings

The examination of bank holding companies results in a composite rating referred to as a RFI/C(D) rating. This unphonomic acronym is made up of four main components and a number of sub-components

All components and sub-components are rated on a
1 through 5 scale with a 1 being the highest rating

"C" is the composite rating of the holding company

"R" is the risk management component and consists of four sub-components:

Board and management oversight
Policies, procedures and limits
Risk monitoring and management information systems
Internal controls

"F" is the financial condition component of the rating. It has the same four sub-components as the F component of the rating

"I" attempts to rate the potential impact of the holding company and its non-depository subsidiaries on the subsidiary depository institutions

"D" is the depository subsidiary component of the rating. If the holding company has but one depository subsidiary, the D component will generally be the CAMEL rating of the subsidiary. For multiple depository subsidiaries, the D component will be weighted over all such subsidiaries

For greater detail of the bank holding company rating system, see Bank Holding Company Rating System, 69 FR 70444

S&L Holding Company Exam Ratings

The OTS takes a slightly different tack from the FRB in its rating of S&L holding companies

Category I holding companies are essentially shell holding companies with no significant activities other than through a depository subsidiary
Category II holding companies are more complex and are considered higher risk entities

The OTS has recently 12.17.07 announced changes to its S&L Holding Company rating system to be effective for all SLHC examinations beginning on or after 1.01.08

Changes will affect the Organizational Structure and Risk Management (which replaces Relationship) components of the rating
CORE scores will also be changed from the present "A" (above average), "S" (satisfactory) and "U" (unsatisfactory) to a numeric 1 to 5 point scale similar to the UFIRS and CAMELS systems
Historically the SLHC scores primarily reflected the effect of the entity's condition on the thrift subsidiary. Under the new system this will still be an important consideration, but the ratings will focus more on the condition of the SLHC itself
OTS does not intend to amend the assessment regulation at the present time, but will do so after most holding companies are assigned a rating under the new system. For the present, a 4 or 5 under the new system will correspond to the "U" in the regulation 12 CFR 502.29
Full text of changes

While the bank regulatory agencies utilize a CAMEL rating, the OTS uses a CORE rating comprised of:

Capital
Organizational structure
Risk management
Earnings

For Category I companies, the CORE rating is predominantly based upon the financial condition of the depository subsidiary

CORE Scores

Each individual component has its own 1 - 5 score and there is a separate composite score for the institution as a whole

The meanings composite scores may be summarized as:

1 - A holding company enterprise in this group is sound in almost every respect and generally has components rated 1 or 2
2 - A holding company enterprise in this group is fundamentally sound but may have modest weaknesses.
3 - A holding company enterprise in this group raises some degree of supervisory concern in one or more of the component areas, with weaknesses that range from moderate to severe.
4 - A holding company enterprise in this group has serious financial or managerial deficiencies that result in unsatisfactory performance.
5 - The magnitude and character of the risk management or financial weaknesses of a holding company enterprise in this category could lead to insolvency without immediate aid from shareholders or supervisory action.

Meanings of the individual component scores may be found in the OTS issuance (Docket ID OTE-2007-009)

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