Savings and Loan Holding Company Rating System, 17618-17625 [E7-6602]
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requires this information to be compiled
periodically and published by the
agency in a form that will be helpful to
the public, the law enforcement
community, and Congress. As required
by section 33112(c), this report provides
information on theft and recovery of
vehicles; rating rules and plans used by
motor vehicle insurers to reduce
premiums due to a reduction in motor
vehicle thefts; and actions taken by
insurers to assist in deterring thefts.
ADDRESSES: Interested persons may
obtain a copy of this report and
appendices by contacting the U.S.
Department of Transportation, Docket
Management, Room PL–401, 400
Seventh Street, SW., Washington, DC
20590. Docket hours are from 10 a.m. to
5 p.m. Requests should refer to Docket
No. 2004–17217. This report and
appendices may also be viewed on-line
at: https://www.nhtsa.dot.gov/cars/rules/
theft.
FOR FURTHER INFORMATION CONTACT: Ms.
Rosalind Proctor, Office of International
Vehicle, Fuel Economy and Consumer
Standards, NHTSA, 400 Seventh Street,
SW., Washington, DC 20590. Ms.
Proctor’s telephone number is (202)
366–0846. Her fax number is (202) 493–
2290.
SUPPLEMENTARY INFORMATION: The Motor
Vehicle Theft Law Enforcement Act of
1984 (Theft Act) was implemented to
enhance detection and prosecution of
motor vehicle theft (Pub. L. 98–547).
The Theft Act added a new Title VI to
the Motor Vehicle Information and Cost
Savings Act, which required the
Secretary of Transportation to issue a
theft prevention standard for identifying
major parts of certain high-theft lines of
passenger cars. The Act also addressed
several other actions to reduce motor
vehicle theft, such as increased criminal
penalties for those who traffic in stolen
vehicles and parts, curtailment of the
exportation of stolen motor vehicles and
off-highway mobile equipment,
establishment of penalties for
dismantling vehicles for the purpose of
trafficking in stolen parts, and
development of ways to encourage
decreases in premiums charged to
consumers for motor vehicle theft
insurance.
This notice announces publication by
NHTSA of the annual insurer report on
motor vehicle theft for the 2001
reporting year. Section 33112(h) of Title
49 of the U.S. Code, requires this
information to be compiled periodically
and published by the agency in a form
that will be helpful to the public, the
law enforcement community, and
Congress. As required by section
33112(h), this report focuses on the
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assessment of information on theft and
recovery of motor vehicles,
comprehensive insurance coverage and
actions taken by insurers to reduce
thefts for the 2001 reporting period.
Section 33112 of Title 49 requires
subject insurers or designated agents to
report annually to the agency on theft
and recovery of vehicles, on rating rules
and plans used by insurers to reduce
premiums due to a reduction in motor
vehicle thefts, and on actions taken by
insurers to assist in deterring thefts.
Rental and leasing companies also are
required to provide annual theft reports
to the agency. In accordance with 49
CFR Part 544.5, each insurer, rental and
leasing company to which this
regulation applies must submit a report
annually not later than October 25,
beginning with the calendar year for
which they are required to report. The
report would contain information for
the calendar year three years previous to
the year in which the report is filed. The
report that was due by October 25, 2004
contains the required information for
the 2001 calendar year. Interested
persons may obtain a copy of individual
insurer reports for CY 2001 by
contacting the U.S. Department of
Transportation, Docket Management,
Room PL–401, 400 Seventh Street, SW.,
Washington, DC 20590. Docket hours
are from 10 a.m. to 5 p.m. Requests
should refer to Docket No. 2004–17217.
The annual insurer reports provided
under section 33112 are intended to aid
in implementing the Theft Act and
fulfilling the Department’s requirements
to report to the public the results of the
insurer reports. The first annual insurer
report, referred to as the Section 612
Report on Motor Vehicle Theft, was
prepared by the agency and issued in
December 1987. The report included
theft and recovery data by vehicle type,
make, line, and model which were
tabulated by insurance companies and,
rental and leasing companies.
Comprehensive premium information
for each of the reporting insurance
companies was also included. This
report, the seventeenth, discloses the
same subject information and follows
the same reporting format.
Issued on: March 30, 2007.
Stephen R. Kratzke,
Associate Administrator for Rulemaking.
[FR Doc. E7–6517 Filed 4–6–07; 8:45 am]
BILLING CODE 4910–59–P
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DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
[No. OTS–2007–0009]
Savings and Loan Holding Company
Rating System
Office of Thrift Supervision,
Treasury (OTS).
ACTION: Notice and request for comment.
AGENCY:
SUMMARY: Changes in the environment
in which depository institutions and
their holding companies operate have
had a substantial impact on the way
they are managed and necessitate
changes in the way they are supervised.
OTS supervises a diverse population of
holding companies ranging from noncomplex companies with limited
activities to large, internationally active
conglomerates that engage in a variety of
activities. OTS has a well-established
program for meeting its statutory
responsibilities with respect to savings
and loan holding companies (SLHCs or
holding companies) and the thrift
industry. Holding company supervision
is an integral part of this oversight
program, and OTS routinely takes steps
to enhance its risk-focused supervision
of holding companies.
While OTS has emphasized risk
management in its supervisory
processes for SLHCs of all sizes and
complexities, this emphasis is not
readily apparent in the primary
components of the current SLHC
supervisory rating system, CORE
(Capital, Organizational Structure,
Relationship, and Earnings). Therefore,
OTS is considering making changes to
the component descriptions and rating
scale used to evaluate the condition of
SLHCs. All SLHCs are assigned a rating,
although the degree of supervisory
scrutiny varies based on a risk-focused
evaluation of their size, complexity,
business activities, and risk exposures.
OTS is committed to maintaining a
common CORE component framework
and a rating system that is flexible and
applies to all SLHCs. After reviewing
public comments, OTS intends to make
any necessary changes to the proposal
and adopt a final SLHC rating system.
DATES: Comments must be received by
June 8, 2007.
ADDRESSES: You may submit comments,
identified by OTS–2007–0009, by any of
the following methods:
• Federal eRulemaking Portal: Go to
https://www.regulations.gov, select
‘‘Office of Thrift Supervision’’ from the
agency drop-down menu, then click
submit. Select Docket ID ‘‘OTS–2007–
0009’’ to submit or view public
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comments and to view supporting and
related materials for this notice of
proposed rulemaking. The ‘‘User Tips’’
link at the top of the page provides
information on using Regulations.gov,
including instructions for submitting or
viewing public comments, viewing
other supporting and related materials,
and viewing the docket after the close
of the comment period.
• Mail: Regulation Comments, Chief
Counsel’s Office, Office of Thrift
Supervision, 1700 G Street, NW.,
Washington, DC 20552, Attention: OTS–
2007–0009.
• Hand Delivery/Courier: Guard’s
Desk, East Lobby Entrance, 1700 G
Street, NW., from 9 a.m. to 4 p.m. on
business days, Attention: Regulation
Comments, Chief Counsel’s Office,
Attention: OTS–2007–0009.
Instructions: All submissions received
must include the agency name and
docket number for this rulemaking. All
comments received will be entered into
the docket and posted on
Regulations.gov without change,
including any personal information
provided. Comments, including
attachments and other supporting
materials received are part of the public
record and subject to public disclosure.
Do not enclose any information in your
comment or supporting materials that
you consider confidential or
inappropriate for public disclosure.
Viewing Comments Electronically: Go
to https://www.regulations.gov, select
‘‘Office of Thrift Supervision’’ from the
agency drop-down menu, then click
‘‘Submit.’’ Select Docket ID ‘‘OTS–
2007–0009’’ to view public comments
for this notice of proposed rulemaking.
Viewing Comments On-Site: You may
inspect comments at the Public Reading
Room, 1700 G Street, NW., by
appointment. To make an appointment
for access, call (202) 906–5922, send an
e-mail to public.info@ots.treas.gov, or
send a facsimile transmission to (202)
906–6518. (Prior notice identifying the
materials you will be requesting will
assist us in serving you.) We schedule
appointments on business days between
10 a.m. and 4 p.m. In most cases,
appointments will be available the next
business day following the date we
receive a request.
FOR FURTHER INFORMATION CONTACT:
Donna Deale, Director, Holding
Companies and Affiliates, (202) 906–
7488.
SUPPLEMENTARY INFORMATION:
The SLHC rating system is a
management information and
supervisory tool that systematically
indicates the condition of SLHCs. It
provides an evaluation of the SLHC’s
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condition for use by the supervisory
community and focuses supervisory
responses and actions. The SLHC rating
system also provides a measurement
tool to discuss the enterprise’s condition
with SLHC management. The current
SLHC rating system was implemented
in 1988. The rating system currently
includes the following components:
Capital
The first component of a holding
company examination is an evaluation
of Capital. OTS does not apply a
standardized capital requirement to
SLHCs. Instead, OTS considers the
overall risk profile of the consolidated
entity on a case-by-case basis. This
involves assessing analytical measures
that include overall leverage, the level
of short-term debt and liquidity, cash
flow, reliance on thrift and other
subsidiary earnings, interest coverage,
quality of earnings, and level of
consolidated tangible and equity capital.
Individualized capital requirements can
be used as a tool to achieve this goal
when necessary.
Organizational Structure
The Organizational Structure
component requires examiners to
identify the organizational structure and
ownership and assess any changes. OTS
also reviews the activities of the holding
company and other affiliates to
determine regulatory compliance and to
assess the risks these activities may pose
to the thrift.
Relationship
In the Relationship component,
examiners assess the interaction of the
holding company’s board of directors
and executive management with the
thrift. Examiners reach conclusions
about:
• The materiality of the thrift to the
holding company or its controlling
shareholders;
• The degree of influence the holding
company has over the thrift and how
this influence affects the thrift’s
operations;
• Whether the board of directors
provides adequate oversight for the
holding company and its subsidiaries;
• How actively the holding company
is involved in the management of the
thrift;
• The degree of interdependence of
the thrift and other entities within the
holding company structure; and
• Whether the board has
implemented effective policies and
procedures to maintain separate
corporate identities and avoid conflicts
of interest.
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Earnings
In the Earnings component, examiners
assess the holding company’s operations
and financial condition and their
current and prospective effect on the
subsidiary thrift. OTS pays close
attention to the holding company’s
earnings trends and capacity as well as
cash flow. It also evaluates the relative
contributions and dividend payout
ratios of significant subsidiaries and the
overall financial performance of the
holding company enterprise.
You can find a thorough description
along with examination procedures for
each component in the OTS Holding
Companies Handbook at https://
www.ots.treas.gov.
After evaluating these four
components, OTS assigns a composite
SLHC rating using the following
definitions: 1
Above Average (A): Holding company
enterprises in this group have a wealth
of financial strength. The enterprise
could be called upon to provide
financial or managerial resources to the
thrift if circumstances dictate. Above
Average holding company enterprises
may exhibit minor weaknesses, but they
are deemed to be correctable in the
normal course of business. For this
rating, all component ratings will
generally be rated 1 or 2.
Satisfactory (S): Holding company
enterprises in this group are those
whose effect on the thrift is considered
neutral. Overall, these holding
companies exhibit financial conditions
and operating performance that pose
only a remote threat to the viability of
the thrift. Satisfactory holding company
enterprises generally do not possess the
financial strength to be considered a
substantial resource to the thrift. These
companies may be reliant on the thrift
for dividends or other sources of funds
to service debt; however, their debt level
and expected need for funds from the
thrift are not considered overwhelming.
For this rating, the components
should generally be rated 2, but may
include components rated 1 or 3.
Unsatisfactory (U): This rating is
reserved for holding company
enterprises that impose a detrimental or
burdensome effect on the thrift. Such
companies exhibit high levels of various
operating weaknesses that at best are
considered less than satisfactory. There
exists an inordinate reliance involving
the thrift. Either the holding company is
1 Component ratings are assigned to all complex
SLHCs and may be assigned, at the examiner’s
discretion, to noncomplex SLHCs. When assigned,
the four components are rated on a scale of one to
three in descending order of performance quality.
The definitions currently in use are set forth in the
OTS Holding Companies Handbook.
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inordinately reliant on the thrift for cash
flow, or the thrift is inordinately reliant
on the holding company for critical
operating systems. Without immediate
corrective action, the thrift’s viability
may be impaired. Enterprises deserving
of this rating will predominantly have
components that are rated 3, although
even one component with a 3 rating
may suffice to justify an overall U rating
if the problems are severe enough. An
Unsatisfactory rating is only given in the
most severe circumstances. Such a
rating would be comparable to a 4 or 5
composite thrift rating, and would carry
the presumption that formal
enforcement action is required,
pursuant to RB 18–1b.
Since the introduction of this rating
system, banking organizations and
SLHCs have become more complex.
Several SLHCs have significant
international operations and many
engage in multiple types of financial
activities. In addition, certain SLHCs
that existed prior to the enactment of
activities restrictions in the GrammLeach-Bliley Act engage in commercial,
manufacturing, and other retail
activities. As of December 2006, SLHCs
had aggregate consolidated assets of
$7.7 trillion. Because of SLHCs’
diversity and OTS’s risk focused
holding company examination
approach, the agency’s approach to
holding company examinations and
ratings must document our assessment
of the risk profile of the holding
company enterprise as well as
management’s ability to identify,
measure, monitor, and control risks.
Changes to Examination Components
This document proposes changes to
two of the existing four examination
components. OTS is proposing these
changes to place greater emphasis on
risk management. The number of
components and OTS’s risk focused
examination approach would not
change because of this proposal.
Using a slightly revised approach
within the CORE framework, OTS will
review two components that focus on
financial condition (Capital and
Earnings) and two other components
(Organizational Structure and Risk
Management) that focus on the activities
and operations conducted within the
enterprise and the SLHC’s risk
management practices.
With the exception of the ratings
changes discussed later in this
document, OTS is not proposing a
change to its philosophy on evaluating
the financial components (Capital and
Earnings). OTS will continue to evaluate
capital adequacy relative to a given
enterprise’s risk profile.
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Within the Organizational Structure
component, examiners would assess
inherent risk in the context of lines of
business, operations, affiliate
relationships, concentrations, and other
exposures. The most significant types of
risk are defined in the proposed rating
description for the Organizational
Structure component. Based on its
experience regulating holding
companies and on a review of similar
guidance by other banking and
supervisory agencies, OTS compiled a
comprehensive list of risks that holding
company enterprises face.
OTS proposes changing the name of
the ‘‘R’’ component from Relationship to
Risk Management. Within the Risk
Management component, examiners
would evaluate corporate governance;
board of directors and senior
management oversight; policies,
procedures, and limits; risk monitoring
and management information systems;
and internal controls. OTS recognizes
that each SLHC must have the flexibility
to tailor risk management programs to
its size, complexity, and inherent risks.
OTS also recognizes that its most
complex holding companies are highly
integrated and may manage risk on an
enterprise-wide basis, both within and
across business lines and legal entities.
Changes to Rating System
OTS believes that it should refine the
current holding company supervisory
approach and ratings system. An
effective rating system must include an
accurate assessment of each enterprise’s
financial and managerial condition. The
rating system must be flexible and apply
to holding companies of all sizes and
complexity. The current rating scale
does not facilitate meaningful
distinctions in the strengths and
weaknesses of an enterprise. Therefore,
OTS is proposing the use of a five-point
numeric scale similar to the Uniform
Financial Institution Ratings System
(UFIRS) and the OTS CAMELS rating
system. The five-point scale would be
used for both composite and component
ratings assigned to SLHCs. The use of a
five-point scale will better reflect issues
of supervisory concern and will provide
more distinction in the supervisory
assessment of condition. A five-point
scale also correlates with and is more
comparable to the thrift and bank
holding company rating systems.
OTS proposes to make one other
change to the ratings definitions.
Historically, OTS has based the rating of
the holding company enterprise on its
effect on its subsidiary thrift. OTS has
encountered situations where it has
supervisory concerns within the holding
company enterprise, which did not have
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a direct impact on the thrift. OTS
believes that using the effect on the
thrift subsidiary as a SLHC rating
criterion can lead to misinterpretation of
the rating. It also may not be as accurate
in portraying the condition of the SLHC
enterprise as ratings criteria based on
financial condition, operations, and risk
profile.
After thoroughly evaluating the
language in the ratings definitions, OTS
believes that language emphasizing the
SLHC’s effect on its thrift subsidiary
limits the supervisory purpose of the
rating. The SLHC’s effect on its thrift
subsidiary will continue to be an
important consideration in the
examination process, but the proposal
does not include such language as rating
criterion.
The proposed changes will elevate the
prominence of risk management; better
align holding company examination
components with OTS’s supervisory
process; and provide a more accurate
assessment of the condition of SLHCs.
OTS recognizes that it bases certain
guidance and administrative processes
on the current SLHC rating scale and
definitions. OTS anticipates that a rating
of ‘‘4’’ or ‘‘5’’ will equate to an
‘‘unsatisfactory’’ rating for assessment
and enforcement purposes. OTS expects
to conform existing guidance and
regulations to incorporate any changes
made to the SLHC rating system.
Proposed Text of the Savings and Loan
Holding Company Rating System
Holding Company Rating System
The holding company rating system is
used to assess a holding company’s
Capital, Organizational Structure, Risk
Management, and Earnings. Using this
system, OTS comprehensively and
uniformly evaluates all holding
company enterprises, focusing
supervisory attention on the holding
company enterprises that are complex
or exhibit financial and operational
weaknesses or adverse trends. The
rating system:
• Identifies problem or deteriorating
holding company enterprises
• Categorizes holding company
enterprises with deficiencies in
particular areas
• Assesses the aggregate strength of
the SLHC industry.
Each holding company enterprise
receives a composite rating based on the
evaluation factors.
Composite and component ratings are
assigned based on a 1 to 5 numeric
scale. A ‘‘1’’ rating is the highest rating,
indicating the strongest performance
and practices and least degree of
supervisory concern. A ‘‘5’’ rating is the
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lowest rating, indicating the weakest
performance and the highest degree of
supervisory concern.
Examiners will use the following
descriptions to assign composite and
component ratings to SLHCs.
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Description of the Rating System
Elements
Composite Rating
The composite rating is the overall
assessment of the holding company
enterprise as reflected by its
organizational structure, risk
management, and consolidated financial
strength. The composite rating
encompasses both a forward-looking
and current assessment of the
consolidated enterprise, as well as an
assessment of the relationship between
the companies in the enterprise. The
composite rating is not a simple
numeric average of the CORE
components; rather, the composite
rating reflects OTS’s judgment of the
relative importance of each component
to the operation of the holding company
enterprise. Some components may
receive more weight than others
depending on the SLHC’s activities and
risk profile. Assignment of a composite
rating may incorporate any factor that
significantly affects the overall
condition of the holding company
enterprise, although generally the
composite rating is closely related to the
component ratings assigned.
Composite 1. A holding company
enterprise in this group is sound in
almost every respect and generally has
components rated 1 or 2. Any
weaknesses are minor, and the board of
directors and management can correct
them in the normal course of business.
The enterprise is able to withstand
economic, financial, and risk exposure
changes because of solid risk
management practices and financial
condition. Cash flow is abundant and
adequately services debt and other
obligations. This holding company
enterprise exhibits strong performance
and risk management practices relative
to its size, complexity, and risk profile.
Composite 2. A holding company
enterprise in this group is
fundamentally sound but may have
modest weaknesses. The board of
directors and management are capable
and willing to correct any weaknesses.
Generally, no component rating should
be more severe than 3 for this holding
company enterprise. Risk management
practices and financial condition create
stability, and this holding company
enterprise is capable of withstanding
business fluctuations. Cash flow is
adequate to service obligations. Overall,
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risk management practices are
satisfactory relative to the enterprise’s
size, complexity, and risk profile.
Composite 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. The magnitude of the
deficiencies is generally not severe
enough to rate a component more
severely than 4. Management may lack
the ability or willingness to effectively
address weaknesses within appropriate
time frames. This holding company
enterprise is less resistant to adverse
business conditions. Risk management
practices may be less than satisfactory
relative to the enterprise’s size,
complexity, and risk profile. However,
there is only a remote threat to the
holding company enterprise’s continued
viability.
Composite 4. A holding company
enterprise in this group has serious
financial or managerial deficiencies that
result in unsatisfactory performance.
The supervisory concerns, which
management and the board are not
satisfactorily addressing, range from
severe to critically deficient. A holding
company enterprise in this group is
generally not capable of withstanding
adverse business fluctuations. Risk
management practices are generally
unacceptable relative to the enterprise’s
size, complexity, and risk profile. The
enterprise may place undue pressure on
subsidiaries to meet its cash flow by
upstreaming imprudent dividends or
fees. Unless there is prompt action to
correct these conditions, future viability
could be impaired.
Composite 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. The volume and
severity of problems are beyond the
board and management’s ability or
willingness to control or correct. Risk
management practices are inadequate
relative to the enterprise’s size,
complexity, and risk profile. The
inability to prevent liquidity or capital
depletion places the holding company
enterprise’s continued viability in
serious doubt.
Capital Adequacy (C) Component Rating
C reflects the adequacy of an
enterprise’s consolidated capital
position, from a regulatory perspective
and an economic capital perspective, as
appropriate to the holding company
enterprise. During OTS’s review of
capital adequacy, OTS will consider the
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risk inherent in an enterprise’s activities
and the ability of capital to absorb
unanticipated losses, support business
activities including the level and
composition of the parent company and
subsidiaries’ debt, and support business
plans and strategies.
Capital Rating 1. A rating of 1
indicates that the consolidated holding
company enterprise maintains an
abundant amount of capital to support
the volume and risk characteristics of its
business lines and products; to provide
a significant cushion to absorb
unanticipated losses; and to fully
support the level and composition of
borrowing. In addition, the enterprise
has abundant capital to support its
business plans and strategies, it has the
ability to enter capital markets to raise
additional capital as necessary, and it
has a strong capital allocation and
planning process.
Capital Rating 2. A rating of 2
indicates that the consolidated holding
company enterprise maintains adequate
capital to support the volume and risk
characteristics of its business lines and
products; to provide a sufficient cushion
to absorb unanticipated losses; and to
support the level and composition of
borrowing. In addition, the enterprise
has sufficient capital to support its
business plans and strategies, it has the
ability to enter capital markets to raise
additional capital when necessary, and
it has a satisfactory capital allocation
and planning process.
Capital Rating 3. A rating of 3
indicates that the consolidated holding
company enterprise may not maintain
sufficient capital to support the volume
and risk characteristics of certain
business lines and products; the
unanticipated losses arising from the
activities; or the level and composition
of borrowing. In addition, the enterprise
may not maintain a sufficient capital
position to support its business plans
and strategies, it may not have the
ability to enter into capital markets to
raise additional capital as necessary, or
it may not have a sufficient capital
allocation and planning process. The
capital position of the consolidated
holding company enterprise could
quickly become inadequate if there is
deterioration in operations.
Capital Rating 4. A rating of 4
indicates that the capital level of the
consolidated holding company
enterprise is significantly below the
amount needed to ensure support for
the volume and risk characteristics of
certain business lines and products; the
unanticipated losses arising from
activities; and the level and composition
of borrowing. In addition, the
weaknesses in the capital position
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prevent the enterprise from supporting
its business plans and strategies, it may
not have the ability to enter into capital
markets to raise additional capital as
necessary, or it has a weak capital
allocation or planning process.
Capital Rating 5. A rating of 5
indicates that the level of capital of the
consolidated holding company
enterprise is critically deficient.
Immediate assistance from shareholders
or other external sources of financial
support is required.
Type of risk
Description
Type of risk
Operational ....
Operational risk arises from
the potential that inadequate information systems, operational problems, breaches in internal
controls, fraud, or unforeseen catastrophes will result in unexpected losses.
Transaction risk arises
from problems with service
or product delivery. This
risk is a function of internal controls, information
systems, employee integrity, and operating processes.
Legal risk arises from the
potential that unenforceable contracts, lawsuits, or
adverse judgments can
disrupt or otherwise negatively affect the operations
or condition of a banking
organization. Compliance
risk is the risk to earnings
or capital arising from violations of, or nonconformance with, laws, rules, regulations, prescribed practices, or ethical standards.
Reputation risk is the potential that negative publicity
regarding an institution’s
business practices, whether true or not, will cause a
decline in the customer
base, costly litigation, or
revenue reductions.
Country risk arises from the
general level of political, financial, and economic uncertainty in a country,
which impacts the value of
the country’s bonds and
equities. Sovereign risk is
the risk that a central bank
will impose foreign exchange regulations that
will reduce or negate the
value of foreign exchange
contracts. It also refers to
the risk of government default on a loan made to a
country or guaranteed by
it.
Contagion/Systemic.
Organizational Structure (O) Component
Rating
The O component is an assessment of
the operations and risks in the holding
company enterprise. In the O
component, OTS evaluates the
organizational structure, considering the
lines of business, affiliate relationships,
concentrations, exposures, and the
overall risk inherent in the structure.
OTS’s analysis under the O
component considers existing as well as
potential issues and risks. OTS pays
particular attention to the following
types of risk in assigning the O rating:
Type of risk
Credit risk arises from the
potential that a borrower
or counterparty will fail to
perform on an obligation.
Market risk is the risk to a financial institution’s condition resulting from adverse
movements in market
rates or prices, such as interest rates, foreign exchange rates, or equity
prices.
Liquidity risk is the potential
that an institution will be
unable to meet its obligations as they come due
because of an inability to
liquidate assets or obtain
adequate funding (funding
liquidity risk) or that it cannot easily unwind or offset
specific exposures without
significantly lowering market prices because of inadequate market depth or
market disruptions (market
liquidity risk).
Market ............
Liquidity ..........
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Description
Credit .............
Legal/Compliance.
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Description
Contagion entails the risk
that financial difficulties
encountered by a business line or subsidiary of
a holding company could
have an adverse impact
on the financial stability of
the enterprise and possibly even on the markets
in which the constituent
parts operate. Systemic
risk is defined by financial
system instability, potentially catastrophic, caused
or exacerbated by idiosyncratic events or conditions
in financial intermediaries.
Impacted areas include:
market value of positions,
liquidity, credit-worthiness
of counterparties and obligors, default rates, liquidations, risk premia, and
valuation uncertainty.
Concentration
The exposure to losses due
to a concentration (assets,
liabilities, off-balancesheet) at the subsidiary,
business line, and/or enterprise level.
Intra-Group
Exposures to risk that result
Transactions.
from transactions between
affiliates.
Strategic and
Strategic and execution risk
Execution.
is the risk to earnings or
capital arising from adverse business decisions
or improper implementation of those decisions.
This risk is a function of
the compatibility of an organization’s strategic
goals, the business strategies developed to achieve
those goals, the resources
deployed against these
goals, and the quality of
implementation. The resources needed to carry
out business strategies
are both tangible and intangible. They include
communication channels,
operating systems, delivery networks, and managerial capacities and capabilities. Strategic risk focuses on more than an
analysis of the written
strategic plan. It focuses
on how plans, systems,
and implementation affect
the enterprise’s franchise
value. It also incorporates
how management analyzes external factors that
impact the strategic direction of the company.
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Type of risk
Description
Insurance
Pricing and
Underwriting
Risk.
Reserving Risk
The risk that pricing and underwriting practices are inadequate to provide for
the risks assumed.
The risk that actual losses or
other contractual payments reflected in reported
reserves or other liabilities
will be greater than estimated.
Organizational Structure Rating 1. A
rating of 1 indicates that the
organizational structure, including the
nature and level of risk associated with
the affiliates’ activities, pose minimal
concern. Management controls and
monitors intra-group exposures. Any
concerns posed by strategic plans, the
control environment, concentrations,
legal or reputational issues, or other
types of risk within the enterprise are
minor, and management and the board
can address them in the normal course
of business.
Organizational Structure Rating 2. A
rating of 2 indicates that the
organizational structure exhibits minor
weaknesses, but the nature and level of
risks associated with the holding
company’s activities are unlikely to be
material concerns. Intra-group
exposures, including servicing
agreements, are generally acceptable,
but isolated transactions or exposures
may present limited cause for regulatory
concern. Concerns posed by strategic
plans, the control environment,
concentrations, legal or reputational
issues, or other types of risks within the
enterprise are modest, and management
and the board can address them in the
normal course of business.
Organizational Structure Rating 3. A
rating of 3 indicates that there are
organizational structure weaknesses that
raise supervisory concern. The nature
and level of risks associated with the
holding company activities are
moderately likely to cause concern.
Intra-group exposures, including
servicing agreements, have the potential
to undermine the financial condition of
other companies in the enterprise.
Strategic growth plans, weaknesses in
the control environment,
concentrations, legal or reputational
issues, or other types of risk within the
enterprise are moderately likely to cause
regulatory concern. The enterprise has
one or more entities in the structure that
could adversely affect the operation of
other entities in the enterprise if
management does not take corrective
action.
Organizational Structure Rating 4. A
rating of 4 indicates that there are
weaknesses in the organizational
structure of the enterprise, and/or the
nature and level of risks associated with
the holding company’s activities are, or
have a considerable likelihood of
becoming, a cause for concern. Intragroup exposures, including servicing
agreements, may also have the
immediate potential to undermine the
operations of companies in the
enterprise. Strategic growth plans,
weaknesses in the control environment,
concentrations, legal or reputational
issues, or other types of risk within the
enterprise may be of considerable cause
for regulatory concern. The weaknesses
identified could seriously affect the
operation of one or more companies in
the enterprise.
17623
Organizational Structure Rating 5. A
rating of 5 indicates that there are
substantial weaknesses in the
organizational structure of the
enterprise, and/or the nature and level
of risks associated with the activities
are, or pose a high likelihood of
becoming, a significant concern.
Strategic growth plans, a deficient
control environment, concentrations,
legal or reputational issues, or other
types of risk within the enterprise may
be of critical concern to one or more
companies in the enterprise. The
weaknesses identified seriously
jeopardize the continued viability of one
or more companies in the enterprise.
Risk Management (R) Component Rating
R represents OTS’s evaluation of the
ability of the directors and senior
management, as appropriate for their
respective positions, to identify,
measure, monitor, and control risk. The
R rating underscores the importance of
the control environment, taking into
consideration the complexity of the
enterprise and the risk inherent in its
activities.
The R rating includes an assessment
of four areas: board and senior
management oversight; policies,
procedures, and limits; risk monitoring
and management information systems;
and internal controls. These areas are
evaluated in the context of inherent
risks as related to the size and
complexity of the holding company’s
operations. They provide a consistent
framework for evaluating risk
management and the control
environment. Moreover, a consistent
review of these four areas provides a
clear structure and basis for discussion
of the R rating.
Risk management element
Description
Governance/Board and Senior Management
Oversight.
This area evaluates the adequacy and effectiveness of board and senior management’s understanding and management of risk inherent in the holding company enterprise’s activities,
as well as the general capabilities of management. It also considers management’s ability to
identify, understand, and control the risks within the holding company enterprise, to hire
competent staff, and to respond to changes in risk profile or changes in the holding company’s operating sectors.
This area evaluates the adequacy of policies, procedures, and limits given the risks inherent in
the activities of the consolidated enterprise and its stated goals and objectives. OTS’s analysis considers the adequacy of the enterprise’s accounting and risk disclosure policies and
procedures.
This area assesses the adequacy of risk measurement and monitoring, and the adequacy of
the holding company’s management reports and information systems. Include a review of
the assumptions, data, and procedures used to measure risk and the consistency of these
tools with the level of complexity of the enterprise’s activities.
This area evaluates the adequacy of internal controls and internal audit procedures, including
the accuracy of financial reporting and disclosure and the strength and influence of the internal audit team. Include a review of the independence of control areas from management
and the consistency of the scope coverage of the internal audit team with the complexity of
the enterprise.
Policies, Procedures, and Limits ........................
Risk Monitoring and Management Information
Systems.
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Internal Controls .................................................
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Risk Management Rating 1. A rating
of 1 indicates that management
effectively identifies and controls all
major enterprise risks. Management is
fully prepared to address risks
emanating from new products and
changing market conditions. The board
and management are forward-looking
and active participants in managing
risk. Management ensures that
appropriate policies and limits exist and
that the board understands, reviews,
and approves them. Policies and limits
are supported by risk monitoring
procedures, reports, and management
information systems that provide
management and the board with the
information and analysis necessary to
make timely and appropriate decisions
in response to changing conditions. Risk
management practices and the
enterprise’s infrastructure are flexible
and highly responsive to changing
industry practices and current
regulatory guidance. Staff has sufficient
expertise and depth to manage the risks
assumed. Internal controls and audit
procedures are sufficiently
comprehensive and appropriate to the
size and activities of the holding
company. There are few noted
exceptions to the enterprise’s
established policies and procedures,
and none is material. Management
effectively and accurately monitors and
manages the enterprise consistent with
applicable laws, regulations, and
guidance, and in accordance with
internal policies and procedures. Risk
management processes are fully
effective in identifying, monitoring, and
controlling risks.
Risk Management Rating 2. A rating
of 2 indicates that the enterprise’s
management of risk is largely effective,
but exhibits some minor weaknesses.
Management and the board demonstrate
a responsiveness and ability to cope
successfully with existing and
foreseeable risks in the business plans.
While the enterprise may have some
minor risk management weaknesses,
management and the board have
recognized and are resolving these
problems. Overall, board and senior
management oversight, policies and
limits, risk monitoring procedures,
reports, and management information
systems are satisfactory and effective.
Risks are controlled and do not require
additional supervisory attention. The
holding company enterprise’s risk
management practices and
infrastructure are satisfactory, and
management makes appropriate
adjustments in response to changing
industry practices and current
regulatory guidance. Staff expertise and
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depth are generally appropriate to
manage the risks assumed. Internal
controls may display modest
weaknesses or deficiencies, but they are
correctable in the normal course of
business. The examiner may have
recommendations for improvement, but
the weaknesses noted should not have
a significant effect on the condition of
the enterprise.
Risk Management Rating 3. A rating
of 3 signifies that there are moderate
deficiencies in risk management
practices and, therefore, there is a cause
for additional supervisory attention.
One or more of the four elements of
sound risk management is not
acceptable, which precludes the
enterprise from fully addressing one or
more significant risks to its operations.
Certain risk management practices need
improvement to ensure that
management and the board are able to
identify, monitor, and control all
significant risks. In addition, the risk
management structure may need
improvement in areas of significant
business activity, or staff expertise may
not be commensurate with the scope
and complexity of business activities.
Management’s response to changing
industry practices and regulatory
guidance may not be sufficient. The
internal control system may be lacking
in some important aspects, leading to
continued control exceptions or failure
to adhere to written policies and
procedures. The risk management
weaknesses could have adverse effects if
management does not take corrective
action.
Risk Management Rating 4. A rating
of 4 represents deficient risk
management practices that fail to
identify, monitor, and control
significant risk exposures in material
respects. There is a general lack of
adequate guidance and supervision by
management and the board. One or
more of the four elements of sound risk
management is deficient and requires
immediate and concerted corrective
action by the board and management.
The enterprise may have serious
identified weaknesses that require
substantial improvement in internal
control, accounting procedures, or
adherence to laws, regulations, and
supervisory guidance. The risk
management deficiencies warrant a high
degree of supervisory attention because,
unless properly addressed, they could
seriously affect the condition of the
holding company enterprise.
Risk Management Rating 5. A rating
of 5 indicates a critical absence of
effective risk management practices in
identifying, monitoring, or controlling
significant risk exposures. One or more
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of the four elements of sound risk
management is wholly deficient, and
management and the board have not
demonstrated the capability to address
these deficiencies. Internal controls are
critically weak and could seriously
jeopardize the continued viability of the
enterprise. If not already evident, there
is an immediate concern about the
reliability of accounting records and
regulatory reports and the potential for
losses if corrective measures are not
taken immediately. Deficiencies in the
enterprise’s risk management
procedures and internal controls require
immediate and close supervisory
attention.
Earnings (E) Component Rating
E reflects the consolidated holding
company enterprise’s overall financial
performance, including measures such
as the quality of consolidated earnings,
profitability, and liquidity. OTS’s
review of this area considers the level,
trend, and sources of earnings on a
consolidated level as well as for
material legal entities or business lines.
OTS also assesses the ability of earnings
to augment capital and to provide
ongoing support for an enterprise’s
activities.
Within this component, OTS also
considers the liquidity of the enterprise.
This rating reflects the consolidated
holding company enterprise’s ability to
attract and maintain the sources of
funds necessary to achieve financial
efficiency, support operations, and meet
obligations. OTS evaluates the funding
conditions for each of the material legal
entities in the holding company
structure to determine if any
weaknesses exist that could affect the
funding profile of the consolidated
enterprise.
Earnings Rating 1. A rating of 1
indicates that the consolidated holding
company enterprise’s overall financial
performance is solid. The quantity and
quality of earnings for material business
lines and subsidiaries are sufficient to
make full provision for the absorption of
losses and/or accretion of capital in
light of asset quality and business plan
objectives. The enterprise has strong
liquidity levels along with welldeveloped funds management practices.
The parent company and subsidiaries
have reliable and sufficient access to
sources of funds on favorable terms to
meet present and anticipated liquidity
needs.
Earnings Rating 2. A rating of 2
indicates that the consolidated holding
company enterprise’s financial
performance is adequate. The quantity
and quality of the earnings for major
business lines and subsidiaries are
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generally adequate to make provision
for the absorption of losses and/or
accretion of capital in light of asset
quality and business plan objectives.
The enterprise maintains satisfactory
liquidity levels and funds management
practices. The parent company and
subsidiaries have access to sufficient
sources of funds on acceptable terms to
meet present and anticipated liquidity
needs. Modest weaknesses in funds
management practices may be evident,
but management and the board can
correct those weaknesses in the normal
course of business.
Earnings Rating 3. A rating of 3
indicates that the consolidated holding
company enterprise’s financial
performance exhibits modest
weaknesses. Major business line and
subsidiary earnings are not fully
adequate to make provisions for the
absorption of losses and the accretion of
capital in relation to the business plan
objectives. The financial performance of
this enterprise may reflect static or
inconsistent earnings trends,
chronically insufficient earnings, or less
than satisfactory asset quality. This
enterprise’s liquidity levels or funds
management practices may need
improvement. The enterprise may lack
ready access to funds on reasonable
terms or may evidence significant
weaknesses in funds management
practices at the parent company or
subsidiary levels. However, these
deficiencies are correctable in the
normal course of business with
sufficient board and management
attention.
Earnings Rating 4. A rating of 4
indicates that the consolidated holding
company enterprise’s financial
performance is weak. Major business
line or subsidiary earnings are
insufficient to provide for losses and the
necessary accretion of capital. The
enterprise may exhibit erratic
fluctuations in net income, poor
earnings (and the likelihood of a further
downward trend), intermittent losses,
chronically depressed earnings, or a
substantial drop from previous
performance. The liquidity levels or
funds management practices of this
holding company enterprise may be
deficient. The enterprise may not have
or be able to obtain a sufficient volume
of funds on reasonable terms to meet
liquidity needs at the parent company
or subsidiary levels.
Earnings Rating 5. A rating of 5
indicates that the consolidated holding
company enterprise has poor financial
performance and one or more business
lines or subsidiaries are experiencing
losses. Such losses, if not reversed,
represent a distinct threat to the
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enterprise’s solvency through erosion of
capital. In addition, the liquidity levels
or funds management practices are
critically deficient and may threaten
continued viability. The enterprise
requires immediate external financial
assistance to meet maturing obligations
or other liquidity needs.
Dated: April 3, 2007.
By the Office of Thrift Supervision.
Scott M. Polakoff,
Deputy Director & Chief Operating Officer.
[FR Doc. E7–6602 Filed 4–6–07; 8:45 am]
BILLING CODE 6720–01–P
DEPARTMENT OF VETERANS
AFFAIRS
[OMB Control No. 2900–0222]
Proposed Information Collection
Activity: Proposed Collection;
Comment Request
National Cemetery
Administration, Department of Veterans
Affairs.
ACTION: Notice.
AGENCY:
SUMMARY: The National Cemetery
Administration (NCA), Department of
Veterans Affairs (VA), is announcing an
opportunity for public comment on the
proposed collection of certain
information by the agency. Under the
Paperwork Reduction Act (PRA) of
1995, Federal agencies are required to
publish notice in the Federal Register
concerning each proposed collection of
information, including each proposed
extension of a currently approved
collection for which approval has
expired, and allow 60 days for public
comment in response to the notice. This
notice solicits comments on the
information needed to obtain a
government headstone or grave marker.
DATES: Written comments and
recommendations on the proposed
collection of information should be
received on or before June 8, 2007.
ADDRESSES: Submit written comments
on the collection of information through
www.Regulations.gov; or to Mechelle
Powell, National Cemetery
Administration (40D), Department of
Veterans Affairs, 810 Vermont Avenue,
NW., Washington, DC 20420; or e-mail:
mechelle.powell@va.gov. Please refer to
‘‘OMB Control No. 2900–0222’’ in any
correspondence. During the comment
period, comments may be viewed online
through the Federal Docket Management
System (FDMS) at www.Regulations.gov.
FOR FURTHER INFORMATION CONTACT:
Mechelle Powell at (202) 501–1960 or
FAX (202) 273–9381.
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17625
Under the
PRA of 1995 (Public Law 104–13; 44
U.S.C. 3501–21), Federal agencies must
obtain approval from the Office of
Management and Budget (OMB) for each
collection of information they conduct
or sponsor. This request for comment is
being made pursuant to Section
3506(c)(2)(A) of the PRA.
With respect to the following
collection of information, NCA invites
comments on: (1) Whether the proposed
collection of information is necessary
for the proper performance of NCA’s
functions, including whether the
information will have practical utility;
(2) the accuracy of NCA’s estimate of the
burden of the proposed collection of
information; (3) ways to enhance the
quality, utility, and clarity of the
information to be collected; and (4)
ways to minimize the burden of the
collection of information on
respondents, including through the use
of automated collection techniques or
the use of other forms of information
technology.
Title: Application for Standard
Government Headstone or Marker for
Installation in a Private or State
Veterans’ Cemetery, VA Form 40–1330.
OMB Control Number: 2900–0222.
Type of Review: Extension of a
currently approved collection.
Abstract: The next of kin or other
responsible parties of deceased veterans
complete VA Form 40–1330 to apply for
Government provided headstones or
markers for unmarked graves. VA uses
the data collected to determine the
veteran’s eligibility for headstone or
marker.
Affected Public: Individuals or
Households.
Estimated Annual Burden: 83,500
hours.
Estimated Average Burden Per
Respondent: 15 minutes.
Frequency of Response: On occasion.
Estimated Number of Respondents:
334,000.
SUPPLEMENTARY INFORMATION:
Dated: March 29, 2007.
By direction of the Secretary.
Denise McLamb,
Program Analyst, Records Management
Service.
[FR Doc. E7–6513 Filed 4–6–07; 8:45 am]
BILLING CODE 8320–01–P
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]]>Agencies
[Federal Register Volume 72, Number 67 (Monday, April 9, 2007)]
[Notices]
[Pages 17618-17625]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-6602]
=======================================================================
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DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
[No. OTS-2007-0009]
Savings and Loan Holding Company Rating System
AGENCY: Office of Thrift Supervision, Treasury (OTS).
ACTION: Notice and request for comment.
-----------------------------------------------------------------------
SUMMARY: Changes in the environment in which depository institutions
and their holding companies operate have had a substantial impact on
the way they are managed and necessitate changes in the way they are
supervised. OTS supervises a diverse population of holding companies
ranging from non-complex companies with limited activities to large,
internationally active conglomerates that engage in a variety of
activities. OTS has a well-established program for meeting its
statutory responsibilities with respect to savings and loan holding
companies (SLHCs or holding companies) and the thrift industry. Holding
company supervision is an integral part of this oversight program, and
OTS routinely takes steps to enhance its risk-focused supervision of
holding companies.
While OTS has emphasized risk management in its supervisory
processes for SLHCs of all sizes and complexities, this emphasis is not
readily apparent in the primary components of the current SLHC
supervisory rating system, CORE (Capital, Organizational Structure,
Relationship, and Earnings). Therefore, OTS is considering making
changes to the component descriptions and rating scale used to evaluate
the condition of SLHCs. All SLHCs are assigned a rating, although the
degree of supervisory scrutiny varies based on a risk-focused
evaluation of their size, complexity, business activities, and risk
exposures. OTS is committed to maintaining a common CORE component
framework and a rating system that is flexible and applies to all
SLHCs. After reviewing public comments, OTS intends to make any
necessary changes to the proposal and adopt a final SLHC rating system.
DATES: Comments must be received by June 8, 2007.
ADDRESSES: You may submit comments, identified by OTS-2007-0009, by any
of the following methods:
Federal eRulemaking Portal: Go to https://
www.regulations.gov, select ``Office of Thrift Supervision'' from the
agency drop-down menu, then click submit. Select Docket ID ``OTS-2007-
0009'' to submit or view public
[[Page 17619]]
comments and to view supporting and related materials for this notice
of proposed rulemaking. The ``User Tips'' link at the top of the page
provides information on using Regulations.gov, including instructions
for submitting or viewing public comments, viewing other supporting and
related materials, and viewing the docket after the close of the
comment period.
Mail: Regulation Comments, Chief Counsel's Office, Office
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552,
Attention: OTS-2007-0009.
Hand Delivery/Courier: Guard's Desk, East Lobby Entrance,
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention:
Regulation Comments, Chief Counsel's Office, Attention: OTS-2007-0009.
Instructions: All submissions received must include the agency name
and docket number for this rulemaking. All comments received will be
entered into the docket and posted on Regulations.gov without change,
including any personal information provided. Comments, including
attachments and other supporting materials received are part of the
public record and subject to public disclosure. Do not enclose any
information in your comment or supporting materials that you consider
confidential or inappropriate for public disclosure.
Viewing Comments Electronically: Go to https://www.regulations.gov,
select ``Office of Thrift Supervision'' from the agency drop-down menu,
then click ``Submit.'' Select Docket ID ``OTS-2007-0009'' to view
public comments for this notice of proposed rulemaking.
Viewing Comments On-Site: You may inspect comments at the Public
Reading Room, 1700 G Street, NW., by appointment. To make an
appointment for access, call (202) 906-5922, send an e-mail to
public.info@ots.treas.gov, or send a facsimile transmission to (202)
906-6518. (Prior notice identifying the materials you will be
requesting will assist us in serving you.) We schedule appointments on
business days between 10 a.m. and 4 p.m. In most cases, appointments
will be available the next business day following the date we receive a
request.
FOR FURTHER INFORMATION CONTACT: Donna Deale, Director, Holding
Companies and Affiliates, (202) 906-7488.
SUPPLEMENTARY INFORMATION:
The SLHC rating system is a management information and supervisory
tool that systematically indicates the condition of SLHCs. It provides
an evaluation of the SLHC's condition for use by the supervisory
community and focuses supervisory responses and actions. The SLHC
rating system also provides a measurement tool to discuss the
enterprise's condition with SLHC management. The current SLHC rating
system was implemented in 1988. The rating system currently includes
the following components:
Capital
The first component of a holding company examination is an
evaluation of Capital. OTS does not apply a standardized capital
requirement to SLHCs. Instead, OTS considers the overall risk profile
of the consolidated entity on a case-by-case basis. This involves
assessing analytical measures that include overall leverage, the level
of short-term debt and liquidity, cash flow, reliance on thrift and
other subsidiary earnings, interest coverage, quality of earnings, and
level of consolidated tangible and equity capital. Individualized
capital requirements can be used as a tool to achieve this goal when
necessary.
Organizational Structure
The Organizational Structure component requires examiners to
identify the organizational structure and ownership and assess any
changes. OTS also reviews the activities of the holding company and
other affiliates to determine regulatory compliance and to assess the
risks these activities may pose to the thrift.
Relationship
In the Relationship component, examiners assess the interaction of
the holding company's board of directors and executive management with
the thrift. Examiners reach conclusions about:
The materiality of the thrift to the holding company or
its controlling shareholders;
The degree of influence the holding company has over the
thrift and how this influence affects the thrift's operations;
Whether the board of directors provides adequate oversight
for the holding company and its subsidiaries;
How actively the holding company is involved in the
management of the thrift;
The degree of interdependence of the thrift and other
entities within the holding company structure; and
Whether the board has implemented effective policies and
procedures to maintain separate corporate identities and avoid
conflicts of interest.
Earnings
In the Earnings component, examiners assess the holding company's
operations and financial condition and their current and prospective
effect on the subsidiary thrift. OTS pays close attention to the
holding company's earnings trends and capacity as well as cash flow. It
also evaluates the relative contributions and dividend payout ratios of
significant subsidiaries and the overall financial performance of the
holding company enterprise.
You can find a thorough description along with examination
procedures for each component in the OTS Holding Companies Handbook at
https://www.ots.treas.gov.
After evaluating these four components, OTS assigns a composite
SLHC rating using the following definitions: \1\
---------------------------------------------------------------------------
\1\ Component ratings are assigned to all complex SLHCs and may
be assigned, at the examiner's discretion, to noncomplex SLHCs. When
assigned, the four components are rated on a scale of one to three
in descending order of performance quality. The definitions
currently in use are set forth in the OTS Holding Companies
Handbook.
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Above Average (A): Holding company enterprises in this group have a
wealth of financial strength. The enterprise could be called upon to
provide financial or managerial resources to the thrift if
circumstances dictate. Above Average holding company enterprises may
exhibit minor weaknesses, but they are deemed to be correctable in the
normal course of business. For this rating, all component ratings will
generally be rated 1 or 2.
Satisfactory (S): Holding company enterprises in this group are
those whose effect on the thrift is considered neutral. Overall, these
holding companies exhibit financial conditions and operating
performance that pose only a remote threat to the viability of the
thrift. Satisfactory holding company enterprises generally do not
possess the financial strength to be considered a substantial resource
to the thrift. These companies may be reliant on the thrift for
dividends or other sources of funds to service debt; however, their
debt level and expected need for funds from the thrift are not
considered overwhelming.
For this rating, the components should generally be rated 2, but
may include components rated 1 or 3.
Unsatisfactory (U): This rating is reserved for holding company
enterprises that impose a detrimental or burdensome effect on the
thrift. Such companies exhibit high levels of various operating
weaknesses that at best are considered less than satisfactory. There
exists an inordinate reliance involving the thrift. Either the holding
company is
[[Page 17620]]
inordinately reliant on the thrift for cash flow, or the thrift is
inordinately reliant on the holding company for critical operating
systems. Without immediate corrective action, the thrift's viability
may be impaired. Enterprises deserving of this rating will
predominantly have components that are rated 3, although even one
component with a 3 rating may suffice to justify an overall U rating if
the problems are severe enough. An Unsatisfactory rating is only given
in the most severe circumstances. Such a rating would be comparable to
a 4 or 5 composite thrift rating, and would carry the presumption that
formal enforcement action is required, pursuant to RB 18-1b.
Since the introduction of this rating system, banking organizations
and SLHCs have become more complex. Several SLHCs have significant
international operations and many engage in multiple types of financial
activities. In addition, certain SLHCs that existed prior to the
enactment of activities restrictions in the Gramm-Leach-Bliley Act
engage in commercial, manufacturing, and other retail activities. As of
December 2006, SLHCs had aggregate consolidated assets of $7.7
trillion. Because of SLHCs' diversity and OTS's risk focused holding
company examination approach, the agency's approach to holding company
examinations and ratings must document our assessment of the risk
profile of the holding company enterprise as well as management's
ability to identify, measure, monitor, and control risks.
Changes to Examination Components
This document proposes changes to two of the existing four
examination components. OTS is proposing these changes to place greater
emphasis on risk management. The number of components and OTS's risk
focused examination approach would not change because of this proposal.
Using a slightly revised approach within the CORE framework, OTS
will review two components that focus on financial condition (Capital
and Earnings) and two other components (Organizational Structure and
Risk Management) that focus on the activities and operations conducted
within the enterprise and the SLHC's risk management practices.
With the exception of the ratings changes discussed later in this
document, OTS is not proposing a change to its philosophy on evaluating
the financial components (Capital and Earnings). OTS will continue to
evaluate capital adequacy relative to a given enterprise's risk
profile.
Within the Organizational Structure component, examiners would
assess inherent risk in the context of lines of business, operations,
affiliate relationships, concentrations, and other exposures. The most
significant types of risk are defined in the proposed rating
description for the Organizational Structure component. Based on its
experience regulating holding companies and on a review of similar
guidance by other banking and supervisory agencies, OTS compiled a
comprehensive list of risks that holding company enterprises face.
OTS proposes changing the name of the ``R'' component from
Relationship to Risk Management. Within the Risk Management component,
examiners would evaluate corporate governance; board of directors and
senior management oversight; policies, procedures, and limits; risk
monitoring and management information systems; and internal controls.
OTS recognizes that each SLHC must have the flexibility to tailor risk
management programs to its size, complexity, and inherent risks. OTS
also recognizes that its most complex holding companies are highly
integrated and may manage risk on an enterprise-wide basis, both within
and across business lines and legal entities.
Changes to Rating System
OTS believes that it should refine the current holding company
supervisory approach and ratings system. An effective rating system
must include an accurate assessment of each enterprise's financial and
managerial condition. The rating system must be flexible and apply to
holding companies of all sizes and complexity. The current rating scale
does not facilitate meaningful distinctions in the strengths and
weaknesses of an enterprise. Therefore, OTS is proposing the use of a
five-point numeric scale similar to the Uniform Financial Institution
Ratings System (UFIRS) and the OTS CAMELS rating system. The five-point
scale would be used for both composite and component ratings assigned
to SLHCs. The use of a five-point scale will better reflect issues of
supervisory concern and will provide more distinction in the
supervisory assessment of condition. A five-point scale also correlates
with and is more comparable to the thrift and bank holding company
rating systems.
OTS proposes to make one other change to the ratings definitions.
Historically, OTS has based the rating of the holding company
enterprise on its effect on its subsidiary thrift. OTS has encountered
situations where it has supervisory concerns within the holding company
enterprise, which did not have a direct impact on the thrift. OTS
believes that using the effect on the thrift subsidiary as a SLHC
rating criterion can lead to misinterpretation of the rating. It also
may not be as accurate in portraying the condition of the SLHC
enterprise as ratings criteria based on financial condition,
operations, and risk profile.
After thoroughly evaluating the language in the ratings
definitions, OTS believes that language emphasizing the SLHC's effect
on its thrift subsidiary limits the supervisory purpose of the rating.
The SLHC's effect on its thrift subsidiary will continue to be an
important consideration in the examination process, but the proposal
does not include such language as rating criterion.
The proposed changes will elevate the prominence of risk
management; better align holding company examination components with
OTS's supervisory process; and provide a more accurate assessment of
the condition of SLHCs. OTS recognizes that it bases certain guidance
and administrative processes on the current SLHC rating scale and
definitions. OTS anticipates that a rating of ``4'' or ``5'' will
equate to an ``unsatisfactory'' rating for assessment and enforcement
purposes. OTS expects to conform existing guidance and regulations to
incorporate any changes made to the SLHC rating system.
Proposed Text of the Savings and Loan Holding Company Rating System
Holding Company Rating System
The holding company rating system is used to assess a holding
company's Capital, Organizational Structure, Risk Management, and
Earnings. Using this system, OTS comprehensively and uniformly
evaluates all holding company enterprises, focusing supervisory
attention on the holding company enterprises that are complex or
exhibit financial and operational weaknesses or adverse trends. The
rating system:
Identifies problem or deteriorating holding company
enterprises
Categorizes holding company enterprises with deficiencies
in particular areas
Assesses the aggregate strength of the SLHC industry.
Each holding company enterprise receives a composite rating based
on the evaluation factors.
Composite and component ratings are assigned based on a 1 to 5
numeric scale. A ``1'' rating is the highest rating, indicating the
strongest performance and practices and least degree of supervisory
concern. A ``5'' rating is the
[[Page 17621]]
lowest rating, indicating the weakest performance and the highest
degree of supervisory concern.
Examiners will use the following descriptions to assign composite
and component ratings to SLHCs.
Description of the Rating System Elements
Composite Rating
The composite rating is the overall assessment of the holding
company enterprise as reflected by its organizational structure, risk
management, and consolidated financial strength. The composite rating
encompasses both a forward-looking and current assessment of the
consolidated enterprise, as well as an assessment of the relationship
between the companies in the enterprise. The composite rating is not a
simple numeric average of the CORE components; rather, the composite
rating reflects OTS's judgment of the relative importance of each
component to the operation of the holding company enterprise. Some
components may receive more weight than others depending on the SLHC's
activities and risk profile. Assignment of a composite rating may
incorporate any factor that significantly affects the overall condition
of the holding company enterprise, although generally the composite
rating is closely related to the component ratings assigned.
Composite 1. A holding company enterprise in this group is sound in
almost every respect and generally has components rated 1 or 2. Any
weaknesses are minor, and the board of directors and management can
correct them in the normal course of business. The enterprise is able
to withstand economic, financial, and risk exposure changes because of
solid risk management practices and financial condition. Cash flow is
abundant and adequately services debt and other obligations. This
holding company enterprise exhibits strong performance and risk
management practices relative to its size, complexity, and risk
profile.
Composite 2. A holding company enterprise in this group is
fundamentally sound but may have modest weaknesses. The board of
directors and management are capable and willing to correct any
weaknesses. Generally, no component rating should be more severe than 3
for this holding company enterprise. Risk management practices and
financial condition create stability, and this holding company
enterprise is capable of withstanding business fluctuations. Cash flow
is adequate to service obligations. Overall, risk management practices
are satisfactory relative to the enterprise's size, complexity, and
risk profile.
Composite 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. The magnitude of
the deficiencies is generally not severe enough to rate a component
more severely than 4. Management may lack the ability or willingness to
effectively address weaknesses within appropriate time frames. This
holding company enterprise is less resistant to adverse business
conditions. Risk management practices may be less than satisfactory
relative to the enterprise's size, complexity, and risk profile.
However, there is only a remote threat to the holding company
enterprise's continued viability.
Composite 4. A holding company enterprise in this group has serious
financial or managerial deficiencies that result in unsatisfactory
performance. The supervisory concerns, which management and the board
are not satisfactorily addressing, range from severe to critically
deficient. A holding company enterprise in this group is generally not
capable of withstanding adverse business fluctuations. Risk management
practices are generally unacceptable relative to the enterprise's size,
complexity, and risk profile. The enterprise may place undue pressure
on subsidiaries to meet its cash flow by upstreaming imprudent
dividends or fees. Unless there is prompt action to correct these
conditions, future viability could be impaired.
Composite 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. The volume and severity of problems are beyond the
board and management's ability or willingness to control or correct.
Risk management practices are inadequate relative to the enterprise's
size, complexity, and risk profile. The inability to prevent liquidity
or capital depletion places the holding company enterprise's continued
viability in serious doubt.
Capital Adequacy (C) Component Rating
C reflects the adequacy of an enterprise's consolidated capital
position, from a regulatory perspective and an economic capital
perspective, as appropriate to the holding company enterprise. During
OTS's review of capital adequacy, OTS will consider the risk inherent
in an enterprise's activities and the ability of capital to absorb
unanticipated losses, support business activities including the level
and composition of the parent company and subsidiaries' debt, and
support business plans and strategies.
Capital Rating 1. A rating of 1 indicates that the consolidated
holding company enterprise maintains an abundant amount of capital to
support the volume and risk characteristics of its business lines and
products; to provide a significant cushion to absorb unanticipated
losses; and to fully support the level and composition of borrowing. In
addition, the enterprise has abundant capital to support its business
plans and strategies, it has the ability to enter capital markets to
raise additional capital as necessary, and it has a strong capital
allocation and planning process.
Capital Rating 2. A rating of 2 indicates that the consolidated
holding company enterprise maintains adequate capital to support the
volume and risk characteristics of its business lines and products; to
provide a sufficient cushion to absorb unanticipated losses; and to
support the level and composition of borrowing. In addition, the
enterprise has sufficient capital to support its business plans and
strategies, it has the ability to enter capital markets to raise
additional capital when necessary, and it has a satisfactory capital
allocation and planning process.
Capital Rating 3. A rating of 3 indicates that the consolidated
holding company enterprise may not maintain sufficient capital to
support the volume and risk characteristics of certain business lines
and products; the unanticipated losses arising from the activities; or
the level and composition of borrowing. In addition, the enterprise may
not maintain a sufficient capital position to support its business
plans and strategies, it may not have the ability to enter into capital
markets to raise additional capital as necessary, or it may not have a
sufficient capital allocation and planning process. The capital
position of the consolidated holding company enterprise could quickly
become inadequate if there is deterioration in operations.
Capital Rating 4. A rating of 4 indicates that the capital level of
the consolidated holding company enterprise is significantly below the
amount needed to ensure support for the volume and risk characteristics
of certain business lines and products; the unanticipated losses
arising from activities; and the level and composition of borrowing. In
addition, the weaknesses in the capital position
[[Page 17622]]
prevent the enterprise from supporting its business plans and
strategies, it may not have the ability to enter into capital markets
to raise additional capital as necessary, or it has a weak capital
allocation or planning process.
Capital Rating 5. A rating of 5 indicates that the level of capital
of the consolidated holding company enterprise is critically deficient.
Immediate assistance from shareholders or other external sources of
financial support is required.
Organizational Structure (O) Component Rating
The O component is an assessment of the operations and risks in the
holding company enterprise. In the O component, OTS evaluates the
organizational structure, considering the lines of business, affiliate
relationships, concentrations, exposures, and the overall risk inherent
in the structure.
OTS's analysis under the O component considers existing as well as
potential issues and risks. OTS pays particular attention to the
following types of risk in assigning the O rating:
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Type of risk Description
------------------------------------------------------------------------
Credit................................. Credit risk arises from the
potential that a borrower or
counterparty will fail to
perform on an obligation.
Market................................. Market risk is the risk to a
financial institution's
condition resulting from
adverse movements in market
rates or prices, such as
interest rates, foreign
exchange rates, or equity
prices.
Liquidity.............................. Liquidity risk is the potential
that an institution will be
unable to meet its obligations
as they come due because of an
inability to liquidate assets
or obtain adequate funding
(funding liquidity risk) or
that it cannot easily unwind
or offset specific exposures
without significantly lowering
market prices because of
inadequate market depth or
market disruptions (market
liquidity risk).
Operational............................ Operational risk arises from
the potential that inadequate
information systems,
operational problems, breaches
in internal controls, fraud,
or unforeseen catastrophes
will result in unexpected
losses. Transaction risk
arises from problems with
service or product delivery.
This risk is a function of
internal controls, information
systems, employee integrity,
and operating processes.
Legal/Compliance....................... Legal risk arises from the
potential that unenforceable
contracts, lawsuits, or
adverse judgments can disrupt
or otherwise negatively affect
the operations or condition of
a banking organization.
Compliance risk is the risk to
earnings or capital arising
from violations of, or
nonconformance with, laws,
rules, regulations, prescribed
practices, or ethical
standards.
Reputation............................. Reputation risk is the
potential that negative
publicity regarding an
institution's business
practices, whether true or
not, will cause a decline in
the customer base, costly
litigation, or revenue
reductions.
Country/Sovereign...................... Country risk arises from the
general level of political,
financial, and economic
uncertainty in a country,
which impacts the value of the
country's bonds and equities.
Sovereign risk is the risk
that a central bank will
impose foreign exchange
regulations that will reduce
or negate the value of foreign
exchange contracts. It also
refers to the risk of
government default on a loan
made to a country or
guaranteed by it.
Contagion/Systemic..................... Contagion entails the risk that
financial difficulties
encountered by a business line
or subsidiary of a holding
company could have an adverse
impact on the financial
stability of the enterprise
and possibly even on the
markets in which the
constituent parts operate.
Systemic risk is defined by
financial system instability,
potentially catastrophic,
caused or exacerbated by
idiosyncratic events or
conditions in financial
intermediaries. Impacted areas
include: market value of
positions, liquidity, credit-
worthiness of counterparties
and obligors, default rates,
liquidations, risk premia, and
valuation uncertainty.
Concentration.......................... The exposure to losses due to a
concentration (assets,
liabilities, off-balance-
sheet) at the subsidiary,
business line, and/or
enterprise level.
Intra-Group Transactions............... Exposures to risk that result
from transactions between
affiliates.
Strategic and Execution................ Strategic and execution risk is
the risk to earnings or
capital arising from adverse
business decisions or improper
implementation of those
decisions. This risk is a
function of the compatibility
of an organization's strategic
goals, the business strategies
developed to achieve those
goals, the resources deployed
against these goals, and the
quality of implementation. The
resources needed to carry out
business strategies are both
tangible and intangible. They
include communication
channels, operating systems,
delivery networks, and
managerial capacities and
capabilities. Strategic risk
focuses on more than an
analysis of the written
strategic plan. It focuses on
how plans, systems, and
implementation affect the
enterprise's franchise value.
It also incorporates how
management analyzes external
factors that impact the
strategic direction of the
company.
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[[Page 17623]]
Insurance
------------------------------------------------------------------------
Pricing and Underwriting Risk.......... The risk that pricing and
underwriting practices are
inadequate to provide for the
risks assumed.
Reserving Risk......................... The risk that actual losses or
other contractual payments
reflected in reported reserves
or other liabilities will be
greater than estimated.
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Organizational Structure Rating 1. A rating of 1 indicates that the
organizational structure, including the nature and level of risk
associated with the affiliates' activities, pose minimal concern.
Management controls and monitors intra-group exposures. Any concerns
posed by strategic plans, the control environment, concentrations,
legal or reputational issues, or other types of risk within the
enterprise are minor, and management and the board can address them in
the normal course of business.
Organizational Structure Rating 2. A rating of 2 indicates that the
organizational structure exhibits minor weaknesses, but the nature and
level of risks associated with the holding company's activities are
unlikely to be material concerns. Intra-group exposures, including
servicing agreements, are generally acceptable, but isolated
transactions or exposures may present limited cause for regulatory
concern. Concerns posed by strategic plans, the control environment,
concentrations, legal or reputational issues, or other types of risks
within the enterprise are modest, and management and the board can
address them in the normal course of business.
Organizational Structure Rating 3. A rating of 3 indicates that
there are organizational structure weaknesses that raise supervisory
concern. The nature and level of risks associated with the holding
company activities are moderately likely to cause concern. Intra-group
exposures, including servicing agreements, have the potential to
undermine the financial condition of other companies in the enterprise.
Strategic growth plans, weaknesses in the control environment,
concentrations, legal or reputational issues, or other types of risk
within the enterprise are moderately likely to cause regulatory
concern. The enterprise has one or more entities in the structure that
could adversely affect the operation of other entities in the
enterprise if management does not take corrective action.
Organizational Structure Rating 4. A rating of 4 indicates that
there are weaknesses in the organizational structure of the enterprise,
and/or the nature and level of risks associated with the holding
company's activities are, or have a considerable likelihood of
becoming, a cause for concern. Intra-group exposures, including
servicing agreements, may also have the immediate potential to
undermine the operations of companies in the enterprise. Strategic
growth plans, weaknesses in the control environment, concentrations,
legal or reputational issues, or other types of risk within the
enterprise may be of considerable cause for regulatory concern. The
weaknesses identified could seriously affect the operation of one or
more companies in the enterprise.
Organizational Structure Rating 5. A rating of 5 indicates that
there are substantial weaknesses in the organizational structure of the
enterprise, and/or the nature and level of risks associated with the
activities are, or pose a high likelihood of becoming, a significant
concern. Strategic growth plans, a deficient control environment,
concentrations, legal or reputational issues, or other types of risk
within the enterprise may be of critical concern to one or more
companies in the enterprise. The weaknesses identified seriously
jeopardize the continued viability of one or more companies in the
enterprise.
Risk Management (R) Component Rating
R represents OTS's evaluation of the ability of the directors and
senior management, as appropriate for their respective positions, to
identify, measure, monitor, and control risk. The R rating underscores
the importance of the control environment, taking into consideration
the complexity of the enterprise and the risk inherent in its
activities.
The R rating includes an assessment of four areas: board and senior
management oversight; policies, procedures, and limits; risk monitoring
and management information systems; and internal controls. These areas
are evaluated in the context of inherent risks as related to the size
and complexity of the holding company's operations. They provide a
consistent framework for evaluating risk management and the control
environment. Moreover, a consistent review of these four areas provides
a clear structure and basis for discussion of the R rating.
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Risk management element Description
------------------------------------------------------------------------
Governance/Board and Senior This area evaluates the adequacy and
Management Oversight. effectiveness of board and senior
management's understanding and
management of risk inherent in the
holding company enterprise's activities,
as well as the general capabilities of
management. It also considers
management's ability to identify,
understand, and control the risks within
the holding company enterprise, to hire
competent staff, and to respond to
changes in risk profile or changes in
the holding company's operating sectors.
Policies, Procedures, and This area evaluates the adequacy of
Limits. policies, procedures, and limits given
the risks inherent in the activities of
the consolidated enterprise and its
stated goals and objectives. OTS's
analysis considers the adequacy of the
enterprise's accounting and risk
disclosure policies and procedures.
Risk Monitoring and This area assesses the adequacy of risk
Management Information measurement and monitoring, and the
Systems. adequacy of the holding company's
management reports and information
systems. Include a review of the
assumptions, data, and procedures used
to measure risk and the consistency of
these tools with the level of complexity
of the enterprise's activities.
Internal Controls............ This area evaluates the adequacy of
internal controls and internal audit
procedures, including the accuracy of
financial reporting and disclosure and
the strength and influence of the
internal audit team. Include a review of
the independence of control areas from
management and the consistency of the
scope coverage of the internal audit
team with the complexity of the
enterprise.
------------------------------------------------------------------------
[[Page 17624]]
Risk Management Rating 1. A rating of 1 indicates that management
effectively identifies and controls all major enterprise risks.
Management is fully prepared to address risks emanating from new
products and changing market conditions. The board and management are
forward-looking and active participants in managing risk. Management
ensures that appropriate policies and limits exist and that the board
understands, reviews, and approves them. Policies and limits are
supported by risk monitoring procedures, reports, and management
information systems that provide management and the board with the
information and analysis necessary to make timely and appropriate
decisions in response to changing conditions. Risk management practices
and the enterprise's infrastructure are flexible and highly responsive
to changing industry practices and current regulatory guidance. Staff
has sufficient expertise and depth to manage the risks assumed.
Internal controls and audit procedures are sufficiently comprehensive
and appropriate to the size and activities of the holding company.
There are few noted exceptions to the enterprise's established policies
and procedures, and none is material. Management effectively and
accurately monitors and manages the enterprise consistent with
applicable laws, regulations, and guidance, and in accordance with
internal policies and procedures. Risk management processes are fully
effective in identifying, monitoring, and controlling risks.
Risk Management Rating 2. A rating of 2 indicates that the
enterprise's management of risk is largely effective, but exhibits some
minor weaknesses. Management and the board demonstrate a responsiveness
and ability to cope successfully with existing and foreseeable risks in
the business plans. While the enterprise may have some minor risk
management weaknesses, management and the board have recognized and are
resolving these problems. Overall, board and senior management
oversight, policies and limits, risk monitoring procedures, reports,
and management information systems are satisfactory and effective.
Risks are controlled and do not require additional supervisory
attention. The holding company enterprise's risk management practices
and infrastructure are satisfactory, and management makes appropriate
adjustments in response to changing industry practices and current
regulatory guidance. Staff expertise and depth are generally
appropriate to manage the risks assumed. Internal controls may display
modest weaknesses or deficiencies, but they are correctable in the
normal course of business. The examiner may have recommendations for
improvement, but the weaknesses noted should not have a significant
effect on the condition of the enterprise.
Risk Management Rating 3. A rating of 3 signifies that there are
moderate deficiencies in risk management practices and, therefore,
there is a cause for additional supervisory attention. One or more of
the four elements of sound risk management is not acceptable, which
precludes the enterprise from fully addressing one or more significant
risks to its operations. Certain risk management practices need
improvement to ensure that management and the board are able to
identify, monitor, and control all significant risks. In addition, the
risk management structure may need improvement in areas of significant
business activity, or staff expertise may not be commensurate with the
scope and complexity of business activities. Management's response to
changing industry practices and regulatory guidance may not be
sufficient. The internal control system may be lacking in some
important aspects, leading to continued control exceptions or failure
to adhere to written policies and procedures. The risk management
weaknesses could have adverse effects if management does not take
corrective action.
Risk Management Rating 4. A rating of 4 represents deficient risk
management practices that fail to identify, monitor, and control
significant risk exposures in material respects. There is a general
lack of adequate guidance and supervision by management and the board.
One or more of the four elements of sound risk management is deficient
and requires immediate and concerted corrective action by the board and
management. The enterprise may have serious identified weaknesses that
require substantial improvement in internal control, accounting
procedures, or adherence to laws, regulations, and supervisory
guidance. The risk management deficiencies warrant a high degree of
supervisory attention because, unless properly addressed, they could
seriously affect the condition of the holding company enterprise.
Risk Management Rating 5. A rating of 5 indicates a critical
absence of effective risk management practices in identifying,
monitoring, or controlling significant risk exposures. One or more of
the four elements of sound risk management is wholly deficient, and
management and the board have not demonstrated the capability to
address these deficiencies. Internal controls are critically weak and
could seriously jeopardize the continued viability of the enterprise.
If not already evident, there is an immediate concern about the
reliability of accounting records and regulatory reports and the
potential for losses if corrective measures are not taken immediately.
Deficiencies in the enterprise's risk management procedures and
internal controls require immediate and close supervisory attention.
Earnings (E) Component Rating
E reflects the consolidated holding company enterprise's overall
financial performance, including measures such as the quality of
consolidated earnings, profitability, and liquidity. OTS's review of
this area considers the level, trend, and sources of earnings on a
consolidated level as well as for material legal entities or business
lines. OTS also assesses the ability of earnings to augment capital and
to provide ongoing support for an enterprise's activities.
Within this component, OTS also considers the liquidity of the
enterprise. This rating reflects the consolidated holding company
enterprise's ability to attract and maintain the sources of funds
necessary to achieve financial efficiency, support operations, and meet
obligations. OTS evaluates the funding conditions for each of the
material legal entities in the holding company structure to determine
if any weaknesses exist that could affect the funding profile of the
consolidated enterprise.
Earnings Rating 1. A rating of 1 indicates that the consolidated
holding company enterprise's overall financial performance is solid.
The quantity and quality of earnings for material business lines and
subsidiaries are sufficient to make full provision for the absorption
of losses and/or accretion of capital in light of asset quality and
business plan objectives. The enterprise has strong liquidity levels
along with well-developed funds management practices. The parent
company and subsidiaries have reliable and sufficient access to sources
of funds on favorable terms to meet present and anticipated liquidity
needs.
Earnings Rating 2. A rating of 2 indicates that the consolidated
holding company enterprise's financial performance is adequate. The
quantity and quality of the earnings for major business lines and
subsidiaries are
[[Page 17625]]
generally adequate to make provision for the absorption of losses and/
or accretion of capital in light of asset quality and business plan
objectives. The enterprise maintains satisfactory liquidity levels and
funds management practices. The parent company and subsidiaries have
access to sufficient sources of funds on acceptable terms to meet
present and anticipated liquidity needs. Modest weaknesses in funds
management practices may be evident, but management and the board can
correct those weaknesses in the normal course of business.
Earnings Rating 3. A rating of 3 indicates that the consolidated
holding company enterprise's financial performance exhibits modest
weaknesses. Major business line and subsidiary earnings are not fully
adequate to make provisions for the absorption of losses and the
accretion of capital in relation to the business plan objectives. The
financial performance of this enterprise may reflect static or
inconsistent earnings trends, chronically insufficient earnings, or
less than satisfactory asset quality. This enterprise's liquidity
levels or funds management practices may need improvement. The
enterprise may lack ready access to funds on reasonable terms or may
evidence significant weaknesses in funds management practices at the
parent company or subsidiary levels. However, these deficiencies are
correctable in the normal course of business with sufficient board and
management attention.
Earnings Rating 4. A rating of 4 indicates that the consolidated
holding company enterprise's financial performance is weak. Major
business line or subsidiary earnings are insufficient to provide for
losses and the necessary accretion of capital. The enterprise may
exhibit erratic fluctuations in net income, poor earnings (and the
likelihood of a further downward trend), intermittent losses,
chronically depressed earnings, or a substantial drop from previous
performance. The liquidity levels or funds management practices of this
holding company enterprise may be deficient. The enterprise may not
have or be able to obtain a sufficient volume of funds on reasonable
terms to meet liquidity needs at the parent company or subsidiary
levels.
Earnings Rating 5. A rating of 5 indicates that the consolidated
holding company enterprise has poor financial performance and one or
more business lines or subsidiaries are experiencing losses. Such
losses, if not reversed, represent a distinct threat to the
enterprise's solvency through erosion of capital. In addition, the
liquidity levels or funds management practices are critically deficient
and may threaten continued viability. The enterprise requires immediate
external financial assistance to meet maturing obligations or other
liquidity needs.
Dated: April 3, 2007.
By the Office of Thrift Supervision.
Scott M. Polakoff,
Deputy Director & Chief Operating Officer.
[FR Doc. E7-6602 Filed 4-6-07; 8:45 am]
BILLING CODE 6720-01-P
