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ForewordSection 1000.0
The
Bank Holding Company Supervision Manual
has been prepared by Federal Reservesupervision personnel to provide guidance toexaminers as they conduct on-site inspections of bank holding companies (BHCs) and their non-bank subsidiaries. The manual is a compilationof formalized procedures and Board supervisorypolicies that supervision and inspection person-nel should follow. The manual includes newconcepts and keeps pace with the ever-changingindustry.AnintegralpartoftheFederalReserve’soverall program to supervise banking organiza-tions operating under a holding company struc-ture, the manual enhances the staff’s ability toimplement the Board’s inspection and monitor-ing efforts.The manual is designed to provide guidanceto examination and supervision personnel.
It should not be considered a legal reference.
Questions concerning the applicability of andcompliance with federal laws and regulationsshould be referred to appropriate legal counsel.The Federal Reserve System conducts risk assessments and a full-scope inspection pro-gram for BHCs. At a minimum, full-scopeinspections should include sufficient proceduresto reach an informed judgment on the assignedratings for the factors included in the bank hold-ing company RFI/C(D) rating system. The pro-cedures of a full-scope inspection focus in parton assessing the types and extent of risks towhich a BHC and its subsidiaries are exposed.Some of these types of risks include credit,market, liquidity, operational, legal, and reputa-tional risks. Inspections also focus on evaluatingthe organization’s policies and procedures foridentifying, managing, and controlling such risk exposures and on determining whether the man-agement and directors are actively involved inthe oversight of the organization’s risk-management program. To determine whetherthe organization’s policies and procedures forrisk management are fully effective and beingfollowed, inspections or reviews also generallyinclude transaction and compliance testingThe inspection process commences with apreliminary risk assessment. The risk assess-ment highlights the strengths and weaknesses of the holding company and is the basis for deter-mining the procedures to be conducted duringan inspection. Risk assessments identify theorganization’s principal business activities andthe types and quantities of risks associated withthe activities (including those conducted off-balance-sheet). The quality of management andthe control of risks are factored into the initialrisk profile of the holding company. Sources of information for the risk assessment include priorbank and BHC inspection reports and workpa-pers, surveillance program reports, and regula-tory reports. In addition, other relevant supervi-sory materials derived from within the FederalReserve System or other federal and state bank-ing supervisors, as well as from other respon-sible regulatory agencies (for example, theSecurities and Exchange Commission and stateinsurance authorities) are used. Other sourcesfor the risk assessment may include the bankingorganization’s publicly available reports, suchas annual and other periodic reports and infor-mational releases; strategic plans and budgets;internal management reports; information pack-ages for the board of directors; correspondence;the board of directors executive and audit com-mittee minutes; internal audit workpapers andreports; and stock-analysis reports. The activi-ties, transactions, and identified areas havingthe most significant risks, inadequate risk-management processes, or rudimentary internalcontrols will represent the banking organiza-tion’s highest risks. The risk-assessment processculminates in a formalized and structured super-visory strategy, which examination staff willfollow when conducting an inspection.The banking organization’s highest risks areexpected to undergo the most rigorous scrutiny,analysis, and transaction testing by examinersand supervisors. Transaction testing is a reliableand essential inspection technique for assessingthe banking organization’s condition and verify-ing its adherence to internal policies, proce-dures, and controls. Transaction testing alone,however, is not sufficient for ensuring safe andsound operations in a highly dynamic bankingenvironment. The changing nature of financialinstruments and markets allows institutions torapidly reposition their portfolio risk exposures.To ensure that banking organizations have sys-tems in place to identify, measure, monitor, andcontrol their changing risk exposures, inspec-tions further focus on evaluating the bankingorganization’srisk-managementprocesses.Theserisk-management evaluations determine theextent to which the banking organization’s man-agement processes can be relied on.The full-scope inspection may be conductedat a point in time or through a series of targetedor limited-scope reviews conducted on an ongo-ing or continuous basis for the largest and most
 BHC Supervision Manual
July 2005Page 1
 
complex banking organizations. Irrespective of the duration of the inspection, planned supervi-sory activities should be coordinated well inadvance with other responsible bank, thrift, andfunctional regulators in order to avoid duplica-tion of effort and to minimize burden on thebanking organization. Supervisory
fi
ndings of inspectionsshouldbecommunicatedtothebank-ing organization
’
s management or boards of directors, as well as to the banking organiza-tion
’
s other bank supervisors and functionalregulators, when relevant.An inspection also measures the
fi
nancialstrength of a BHC or
fi
nancial holding company(FHC) and focuses on
fi
nancial indices of boththe consolidated entity and its component parts.In addition to the analysis of risk, the otherprincipal indices appraised are quality of assets,earnings, capital adequacy, cash
fl
ow and liquid-ity, and the competency of management. Aninspection or supervisory program should alsoassess the banking organization
’
s program fortransactions between insured subsidiaries andaf 
fi
liates. The basic objective of this assessmentis to determine the impact or consequences of transactions between the parent holding com-pany or its nonbanking subsidiaries and theinsured subsidiaries. Of particular importance iswhether intercompany transactions result in adiversion of income (or income opportunity)away from a federally insured subsidiary to aholding company af 
fi
liate.ThecompetencyofBHCmanagementinover-seeing the banking organization
’
s businessactivities, risk management, and
fi
nancial condi-tion is also evaluated. The FHC and BHCinspection process provides a vehicle for a com-prehensive assessment of the effectiveness of management, resulting in a more open andinformed dialogue between management andrepresentatives of the Federal Reserve.Insummary,theinspectionprocessisintendedto increase the
fl
ow of information to the Fed-eral Reserve System concerning the soundnessof FHCs and BHCs. This information will per-mit the Federal Reserve to encourage soundbanking practices and to take appropriate super-visory action when warranted.This manual is updated periodically to re
fl
ectcurrent supervisory policy and procedures andchanging practices within the industry. Themanual is also available on the Board
’
s publicweb site at www.federalreserve.gov/boarddocs/ supmanual/. We solicit the input and contribu-tion of all supervisory staff and others in re
fi
n-ing and modifying its contents. Please addressall correspondence to the Director of BankingSupervision and Regulation, Board of Gover-nors of the Federal Reserve System, Washing-ton, DC 20551.Foreword 1000.0
 BHC Supervision Manual
July 2005Page 2
 
General Table of ContentsBank Holding Company Supervision Manual 1010.0
This general table of contents lists the major section heads for each part of the manual:1000 Foreword, Contents, Preface, Use of the Manual2000 Supervisory Policy and Issues3000 Nonbanking Activities4000 Financial Analysis5000 BHC Inspection Program6000 Alphabetical Subject IndexA detailed table of contents, which lists the subheads within each major section, precedes parts2000 through 5000.
Tabs Sections Title
1000 FOREWORD, CONTENTS, PREFACE,MANUAL USE1000.0 Foreword1010.0 Table of Contents1020.0 Preface1030.0 Use of the Manual1040.0 Bank Holding Company Examination and InspectionAuthority2000 SUPERVISORY POLICY AND ISSUES2000.0 Introduction to Topics for Supervisory Review2010.0 Supervision of Subsidiaries2010.1 Funding Policies2010.2 Loan Administration2010.3 Investments2010.4 Consolidated Planning Process2010.5 Environmental Liability2010.6 Financial Institution Subsidiary Retail Salesof Nondeposit Investment Products2010.7
Reserved 
2010.8 Sharing of Facilities and Staff by BankingOrganizations
 BHC Supervision Manual
July 2006Page 1
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