District Circular Letters
June 2, 1998
BANKING SUPERVISION AND REGULATION:
INVESTMENT SECURITIES AND
END-USER DERIVATIVES ACTIVITIES
SOUND PRACTICES IN SUBPRIME AUTO LENDING
To State Member Banks, Bank
Holding Companies, Edge Act Corporations,
U.S. Branches and Agencies of Foreign Banks,
and Others Concerned
in the Twelfth Federal Reserve District
Interagency Guidance Regarding Investment Securities and End-User
Derivatives Activities
In March 1995, the Board of Governors of the Federal Reserve System issued
guidance to banking organizations regarding sound risk management practices
for trading and derivatives activities. This guidance, which was set forth
in SR
95-17, recently was adopted on an interagency basis by the Federal
Financial Institutions Examination Council (FFIEC) in its Supervisory
Policy Statement on Investment Securities and End-User Derivatives Activities.
The Federal Reserve Bank of San Francisco is pleased to enclose this policy
statement for your information. The FFIEC Policy Statement, which was
adopted by the Board, provides guidance on sound practices for managing
the market, credit, liquidity, operational, and legal risks involved in
investment securities and end-user derivatives activities. The FFIEC Policy
Statement also rescinds the constraints on investments in "high-risk"
mortgage derivatives products contained in the 1992 FFIEC Supervisory
Policy Statement on Securities Activities published on February 3, 1992,
and distributed in SR
92-1.
State member banks and Edge corporations are expected
to apply the sound practices advanced in the new policy statement, which
reflect a risk-focused approach and the evaluation and control of risk
on an investment portfolio or institution-wide basis. The basic principles
also apply to bank holding companies, which should manage and
control aggregate risk exposures on a consolidated basis, while recognizing
legal distinctions and possible obstacles to cash movements among subsidiaries.
The guidance also should be incorporated into the policies of U.S.
branches and agencies of foreign banks, with appropriate adaptations
to reflect the fact that (1) those offices are an integral part of a foreign
bank which should be managing its risks on a consolidated basis and recognizing
possible obstacles to cash movements among its branches, and (2) the foreign
bank is subject to overall supervision by home country supervisory authority.
Federal Reserve Paper Regarding Subprime Auto Lending
Along with the continued rapid growth of the overall subprime lending
segment, several prominent subprime auto lenders have experienced financial
difficulties arising from operational deficiencies. In light of this and
in accordance with a risk-focused examination approach, an enhanced understanding
of this industry's structural and operational elements is warranted.
Attached is a paper relating to sound practices of subprime auto lenders.
The paper, which was prepared by staff of the Federal Reserve Bank of
Minneapolis with assistance from the Cleveland, Richmond, and Atlanta
Reserve Banks, discusses many of the fundamentals of subprime auto lending.
Topics include
- overview of the subprime auto loan segment;
- subprime auto lending fundamentals, including underwriting, collateral,
loan servicing and collection, and vehicle repossession and resale;
- asset and earnings quality;
- management experience and operating niche; and
- legal risks and organizational structure.
Additional Information
For additional information regarding the Interagency Guidance Regarding
Investment Securities and End-User Derivatives Activities, please contact
our Banking Supervision and Regulation Department, at (415) 974-2023.
For additional information regarding the Federal Reserve paper on subprime
auto lending, please contact Mr. Ron Feldman, Federal Reserve Bank of
Minneapolis, at (612) 204-5176.
FEDERAL RESERVE BANK OF SAN FRANCISCO
Enclosures (Please note: Not all of the referenced attachments are
available online.)
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