District Circular Letters
July 25, 1997
BANKING SUPERVISION AND REGULATION:
SECONDARY MARKET CREDIT ACTIVITIES
To State Member Banks,
Bank Holding Companies, Edge Act Corporations,
and U.S. Branches and Agencies of Foreign Banks
in the Twelfth Federal Reserve District
Guidance Regarding Risk Management and Capital Adequacy Exposures (SR
97-21[SUP])
Attached is a supervisory letter regarding the risk management and capital
adequacy of secondary market credit activities such as loan syndications,
loan sales and participations, asset securitizations, and the provision
of credit and liquidity enhancements to such transactions.
The guidance set forth in this letter highlights the concern that the
risks associated with certain activities, particularly securitized transactions,
may be less obvious and more complex than the risks inherent in traditional
lending activities. Moreover, some secondary market credit activities
involve credit, liquidity, operational, legal, and reputational risks
in concentrations and forms that may not be fully recognized by or incorporated
into internal risk management systems. The extent of these exposures may
not be entirely evident until transactions deteriorate.
The supervisory guidance notes that institutions should incorporate
all of the risks arising from their secondary market credit activities
into their consolidated risk management systems. The sophistication with
which the risks of these activities are incorporated into an institution's
risk management system should be commensurate with the nature and volume
of its secondary market credit activities. In addition, the guidance indicates
that banking organizations involved in secondary market credit activities
should maintain adequate capital against the associated exposures and
should implement reasonable methods for allocating capital internally.
For Additional Information
If you have any questions about these matters, please contact our Banking
Supervision and Regulation Department, at (415) 974-2023.
FEDERAL RESERVE BANK OF SAN FRANCISCO
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