District Circular Letters

April 2, 1999

BANK SECRECY ACT REGULATIONS:
"KNOW YOUR CUSTOMER" PROGRAMS

INTERAGENCY LETTER:
ALLOWANCE FOR LOAN LOSS

REGULATION CC:
SOFTWARE CHANGES RELATING TO MERGERS

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

Withdrawal of Proposal to Create a "Know Your Customer" Rule (Docket R-1019)

On December 7, 1998, the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and Office of Thrift Supervision (the Agencies) published for public comment a proposed "Know Your Customer" rule (see our letter of December 11, 1998). The public comment period for the proposal ended on March 8, 1999.

After reviewing the comments, the Agencies have reevaluated the proposed "Know Your Customer" rule and have decided to withdraw it.

The Agencies received an unprecedented number of comments on the proposal from the public, banking organizations, industry trade associations, and members of Congress. Most of the comments reflected public concern over the privacy of information that would be collected and held by financial institutions, and many addressed the expected burden the proposed rule would impose on banks and savings associations.

The Agencies are sensitive not only to the concerns raised by the commenters, but also to the need to ensure that the institutions we regulate adhere to the nation's anti-money laundering statutes, including the Bank Secrecy Act. The Agencies agree that there must be an appropriate balance between these legitimate interests.

The Agencies' withdrawal of the proposed rule does not diminish in any manner our long-standing support for the anti-money laundering provisions of the Bank Secrecy Act. Over the past fifteen years, banking organizations and law enforcement authorities have forged a vital partnership to fight financial crime. This partnership will continue, and will evolve as technology and other factors intensify the challenges we face.

Interagency Letter Regarding the Allowance for Loan Loss

The Securities and Exchange Commission, Federal Deposit Insurance Corporation, Federal Reserve Board, Office of the Comptroller of the Currency, and Office of Thrift Supervision have jointly issued the enclosed letter to financial institutions regarding the allowance for loan losses. This letter supplements a November 1998 Joint Interagency Statement in which the Agencies reaffirmed the importance of credible financial statements and meaningful disclosure to investors and to a safe and sound financial system (see our letter of December 9, 1998). The November 1998 Joint Interagency Statement underscored the requirement that depository institutions record and report their allowance for loan and lease losses in accordance with generally accepted accounting principles (GAAP).

Despite the issuance of the November 1998 Statement, there is continued uncertainty among depository institutions as to the expectations of the banking and securities regulators on the appropriate amount, disclosure, and documentation of the allowance for credit losses. The enclosed letter announces additional measures designed to address this uncertainty.

Final Rule Liberalizing Merger-Transition Provisions (R-1027)

The Board has announced final amendments to Regulation CC that will facilitate banks' efforts for Year 2000 readiness. The amendments will allow banks that consummate merger transactions on or after July 1, 1998, and before March 1, 2000, greater time to implement software changes related to the merger. The amendments allow these banks to be treated as separate banks until March 1, 2001. Beginning in March 2000, banks that merge will be subject to the normal one-year transition period. The Board's action recognizes that banks are currently dedicating their automation resources to addressing Year 2000 and leap year computer problems. The extension of the merger transition period will enable merging banks that were individually Year 2000 compliant to delay combining their systems until after the key century rollover and leap year events of Year 2000. Merging institutions will therefore avoid having to reprogram and retest systems that have already been certified as Year 2000 compliant. The extension should also help ensure that banks have sufficient resources to address unanticipated Year 2000 problems that may arise at the turn of the century.

Copies

Copies of the Board's notices (Docket R-1019 and Docket R-1027) are available from our Corporate Services Department. To request copies to be sent via mail, please call (415) 974-2748. To request copies to be sent via fax, please call (415) 974-3333, and specify document numbers 4181 and 4242, respectively.

Additional Information

For additional information regarding the interagency statements, please contact our Banking Supervision and Regulation Department, at (415) 974-2932 [for the withdrawal of the "Know Your Customer" proposal] and (415) 974-3007 [for the letter regarding Allowance for Loan Loss]. For additional information regarding Regulation CC, please contact our Law Department, at (415) 974-2256.

FEDERAL RESERVE BANK OF SAN FRANCISCO