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17618 Federal Register / Vol. 72, No.

67 / Monday, April 9, 2007 / Notices

requires this information to be compiled assessment of information on theft and DEPARTMENT OF THE TREASURY
periodically and published by the recovery of motor vehicles,
agency in a form that will be helpful to comprehensive insurance coverage and Office of Thrift Supervision
the public, the law enforcement actions taken by insurers to reduce [No. OTS–2007–0009]
community, and Congress. As required thefts for the 2001 reporting period.
by section 33112(c), this report provides Savings and Loan Holding Company
Section 33112 of Title 49 requires
information on theft and recovery of Rating System
vehicles; rating rules and plans used by subject insurers or designated agents to
motor vehicle insurers to reduce report annually to the agency on theft AGENCY: Office of Thrift Supervision,
premiums due to a reduction in motor and recovery of vehicles, on rating rules Treasury (OTS).
vehicle thefts; and actions taken by and plans used by insurers to reduce ACTION: Notice and request for comment.
insurers to assist in deterring thefts. premiums due to a reduction in motor
ADDRESSES: Interested persons may vehicle thefts, and on actions taken by SUMMARY: Changes in the environment
obtain a copy of this report and insurers to assist in deterring thefts. in which depository institutions and
appendices by contacting the U.S. Rental and leasing companies also are their holding companies operate have
Department of Transportation, Docket required to provide annual theft reports had a substantial impact on the way
Management, Room PL–401, 400 to the agency. In accordance with 49 they are managed and necessitate
Seventh Street, SW., Washington, DC CFR Part 544.5, each insurer, rental and changes in the way they are supervised.
20590. Docket hours are from 10 a.m. to leasing company to which this OTS supervises a diverse population of
5 p.m. Requests should refer to Docket regulation applies must submit a report holding companies ranging from non-
No. 2004–17217. This report and annually not later than October 25, complex companies with limited
appendices may also be viewed on-line beginning with the calendar year for activities to large, internationally active
at: http://www.nhtsa.dot.gov/cars/rules/ which they are required to report. The conglomerates that engage in a variety of
theft. report would contain information for activities. OTS has a well-established
FOR FURTHER INFORMATION CONTACT: Ms. the calendar year three years previous to program for meeting its statutory
Rosalind Proctor, Office of International the year in which the report is filed. The responsibilities with respect to savings
Vehicle, Fuel Economy and Consumer and loan holding companies (SLHCs or
report that was due by October 25, 2004
Standards, NHTSA, 400 Seventh Street, holding companies) and the thrift
contains the required information for
SW., Washington, DC 20590. Ms. industry. Holding company supervision
the 2001 calendar year. Interested is an integral part of this oversight
Proctor’s telephone number is (202) persons may obtain a copy of individual
366–0846. Her fax number is (202) 493– program, and OTS routinely takes steps
insurer reports for CY 2001 by to enhance its risk-focused supervision
2290. contacting the U.S. Department of of holding companies.
SUPPLEMENTARY INFORMATION: The Motor Transportation, Docket Management, While OTS has emphasized risk
Vehicle Theft Law Enforcement Act of Room PL–401, 400 Seventh Street, SW., management in its supervisory
1984 (Theft Act) was implemented to Washington, DC 20590. Docket hours processes for SLHCs of all sizes and
enhance detection and prosecution of are from 10 a.m. to 5 p.m. Requests complexities, this emphasis is not
motor vehicle theft (Pub. L. 98–547). should refer to Docket No. 2004–17217. readily apparent in the primary
The Theft Act added a new Title VI to
The annual insurer reports provided components of the current SLHC
the Motor Vehicle Information and Cost
under section 33112 are intended to aid supervisory rating system, CORE
Savings Act, which required the
in implementing the Theft Act and (Capital, Organizational Structure,
Secretary of Transportation to issue a
fulfilling the Department’s requirements Relationship, and Earnings). Therefore,
theft prevention standard for identifying
to report to the public the results of the OTS is considering making changes to
major parts of certain high-theft lines of
insurer reports. The first annual insurer the component descriptions and rating
passenger cars. The Act also addressed
report, referred to as the Section 612 scale used to evaluate the condition of
several other actions to reduce motor
SLHCs. All SLHCs are assigned a rating,
vehicle theft, such as increased criminal Report on Motor Vehicle Theft, was
although the degree of supervisory
penalties for those who traffic in stolen prepared by the agency and issued in
scrutiny varies based on a risk-focused
vehicles and parts, curtailment of the December 1987. The report included evaluation of their size, complexity,
exportation of stolen motor vehicles and theft and recovery data by vehicle type, business activities, and risk exposures.
off-highway mobile equipment, make, line, and model which were OTS is committed to maintaining a
establishment of penalties for tabulated by insurance companies and, common CORE component framework
dismantling vehicles for the purpose of rental and leasing companies. and a rating system that is flexible and
trafficking in stolen parts, and Comprehensive premium information applies to all SLHCs. After reviewing
development of ways to encourage for each of the reporting insurance public comments, OTS intends to make
decreases in premiums charged to companies was also included. This any necessary changes to the proposal
consumers for motor vehicle theft report, the seventeenth, discloses the and adopt a final SLHC rating system.
insurance. same subject information and follows
This notice announces publication by DATES: Comments must be received by
NHTSA of the annual insurer report on the same reporting format. June 8, 2007.
motor vehicle theft for the 2001 Issued on: March 30, 2007. ADDRESSES: You may submit comments,
reporting year. Section 33112(h) of Title Stephen R. Kratzke, identified by OTS–2007–0009, by any of
49 of the U.S. Code, requires this Associate Administrator for Rulemaking. the following methods:
information to be compiled periodically • Federal eRulemaking Portal: Go to
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[FR Doc. E7–6517 Filed 4–6–07; 8:45 am]

and published by the agency in a form http://www.regulations.gov, select
that will be helpful to the public, the ‘‘Office of Thrift Supervision’’ from the
law enforcement community, and agency drop-down menu, then click
Congress. As required by section submit. Select Docket ID ‘‘OTS–2007–
33112(h), this report focuses on the 0009’’ to submit or view public

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Federal Register / Vol. 72, No. 67 / Monday, April 9, 2007 / Notices 17619

comments and to view supporting and condition for use by the supervisory Earnings
related materials for this notice of community and focuses supervisory In the Earnings component, examiners
proposed rulemaking. The ‘‘User Tips’’ responses and actions. The SLHC rating assess the holding company’s operations
link at the top of the page provides system also provides a measurement and financial condition and their
information on using Regulations.gov, tool to discuss the enterprise’s condition current and prospective effect on the
including instructions for submitting or with SLHC management. The current subsidiary thrift. OTS pays close
viewing public comments, viewing SLHC rating system was implemented attention to the holding company’s
other supporting and related materials, in 1988. The rating system currently earnings trends and capacity as well as
and viewing the docket after the close includes the following components: cash flow. It also evaluates the relative
of the comment period. contributions and dividend payout
• Mail: Regulation Comments, Chief Capital
ratios of significant subsidiaries and the
Counsel’s Office, Office of Thrift The first component of a holding overall financial performance of the
Supervision, 1700 G Street, NW., company examination is an evaluation holding company enterprise.
Washington, DC 20552, Attention: OTS– of Capital. OTS does not apply a You can find a thorough description
2007–0009. standardized capital requirement to along with examination procedures for
• Hand Delivery/Courier: Guard’s SLHCs. Instead, OTS considers the each component in the OTS Holding
Desk, East Lobby Entrance, 1700 G overall risk profile of the consolidated Companies Handbook at http://
Street, NW., from 9 a.m. to 4 p.m. on entity on a case-by-case basis. This www.ots.treas.gov.
business days, Attention: Regulation involves assessing analytical measures After evaluating these four
Comments, Chief Counsel’s Office, that include overall leverage, the level components, OTS assigns a composite
Attention: OTS–2007–0009. of short-term debt and liquidity, cash SLHC rating using the following
Instructions: All submissions received flow, reliance on thrift and other definitions: 1
must include the agency name and subsidiary earnings, interest coverage, Above Average (A): Holding company
docket number for this rulemaking. All quality of earnings, and level of enterprises in this group have a wealth
comments received will be entered into consolidated tangible and equity capital. of financial strength. The enterprise
the docket and posted on Individualized capital requirements can could be called upon to provide
Regulations.gov without change, be used as a tool to achieve this goal financial or managerial resources to the
including any personal information when necessary. thrift if circumstances dictate. Above
provided. Comments, including Average holding company enterprises
attachments and other supporting Organizational Structure may exhibit minor weaknesses, but they
materials received are part of the public The Organizational Structure are deemed to be correctable in the
record and subject to public disclosure. component requires examiners to normal course of business. For this
Do not enclose any information in your identify the organizational structure and rating, all component ratings will
comment or supporting materials that ownership and assess any changes. OTS generally be rated 1 or 2.
you consider confidential or also reviews the activities of the holding Satisfactory (S): Holding company
inappropriate for public disclosure. company and other affiliates to enterprises in this group are those
Viewing Comments Electronically: Go determine regulatory compliance and to whose effect on the thrift is considered
to http://www.regulations.gov, select assess the risks these activities may pose neutral. Overall, these holding
‘‘Office of Thrift Supervision’’ from the to the thrift. companies exhibit financial conditions
agency drop-down menu, then click and operating performance that pose
‘‘Submit.’’ Select Docket ID ‘‘OTS– Relationship only a remote threat to the viability of
2007–0009’’ to view public comments In the Relationship component, the thrift. Satisfactory holding company
for this notice of proposed rulemaking. examiners assess the interaction of the enterprises generally do not possess the
Viewing Comments On-Site: You may holding company’s board of directors financial strength to be considered a
inspect comments at the Public Reading and executive management with the substantial resource to the thrift. These
Room, 1700 G Street, NW., by thrift. Examiners reach conclusions companies may be reliant on the thrift
appointment. To make an appointment about: for dividends or other sources of funds
for access, call (202) 906–5922, send an • The materiality of the thrift to the to service debt; however, their debt level
e-mail to public.info@ots.treas.gov, or holding company or its controlling and expected need for funds from the
send a facsimile transmission to (202) shareholders; thrift are not considered overwhelming.
906–6518. (Prior notice identifying the For this rating, the components
• The degree of influence the holding
materials you will be requesting will should generally be rated 2, but may
company has over the thrift and how
assist us in serving you.) We schedule include components rated 1 or 3.
this influence affects the thrift’s
appointments on business days between Unsatisfactory (U): This rating is
10 a.m. and 4 p.m. In most cases, reserved for holding company
• Whether the board of directors enterprises that impose a detrimental or
appointments will be available the next provides adequate oversight for the
business day following the date we burdensome effect on the thrift. Such
holding company and its subsidiaries; companies exhibit high levels of various
receive a request. • How actively the holding company operating weaknesses that at best are
FOR FURTHER INFORMATION CONTACT: is involved in the management of the considered less than satisfactory. There
Donna Deale, Director, Holding thrift; exists an inordinate reliance involving
Companies and Affiliates, (202) 906– • The degree of interdependence of the thrift. Either the holding company is
7488. the thrift and other entities within the
SUPPLEMENTARY INFORMATION: holding company structure; and
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1 Component ratings are assigned to all complex

The SLHC rating system is a • Whether the board has SLHCs and may be assigned, at the examiner’s
management information and implemented effective policies and discretion, to noncomplex SLHCs. When assigned,
the four components are rated on a scale of one to
supervisory tool that systematically procedures to maintain separate three in descending order of performance quality.
indicates the condition of SLHCs. It corporate identities and avoid conflicts The definitions currently in use are set forth in the
provides an evaluation of the SLHC’s of interest. OTS Holding Companies Handbook.

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17620 Federal Register / Vol. 72, No. 67 / Monday, April 9, 2007 / Notices

inordinately reliant on the thrift for cash Within the Organizational Structure a direct impact on the thrift. OTS
flow, or the thrift is inordinately reliant component, examiners would assess believes that using the effect on the
on the holding company for critical inherent risk in the context of lines of thrift subsidiary as a SLHC rating
operating systems. Without immediate business, operations, affiliate criterion can lead to misinterpretation of
corrective action, the thrift’s viability relationships, concentrations, and other the rating. It also may not be as accurate
may be impaired. Enterprises deserving exposures. The most significant types of in portraying the condition of the SLHC
of this rating will predominantly have risk are defined in the proposed rating enterprise as ratings criteria based on
components that are rated 3, although description for the Organizational financial condition, operations, and risk
even one component with a 3 rating Structure component. Based on its profile.
may suffice to justify an overall U rating experience regulating holding After thoroughly evaluating the
if the problems are severe enough. An companies and on a review of similar language in the ratings definitions, OTS
Unsatisfactory rating is only given in the guidance by other banking and believes that language emphasizing the
most severe circumstances. Such a supervisory agencies, OTS compiled a SLHC’s effect on its thrift subsidiary
rating would be comparable to a 4 or 5 comprehensive list of risks that holding limits the supervisory purpose of the
composite thrift rating, and would carry company enterprises face. rating. The SLHC’s effect on its thrift
the presumption that formal OTS proposes changing the name of subsidiary will continue to be an
enforcement action is required, the ‘‘R’’ component from Relationship to important consideration in the
pursuant to RB 18–1b. Risk Management. Within the Risk examination process, but the proposal
Since the introduction of this rating Management component, examiners does not include such language as rating
system, banking organizations and would evaluate corporate governance; criterion.
SLHCs have become more complex. board of directors and senior The proposed changes will elevate the
Several SLHCs have significant management oversight; policies, prominence of risk management; better
international operations and many procedures, and limits; risk monitoring align holding company examination
engage in multiple types of financial and management information systems; components with OTS’s supervisory
activities. In addition, certain SLHCs and internal controls. OTS recognizes process; and provide a more accurate
that existed prior to the enactment of that each SLHC must have the flexibility assessment of the condition of SLHCs.
activities restrictions in the Gramm- to tailor risk management programs to OTS recognizes that it bases certain
Leach-Bliley Act engage in commercial, its size, complexity, and inherent risks. guidance and administrative processes
manufacturing, and other retail OTS also recognizes that its most on the current SLHC rating scale and
activities. As of December 2006, SLHCs complex holding companies are highly definitions. OTS anticipates that a rating
had aggregate consolidated assets of integrated and may manage risk on an of ‘‘4’’ or ‘‘5’’ will equate to an
$7.7 trillion. Because of SLHCs’ enterprise-wide basis, both within and ‘‘unsatisfactory’’ rating for assessment
diversity and OTS’s risk focused across business lines and legal entities. and enforcement purposes. OTS expects
holding company examination to conform existing guidance and
Changes to Rating System
approach, the agency’s approach to regulations to incorporate any changes
holding company examinations and OTS believes that it should refine the
made to the SLHC rating system.
ratings must document our assessment current holding company supervisory
of the risk profile of the holding approach and ratings system. An Proposed Text of the Savings and Loan
company enterprise as well as effective rating system must include an Holding Company Rating System
management’s ability to identify, accurate assessment of each enterprise’s
financial and managerial condition. The Holding Company Rating System
measure, monitor, and control risks.
rating system must be flexible and apply The holding company rating system is
Changes to Examination Components to holding companies of all sizes and used to assess a holding company’s
This document proposes changes to complexity. The current rating scale Capital, Organizational Structure, Risk
two of the existing four examination does not facilitate meaningful Management, and Earnings. Using this
components. OTS is proposing these distinctions in the strengths and system, OTS comprehensively and
changes to place greater emphasis on weaknesses of an enterprise. Therefore, uniformly evaluates all holding
risk management. The number of OTS is proposing the use of a five-point company enterprises, focusing
components and OTS’s risk focused numeric scale similar to the Uniform supervisory attention on the holding
examination approach would not Financial Institution Ratings System company enterprises that are complex
change because of this proposal. (UFIRS) and the OTS CAMELS rating or exhibit financial and operational
Using a slightly revised approach system. The five-point scale would be weaknesses or adverse trends. The
within the CORE framework, OTS will used for both composite and component rating system:
review two components that focus on ratings assigned to SLHCs. The use of a • Identifies problem or deteriorating
financial condition (Capital and five-point scale will better reflect issues holding company enterprises
Earnings) and two other components of supervisory concern and will provide • Categorizes holding company
(Organizational Structure and Risk more distinction in the supervisory enterprises with deficiencies in
Management) that focus on the activities assessment of condition. A five-point particular areas
and operations conducted within the scale also correlates with and is more • Assesses the aggregate strength of
enterprise and the SLHC’s risk comparable to the thrift and bank the SLHC industry.
management practices. holding company rating systems. Each holding company enterprise
With the exception of the ratings OTS proposes to make one other receives a composite rating based on the
changes discussed later in this change to the ratings definitions. evaluation factors.
document, OTS is not proposing a Historically, OTS has based the rating of Composite and component ratings are
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change to its philosophy on evaluating the holding company enterprise on its assigned based on a 1 to 5 numeric
the financial components (Capital and effect on its subsidiary thrift. OTS has scale. A ‘‘1’’ rating is the highest rating,
Earnings). OTS will continue to evaluate encountered situations where it has indicating the strongest performance
capital adequacy relative to a given supervisory concerns within the holding and practices and least degree of
enterprise’s risk profile. company enterprise, which did not have supervisory concern. A ‘‘5’’ rating is the

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Federal Register / Vol. 72, No. 67 / Monday, April 9, 2007 / Notices 17621

lowest rating, indicating the weakest risk management practices are risk inherent in an enterprise’s activities
performance and the highest degree of satisfactory relative to the enterprise’s and the ability of capital to absorb
supervisory concern. size, complexity, and risk profile. unanticipated losses, support business
Examiners will use the following Composite 3. A holding company activities including the level and
descriptions to assign composite and enterprise in this group raises some composition of the parent company and
component ratings to SLHCs. degree of supervisory concern in one or subsidiaries’ debt, and support business
more of the component areas, with plans and strategies.
Description of the Rating System weaknesses that range from moderate to Capital Rating 1. A rating of 1
Elements severe. The magnitude of the indicates that the consolidated holding
Composite Rating deficiencies is generally not severe company enterprise maintains an
enough to rate a component more abundant amount of capital to support
The composite rating is the overall
severely than 4. Management may lack the volume and risk characteristics of its
assessment of the holding company
the ability or willingness to effectively business lines and products; to provide
enterprise as reflected by its
address weaknesses within appropriate a significant cushion to absorb
organizational structure, risk
time frames. This holding company unanticipated losses; and to fully
management, and consolidated financial
enterprise is less resistant to adverse support the level and composition of
strength. The composite rating
business conditions. Risk management borrowing. In addition, the enterprise
encompasses both a forward-looking
practices may be less than satisfactory has abundant capital to support its
and current assessment of the relative to the enterprise’s size, business plans and strategies, it has the
consolidated enterprise, as well as an complexity, and risk profile. However, ability to enter capital markets to raise
assessment of the relationship between there is only a remote threat to the additional capital as necessary, and it
the companies in the enterprise. The holding company enterprise’s continued has a strong capital allocation and
composite rating is not a simple viability. planning process.
numeric average of the CORE Composite 4. A holding company Capital Rating 2. A rating of 2
components; rather, the composite enterprise in this group has serious indicates that the consolidated holding
rating reflects OTS’s judgment of the financial or managerial deficiencies that company enterprise maintains adequate
relative importance of each component result in unsatisfactory performance. capital to support the volume and risk
to the operation of the holding company The supervisory concerns, which characteristics of its business lines and
enterprise. Some components may management and the board are not products; to provide a sufficient cushion
receive more weight than others satisfactorily addressing, range from to absorb unanticipated losses; and to
depending on the SLHC’s activities and severe to critically deficient. A holding support the level and composition of
risk profile. Assignment of a composite company enterprise in this group is borrowing. In addition, the enterprise
rating may incorporate any factor that generally not capable of withstanding has sufficient capital to support its
significantly affects the overall adverse business fluctuations. Risk business plans and strategies, it has the
condition of the holding company management practices are generally ability to enter capital markets to raise
enterprise, although generally the unacceptable relative to the enterprise’s additional capital when necessary, and
composite rating is closely related to the size, complexity, and risk profile. The it has a satisfactory capital allocation
component ratings assigned. enterprise may place undue pressure on and planning process.
Composite 1. A holding company subsidiaries to meet its cash flow by Capital Rating 3. A rating of 3
enterprise in this group is sound in upstreaming imprudent dividends or indicates that the consolidated holding
almost every respect and generally has fees. Unless there is prompt action to company enterprise may not maintain
components rated 1 or 2. Any correct these conditions, future viability sufficient capital to support the volume
weaknesses are minor, and the board of could be impaired. and risk characteristics of certain
directors and management can correct Composite 5. The magnitude and business lines and products; the
them in the normal course of business. character of the risk management or unanticipated losses arising from the
The enterprise is able to withstand financial weaknesses of a holding activities; or the level and composition
economic, financial, and risk exposure company enterprise in this category of borrowing. In addition, the enterprise
changes because of solid risk could lead to insolvency without may not maintain a sufficient capital
management practices and financial immediate aid from shareholders or position to support its business plans
condition. Cash flow is abundant and supervisory action. The volume and and strategies, it may not have the
adequately services debt and other severity of problems are beyond the ability to enter into capital markets to
obligations. This holding company board and management’s ability or raise additional capital as necessary, or
enterprise exhibits strong performance willingness to control or correct. Risk it may not have a sufficient capital
and risk management practices relative management practices are inadequate allocation and planning process. The
to its size, complexity, and risk profile. relative to the enterprise’s size, capital position of the consolidated
Composite 2. A holding company complexity, and risk profile. The holding company enterprise could
enterprise in this group is inability to prevent liquidity or capital quickly become inadequate if there is
fundamentally sound but may have depletion places the holding company deterioration in operations.
modest weaknesses. The board of enterprise’s continued viability in Capital Rating 4. A rating of 4
directors and management are capable serious doubt. indicates that the capital level of the
and willing to correct any weaknesses. consolidated holding company
Generally, no component rating should Capital Adequacy (C) Component Rating enterprise is significantly below the
be more severe than 3 for this holding C reflects the adequacy of an amount needed to ensure support for
company enterprise. Risk management enterprise’s consolidated capital the volume and risk characteristics of
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practices and financial condition create position, from a regulatory perspective certain business lines and products; the
stability, and this holding company and an economic capital perspective, as unanticipated losses arising from
enterprise is capable of withstanding appropriate to the holding company activities; and the level and composition
business fluctuations. Cash flow is enterprise. During OTS’s review of of borrowing. In addition, the
adequate to service obligations. Overall, capital adequacy, OTS will consider the weaknesses in the capital position

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17622 Federal Register / Vol. 72, No. 67 / Monday, April 9, 2007 / Notices

prevent the enterprise from supporting Type of risk Description Type of risk Description
its business plans and strategies, it may
not have the ability to enter into capital Operational .... Operational risk arises from Contagion/Sys- Contagion entails the risk
markets to raise additional capital as the potential that inad- temic. that financial difficulties
equate information sys- encountered by a busi-
necessary, or it has a weak capital
tems, operational prob- ness line or subsidiary of
allocation or planning process. lems, breaches in internal a holding company could
Capital Rating 5. A rating of 5 controls, fraud, or unfore- have an adverse impact
indicates that the level of capital of the seen catastrophes will re- on the financial stability of
consolidated holding company sult in unexpected losses. the enterprise and pos-
Transaction risk arises sibly even on the markets
enterprise is critically deficient. from problems with service in which the constituent
Immediate assistance from shareholders or product delivery. This parts operate. Systemic
or other external sources of financial risk is a function of inter- risk is defined by financial
support is required. nal controls, information system instability, poten-
systems, employee integ- tially catastrophic, caused
Organizational Structure (O) Component rity, and operating proc- or exacerbated by idiosyn-
Rating esses. cratic events or conditions
Legal/Compli- Legal risk arises from the in financial intermediaries.
The O component is an assessment of ance. potential that unenforce- Impacted areas include:
the operations and risks in the holding able contracts, lawsuits, or market value of positions,
company enterprise. In the O adverse judgments can liquidity, credit-worthiness
component, OTS evaluates the disrupt or otherwise nega- of counterparties and obli-
tively affect the operations gors, default rates, liquida-
organizational structure, considering the
or condition of a banking tions, risk premia, and
lines of business, affiliate relationships, organization. Compliance valuation uncertainty.
concentrations, exposures, and the risk is the risk to earnings Concentration The exposure to losses due
overall risk inherent in the structure. or capital arising from vio- to a concentration (assets,
OTS’s analysis under the O lations of, or nonconform- liabilities, off-balance-
ance with, laws, rules, reg- sheet) at the subsidiary,
component considers existing as well as
ulations, prescribed prac- business line, and/or en-
potential issues and risks. OTS pays tices, or ethical standards. terprise level.
particular attention to the following Reputation ...... Reputation risk is the poten- Intra-Group Exposures to risk that result
types of risk in assigning the O rating: tial that negative publicity Transactions. from transactions between
regarding an institution’s affiliates.
Type of risk Description business practices, wheth- Strategic and Strategic and execution risk
er true or not, will cause a Execution. is the risk to earnings or
Credit ............. Credit risk arises from the decline in the customer capital arising from ad-
potential that a borrower base, costly litigation, or verse business decisions
or counterparty will fail to revenue reductions. or improper implementa-
perform on an obligation. Country/Sov- Country risk arises from the tion of those decisions.
Market ............ Market risk is the risk to a fi- ereign. general level of political, fi- This risk is a function of
nancial institution’s condi- nancial, and economic un- the compatibility of an or-
tion resulting from adverse certainty in a country, ganization’s strategic
movements in market which impacts the value of goals, the business strate-
rates or prices, such as in- the country’s bonds and gies developed to achieve
terest rates, foreign ex- equities. Sovereign risk is those goals, the resources
change rates, or equity the risk that a central bank deployed against these
prices. will impose foreign ex- goals, and the quality of
Liquidity .......... Liquidity risk is the potential change regulations that implementation. The re-
that an institution will be will reduce or negate the sources needed to carry
unable to meet its obliga- value of foreign exchange out business strategies
tions as they come due contracts. It also refers to are both tangible and in-
because of an inability to the risk of government de- tangible. They include
liquidate assets or obtain fault on a loan made to a communication channels,
adequate funding (funding country or guaranteed by operating systems, deliv-
liquidity risk) or that it can- it. ery networks, and mana-
not easily unwind or offset gerial capacities and capa-
specific exposures without bilities. Strategic risk fo-
significantly lowering mar- cuses on more than an
ket prices because of in- analysis of the written
adequate market depth or strategic plan. It focuses
market disruptions (market on how plans, systems,
liquidity risk). and implementation affect
the enterprise’s franchise
value. It also incorporates
how management ana-
lyzes external factors that
impact the strategic direc-
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tion of the company.

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Type of risk Description and the board can address them in the Organizational Structure Rating 5. A
normal course of business. rating of 5 indicates that there are
Insurance Organizational Structure Rating 3. A substantial weaknesses in the
rating of 3 indicates that there are organizational structure of the
Pricing and The risk that pricing and un- organizational structure weaknesses that enterprise, and/or the nature and level
Underwriting derwriting practices are in- raise supervisory concern. The nature of risks associated with the activities
Risk. adequate to provide for
the risks assumed.
and level of risks associated with the are, or pose a high likelihood of
Reserving Risk The risk that actual losses or
holding company activities are becoming, a significant concern.
other contractual pay- moderately likely to cause concern. Strategic growth plans, a deficient
ments reflected in reported Intra-group exposures, including control environment, concentrations,
reserves or other liabilities servicing agreements, have the potential legal or reputational issues, or other
will be greater than esti- to undermine the financial condition of types of risk within the enterprise may
mated. other companies in the enterprise. be of critical concern to one or more
Strategic growth plans, weaknesses in companies in the enterprise. The
Organizational Structure Rating 1. A the control environment, weaknesses identified seriously
rating of 1 indicates that the concentrations, legal or reputational jeopardize the continued viability of one
organizational structure, including the issues, or other types of risk within the or more companies in the enterprise.
nature and level of risk associated with enterprise are moderately likely to cause
Risk Management (R) Component Rating
the affiliates’ activities, pose minimal regulatory concern. The enterprise has
concern. Management controls and one or more entities in the structure that R represents OTS’s evaluation of the
monitors intra-group exposures. Any could adversely affect the operation of ability of the directors and senior
concerns posed by strategic plans, the other entities in the enterprise if management, as appropriate for their
control environment, concentrations, management does not take corrective respective positions, to identify,
legal or reputational issues, or other action. measure, monitor, and control risk. The
types of risk within the enterprise are Organizational Structure Rating 4. A R rating underscores the importance of
rating of 4 indicates that there are the control environment, taking into
minor, and management and the board
weaknesses in the organizational consideration the complexity of the
can address them in the normal course
structure of the enterprise, and/or the enterprise and the risk inherent in its
of business.
nature and level of risks associated with activities.
Organizational Structure Rating 2. A the holding company’s activities are, or The R rating includes an assessment
rating of 2 indicates that the have a considerable likelihood of of four areas: board and senior
organizational structure exhibits minor becoming, a cause for concern. Intra- management oversight; policies,
weaknesses, but the nature and level of group exposures, including servicing procedures, and limits; risk monitoring
risks associated with the holding agreements, may also have the and management information systems;
company’s activities are unlikely to be immediate potential to undermine the and internal controls. These areas are
material concerns. Intra-group operations of companies in the evaluated in the context of inherent
exposures, including servicing enterprise. Strategic growth plans, risks as related to the size and
agreements, are generally acceptable, weaknesses in the control environment, complexity of the holding company’s
but isolated transactions or exposures concentrations, legal or reputational operations. They provide a consistent
may present limited cause for regulatory issues, or other types of risk within the framework for evaluating risk
concern. Concerns posed by strategic enterprise may be of considerable cause management and the control
plans, the control environment, for regulatory concern. The weaknesses environment. Moreover, a consistent
concentrations, legal or reputational identified could seriously affect the review of these four areas provides a
issues, or other types of risks within the operation of one or more companies in clear structure and basis for discussion
enterprise are modest, and management the enterprise. of the R rating.

Risk management element Description

Governance/Board and Senior Management This area evaluates the adequacy and effectiveness of board and senior management’s un-
Oversight. derstanding 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 com-
pany’s operating sectors.
Policies, Procedures, and Limits ........................ 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 anal-
ysis considers the adequacy of the enterprise’s accounting and risk disclosure policies and
Risk Monitoring and Management Information This area assesses the adequacy of risk measurement and monitoring, and the adequacy of
Systems. 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 inter-
nal audit team. Include a review of the independence of control areas from management
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and the consistency of the scope coverage of the internal audit team with the complexity of
the enterprise.

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17624 Federal Register / Vol. 72, No. 67 / Monday, April 9, 2007 / Notices

Risk Management Rating 1. A rating depth are generally appropriate to of the four elements of sound risk
of 1 indicates that management manage the risks assumed. Internal management is wholly deficient, and
effectively identifies and controls all controls may display modest management and the board have not
major enterprise risks. Management is weaknesses or deficiencies, but they are demonstrated the capability to address
fully prepared to address risks correctable in the normal course of these deficiencies. Internal controls are
emanating from new products and business. The examiner may have critically weak and could seriously
changing market conditions. The board recommendations for improvement, but jeopardize the continued viability of the
and management are forward-looking the weaknesses noted should not have enterprise. If not already evident, there
and active participants in managing a significant effect on the condition of is an immediate concern about the
risk. Management ensures that the enterprise. reliability of accounting records and
appropriate policies and limits exist and Risk Management Rating 3. A rating regulatory reports and the potential for
that the board understands, reviews, of 3 signifies that there are moderate losses if corrective measures are not
and approves them. Policies and limits deficiencies in risk management taken immediately. Deficiencies in the
are supported by risk monitoring practices and, therefore, there is a cause enterprise’s risk management
procedures, reports, and management for additional supervisory attention. procedures and internal controls require
information systems that provide One or more of the four elements of immediate and close supervisory
management and the board with the sound risk management is not attention.
information and analysis necessary to acceptable, which precludes the
enterprise from fully addressing one or Earnings (E) Component Rating
make timely and appropriate decisions
in response to changing conditions. Risk more significant risks to its operations. E reflects the consolidated holding
management practices and the Certain risk management practices need company enterprise’s overall financial
enterprise’s infrastructure are flexible improvement to ensure that performance, including measures such
and highly responsive to changing management and the board are able to as the quality of consolidated earnings,
industry practices and current identify, monitor, and control all profitability, and liquidity. OTS’s
regulatory guidance. Staff has sufficient significant risks. In addition, the risk review of this area considers the level,
expertise and depth to manage the risks management structure may need trend, and sources of earnings on a
assumed. Internal controls and audit improvement in areas of significant consolidated level as well as for
procedures are sufficiently business activity, or staff expertise may material legal entities or business lines.
not be commensurate with the scope OTS also assesses the ability of earnings
comprehensive and appropriate to the
and complexity of business activities. to augment capital and to provide
size and activities of the holding
Management’s response to changing ongoing support for an enterprise’s
company. There are few noted
industry practices and regulatory activities.
exceptions to the enterprise’s Within this component, OTS also
established policies and procedures, guidance may not be sufficient. The
internal control system may be lacking considers the liquidity of the enterprise.
and none is material. Management This rating reflects the consolidated
effectively and accurately monitors and in some important aspects, leading to
continued control exceptions or failure holding company enterprise’s ability to
manages the enterprise consistent with attract and maintain the sources of
applicable laws, regulations, and to adhere to written policies and
procedures. The risk management funds necessary to achieve financial
guidance, and in accordance with efficiency, support operations, and meet
weaknesses could have adverse effects if
internal policies and procedures. Risk obligations. OTS evaluates the funding
management does not take corrective
management processes are fully conditions for each of the material legal
effective in identifying, monitoring, and Risk Management Rating 4. A rating entities in the holding company
controlling risks. of 4 represents deficient risk structure to determine if any
Risk Management Rating 2. A rating management practices that fail to weaknesses exist that could affect the
of 2 indicates that the enterprise’s identify, monitor, and control funding profile of the consolidated
management of risk is largely effective, significant risk exposures in material enterprise.
but exhibits some minor weaknesses. respects. There is a general lack of Earnings Rating 1. A rating of 1
Management and the board demonstrate adequate guidance and supervision by indicates that the consolidated holding
a responsiveness and ability to cope management and the board. One or company enterprise’s overall financial
successfully with existing and more of the four elements of sound risk performance is solid. The quantity and
foreseeable risks in the business plans. management is deficient and requires quality of earnings for material business
While the enterprise may have some immediate and concerted corrective lines and subsidiaries are sufficient to
minor risk management weaknesses, action by the board and management. make full provision for the absorption of
management and the board have The enterprise may have serious losses and/or accretion of capital in
recognized and are resolving these identified weaknesses that require light of asset quality and business plan
problems. Overall, board and senior substantial improvement in internal objectives. The enterprise has strong
management oversight, policies and control, accounting procedures, or liquidity levels along with well-
limits, risk monitoring procedures, adherence to laws, regulations, and developed funds management practices.
reports, and management information supervisory guidance. The risk The parent company and subsidiaries
systems are satisfactory and effective. management deficiencies warrant a high have reliable and sufficient access to
Risks are controlled and do not require degree of supervisory attention because, sources of funds on favorable terms to
additional supervisory attention. The unless properly addressed, they could meet present and anticipated liquidity
holding company enterprise’s risk seriously affect the condition of the needs.
management practices and holding company enterprise. Earnings Rating 2. A rating of 2
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infrastructure are satisfactory, and Risk Management Rating 5. A rating indicates that the consolidated holding
management makes appropriate of 5 indicates a critical absence of company enterprise’s financial
adjustments in response to changing effective risk management practices in performance is adequate. The quantity
industry practices and current identifying, monitoring, or controlling and quality of the earnings for major
regulatory guidance. Staff expertise and significant risk exposures. One or more business lines and subsidiaries are

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Federal Register / Vol. 72, No. 67 / Monday, April 9, 2007 / Notices 17625

generally adequate to make provision enterprise’s solvency through erosion of SUPPLEMENTARY INFORMATION: Under the
for the absorption of losses and/or capital. In addition, the liquidity levels PRA of 1995 (Public Law 104–13; 44
accretion of capital in light of asset or funds management practices are U.S.C. 3501–21), Federal agencies must
quality and business plan objectives. critically deficient and may threaten obtain approval from the Office of
The enterprise maintains satisfactory continued viability. The enterprise Management and Budget (OMB) for each
liquidity levels and funds management requires immediate external financial collection of information they conduct
practices. The parent company and assistance to meet maturing obligations or sponsor. This request for comment is
subsidiaries have access to sufficient or other liquidity needs. being made pursuant to Section
sources of funds on acceptable terms to Dated: April 3, 2007. 3506(c)(2)(A) of the PRA.
meet present and anticipated liquidity By the Office of Thrift Supervision.
needs. Modest weaknesses in funds With respect to the following
Scott M. Polakoff, collection of information, NCA invites
management practices may be evident,
Deputy Director & Chief Operating Officer. comments on: (1) Whether the proposed
but management and the board can
correct those weaknesses in the normal [FR Doc. E7–6602 Filed 4–6–07; 8:45 am] collection of information is necessary
course of business. BILLING CODE 6720–01–P for the proper performance of NCA’s
Earnings Rating 3. A rating of 3 functions, including whether the
indicates that the consolidated holding information will have practical utility;
company enterprise’s financial DEPARTMENT OF VETERANS (2) the accuracy of NCA’s estimate of the
performance exhibits modest AFFAIRS burden of the proposed collection of
weaknesses. Major business line and information; (3) ways to enhance the
[OMB Control No. 2900–0222]
subsidiary earnings are not fully quality, utility, and clarity of the
adequate to make provisions for the Proposed Information Collection information to be collected; and (4)
absorption of losses and the accretion of Activity: Proposed Collection; ways to minimize the burden of the
capital in relation to the business plan Comment Request collection of information on
objectives. The financial performance of
respondents, including through the use
this enterprise may reflect static or AGENCY: National Cemetery
inconsistent earnings trends, Administration, Department of Veterans of automated collection techniques or
chronically insufficient earnings, or less Affairs. the use of other forms of information
than satisfactory asset quality. This technology.
ACTION: Notice.
enterprise’s liquidity levels or funds Title: Application for Standard
management practices may need SUMMARY: The National Cemetery Government Headstone or Marker for
improvement. The enterprise may lack Administration (NCA), Department of Installation in a Private or State
ready access to funds on reasonable Veterans Affairs (VA), is announcing an Veterans’ Cemetery, VA Form 40–1330.
terms or may evidence significant opportunity for public comment on the
OMB Control Number: 2900–0222.
weaknesses in funds management proposed collection of certain
practices at the parent company or information by the agency. Under the Type of Review: Extension of a
subsidiary levels. However, these Paperwork Reduction Act (PRA) of currently approved collection.
deficiencies are correctable in the 1995, Federal agencies are required to Abstract: The next of kin or other
normal course of business with publish notice in the Federal Register responsible parties of deceased veterans
sufficient board and management concerning each proposed collection of complete VA Form 40–1330 to apply for
attention. information, including each proposed Government provided headstones or
Earnings Rating 4. A rating of 4 extension of a currently approved markers for unmarked graves. VA uses
indicates that the consolidated holding collection for which approval has the data collected to determine the
company enterprise’s financial expired, and allow 60 days for public
performance is weak. Major business veteran’s eligibility for headstone or
comment in response to the notice. This marker.
line or subsidiary earnings are notice solicits comments on the
insufficient to provide for losses and the information needed to obtain a Affected Public: Individuals or
necessary accretion of capital. The government headstone or grave marker. Households.
enterprise may exhibit erratic DATES: Written comments and Estimated Annual Burden: 83,500
fluctuations in net income, poor recommendations on the proposed hours.
earnings (and the likelihood of a further collection of information should be
downward trend), intermittent losses, Estimated Average Burden Per
received on or before June 8, 2007. Respondent: 15 minutes.
chronically depressed earnings, or a
substantial drop from previous ADDRESSES: Submit written comments
Frequency of Response: On occasion.
performance. The liquidity levels or on the collection of information through
www.Regulations.gov; or to Mechelle Estimated Number of Respondents:
funds management practices of this
Powell, National Cemetery 334,000.
holding company enterprise may be
deficient. The enterprise may not have Administration (40D), Department of Dated: March 29, 2007.
or be able to obtain a sufficient volume Veterans Affairs, 810 Vermont Avenue, By direction of the Secretary.
of funds on reasonable terms to meet NW., Washington, DC 20420; or e-mail:
Denise McLamb,
liquidity needs at the parent company mechelle.powell@va.gov. Please refer to
‘‘OMB Control No. 2900–0222’’ in any Program Analyst, Records Management
or subsidiary levels. Service.
Earnings Rating 5. A rating of 5 correspondence. During the comment
period, comments may be viewed online [FR Doc. E7–6513 Filed 4–6–07; 8:45 am]
indicates that the consolidated holding
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company enterprise has poor financial through the Federal Docket Management BILLING CODE 8320–01–P

performance and one or more business System (FDMS) at www.Regulations.gov.

lines or subsidiaries are experiencing FOR FURTHER INFORMATION CONTACT:
losses. Such losses, if not reversed, Mechelle Powell at (202) 501–1960 or
represent a distinct threat to the FAX (202) 273–9381.

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