flexibility in reporting details on problem loans.

Full write-ups on any loan that gets special mention in an exam report are now required only if bank management disagrees with an examiner's criticism or if the institution's overall performance rating is going to be low. These detailed explanations are required if the bank receives a Camels rating of 3, 4, or 5.

Previously, write-ups related to disagreements were required only if the criticized credits were among the largest in a portfolio.

The old standard, set in 1994, required examiners to write up at least the 10 largest credits they classified as problematic. Examiners may now comment on a group of loans with similar weaknesses rather than reporting fully on each one.

The instructions give examiners more discretion in reporting on healthier banks. Instead of working with a minimum of 10 write-ups, they may judge whether more or fewer are needed. Shorter descriptions of weak loans are allowed if examiners and management devise a plan for resolving problems.

The Fed has been taking steps in recent years to improve the efficiency of exams by focusing on the biggest risks facing an institution.

"The new approach encourages a cooperative effort between examiners and bank management," Richard Spillenkothen, director of the Fed's banking supervision and regulation division, wrote in a Sept. 29 supervisory letter.

The revised standards let examiners "omit details that are of little benefit to banking organizations and Federal Reserve supervisory staff on the majority of adversely classified assets," Mr. Spillenkothen added.

A separate letter issued the same day on loan line sheets, which contain data on individual loans and their grades, added an item to the checklist of information examiners must provide. Now they are required to cite any "significant" comment from bank management, including responses to the loan grade.

Line sheets describe the nuts and bolts of loans, such as terms, repayment sources, and the value of collateral. Examiners are required to summarize how they determined a loan grade, and the letter instructed them to elaborate when they deem necessary. That additional documentation might include information about a specific reserve or a previous chargeoff.

Examiners should note in the line sheet whether information is unavailable to an examiner because of deficiencies in a bank's loan administration policy or process, and take that into account when grading the loan. If deficiencies are viewed as serious, they should be discussed in the exam report.

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