The government will adopt a rule June 1 governing bank investments, though compliance will not become mandatory until July, a federal regulator said Sunday.
The rule will require banks to evaluate whether securities purchases increase the overall riskiness of their investment portfolios. It will replace a rule that only requires a review of individual securities without regard to their overall effect on a bank's investment holdings.
"The problem was that you could have lots of portfolio risk even though you understood each security," said William A. Stark, assistant director for supervision at the Federal Deposit Insurance Corp. "So now you will have to look at how each security will impact the overall risk of the portfolio."
Addressing the annual convention of the Independent Bankers Association of America, Mr. Stark said the FDIC will adopt the rule in late March or early April and that the other two banking agencies would sign on within a month.
"Anyone with a bank exam after July 1 should expect these new procedures to be used," he said.
C.J. Pickering, president of IBAA Securities Corp., said he expects regulators to give banks time to adjust before strictly enforcing the policy. "Community banks won't be ready," he said. "But I don't see that as a problem because of the expected accommodating stance of the regulators."
Mr. Stark, who was the first speaker at the four-day convention, said bankers should not overreact to the new policy. "Use common sense," he said. "That is what we are trying to say. We want to leave you some room."
The rule will apply to certificates of deposit held as investments, end- user derivatives, and securities held to maturity or available for sale. Exempted are securities the bank actively trades.
Banks must account for market risk, credit risk, liquidity risk, operational risk, and legal risk. Directors and senior managers are responsible for ensuring the analysis is done.
Mr. Stark warned that examiners will criticize banks that rely solely on their brokers to analyze risk or that fail to scrutinize the market prices of highly illiquid securities.
"This proposal is a step in the correct direction," Mr. Stark said. "It is consistent with market changes and consistent with how you manage your banks."