Circular
Uniform Interagency Trust Rating System
October 23, 1998
Circular No. 11104

To All State Member Banks, Bank Holding Companies, and
Branches and Agencies of Foreign Banks, in the Second Federal Reserve District:

The following is from a statement by the Federal Financial Institutions Examinations Council (FFIEC):

The Task Force on Supervision, acting under delegated authority from the FFIEC, has announced that it has approved an updated Uniform Interagency Trust Rating System (UITRS), and is recommending that FFIEC member agencies adopt and implement the updated rating system effective January 1, 1999.

The UITRS is an internal supervisory tool used by FFIEC agencies to evaluate the soundness of fiduciary activities of financial institutions on a uniform basis, and to identify those institutions requiring special supervisory attention.

The updated rating system revises the definitions of the composite and component ratings to align the UITRS rating definitions with the language and tone of ratings definitions in the Uniform Financial Institutions Rating System (UFIRS), commonly referred to as the CAMELS rating system. For example, under the current UITRS, a composite 3 rated trust department is considered generally adequate, while under the UFIRS a composite 3 rated bank exhibits some degree of supervisory concern. The updated rating system brings the UITRS in line with the language and tone of the UFIRS.

The revised rating system also places more emphasis on risk management. Changes in the fiduciary services industry have broadened the range of products and services offered and accelerated the pace of transactions. These trends reinforce the need for institutions to have sound risk management processes. Accordingly, the revised rating system contains language in each of the components rated that emphasizes processes to identify, measure, monitor and control risks. The revised rating system takes into account that appropriate risk management practices may vary considerably, depending on the size, complexity, and risk profile of an institution's fiduciary activities.

The number of components in the revised rating system has been reduced from six to five. In addition, under certain conditions, assignment of two of the component ratings may not be required.

The updated UITRS modifies criteria for assigning an earnings component rating. An evaluation of earnings will be required of all institutions. However, a component rating will only be required to be assigned for institutions that have total trust assets in excess of $100 million, and for all non-deposit trust companies. The assignment of an earnings rating is not required for the remainder of institutions. Supervisory agencies may elect, however, to rate the earnings of these smaller departments under an alternate rating system. With this change, the FFIEC recognizes that many small institutions offer fiduciary services primarily as a service to their community, with profitability being a secondary consideration.

The revised UITRS also modifies the criteria for assigning an asset management rating. The rating may not be applicable for some institutions whose operations do not include activities involving the management of any discretionary assets. The rating would, however, still be applicable when the institution provides investment advice, even though it does not have discretion over the account assets.

The revised rating system eliminates the account administration and conflicts of interest components in the previous system. A new compliance component will be used to assess an institution's efforts to comply with applicable laws and regulations, accepted standards of fiduciary conduct including conflicts of interest and self dealing provisions, the terms of governing instruments, and internal policies and procedures.

The text of the updated rating system, as published in the Federal Register of October 13 is available as a file (pdf - 59kb). Questions on this matter may be directed, at this Bank, to Barbara Yelcich, Examining Officer.