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OCC Bulletin 2007-21 | June 26, 2007

Supervision of National Trust Banks: Revised Guidance: Capital and Liquidity


Chief Executive Officers of National Banks, Department and Division Heads, Examining Personnel, and Other Interested Parties

As of June 7, 2012, this guidance applies to federal savings associations in addition to national banks.*


On September 28, 2000, the Office of the Comptroller of the Currency (OCC) issued OCC Bulletin 2000-26, "Supervision of National Trust Banks: Capital and Liquidity." The bulletin was originally issued to highlight the critical need for national trust banks (NTBs) to maintain adequate liquidity and capital and for examiners to assess these matters through the supervisory process.

In light of recent examination findings and to clarify certain aspects of the previously issued bulletin, the OCC is rescinding 2000-26 and is issuing this revised guidance. Specifically, the revised guidance:

  • Reiterates the OCC's expectation that it is the responsibility of a NTB's management and board to implement a system to analyze and maintain adequate liquidity and capital.
  • Clarifies the OCC's expectation that capital and liquidity in all NTBs will increase beyond the initial minimum requirements as the size, complexity, and corresponding risks of the activities of the NTB evolve.
  • Clarifies the concept that capital and liquidity should be evaluated separately. In addition, clarifies that balance-sheet assets that are pledged or encumbered, such as those that are committed to meet the NTB's minimum capital requirement or to meet state pledging requirements, should not be viewed as an available source of primary liquidity.
  • Discusses the importance that NTBs develop and maintain forward-looking liquidity risk management processes and develop contingency funding plans to address potential shortfalls.


A NTB is a national bank whose business primarily consists of fiduciary and related products and services. Traditional fiduciary services offered by NTBs include personal trust and estate administration, retirement plan services, investment management and advisory activities, and corporate trust administration. Related services include custody and safekeeping, security-holder services, financial planning, and cash management. Most NTBs do not offer loans or accept deposits and do not have FDIC insurance.

Pursuant to the authority granted in 12 USC 92a, and the licensing requirements of 12 CFR 5.26, a NTB must receive OCC approval to exercise fiduciary powers. Some NTBs are independent, stand-alone entities, while others are subsidiaries of, or are affiliated with, commercial banks, bank holding companies, financial service providers, or other business enterprises.

NTBs are subject to the minimum leverage and risk-based capital ratios defined in 12 CFR 3. However, these ratios generally are not optimal measures of capital adequacy for NTBs, as the risks posed by off-balance sheet asset management activities are not captured in capital ratio calculations. In addition, NTBs are required by 12 USC 92a(i) to have initial capital and surplus not less than the capital and surplus required of state banks offering similar services in the state where the trust bank is located.

Experience indicates that the initial minimum capital levels required by many states often may not be sufficient to cover the risks and expenses of operating a NTB. Therefore, NTBs, generally, are chartered with a condition specifying a minimum dollar amount of capital and, in some cases, a minimum amount of liquidity that must be initially maintained. This amount is based on an analysis of quantitative and qualitative factors including, but not limited to, financial projections, fixed and variable expenses, the nature of fiduciary products and services being proposed, and discussions with organizers. For a more complete discussion of chartering considerations for NTBs, please refer to the "Charters" booklet of the Comptroller's Licensing Manual.

Management of Capital Liquity

It is the responsibility of the board of directors and management of a NTB to ensure that capital and liquidity levels are adequate and that appropriate capital and liquidity planning processes are in place. This includes ensuring compliance with the conditions set forth in the initial approval letter or subsequent licensing decisions as well as considering ongoing capital and liquidity needs. Failure to maintain adequate capital or liquidity is an unsafe and unsound banking practice.

Board-approved capital and liquidity policies should outline the board's philosophy and articulate responsibilities and expectations for the management of capital and liquidity. Policies should also define acceptable levels of capital and liquidity, establish a regular monitoring program, and include contingency funding plans that identify alternatives for meeting unanticipated needs.

The board should regularly assess management's adherence to established policies and evaluate capital adequacy and overall levels and trends in liquidity. The OCC expects NTBs to assess the appropriateness of their level of liquidity on, at least, a quarterly basis. Additionally, the OCC expects NTBs to assess the appropriateness of their level of capital at least annually. A more frequent analysis of capital and/or liquidity is warranted for a NTB that:

  • Has not achieved stable profitability;
  • Is experiencing rapid growth, offering new products or entering new business lines;
  • Offers fiduciary services that are concentrated by revenue source or account officer; or
  • Has other conditions that increase the NTB's risk profile.

Capital Management

Bank capital is generally used to support the bank's risk profile, business strategies, and future growth prospects and to provide a cushion against unexpected losses. The OCC expects that capital in all NTBs will increase beyond the initial minimum capital requirement as the size, complexity, and corresponding risks of the business offered by the NTB evolve. When determining capital needs beyond the initial level, management should assess the quantity of risk associated with the NTB's fiduciary and related activities and the quality of the bank's risk management systems in place.

The OCC recognizes that complex analytical processes and tools may not be practical for all NTBs. The analytical processes at a large and sophisticated NTB may include formal, company-wide risk management processes and systems including model-driven risk analysis capabilities and tools used to stress-test the NTB's sensitivity of earnings and capital. For small, less complex NTBs, a less complicated analytical process may include a capital floor based on a percentage of fiduciary and related assets,1 supplemented by an analysis of the following factors:

  • The composition, stability, and direction of revenue. Compare actual revenue against projected revenue. Evaluate revenue by business line. Consider growth expectations along with customer concentrations. Assess fee structure and pricing policies including negotiated concessions. Also, consider earnings sensitivity to market risk factors (e.g., exposure to changes in interest rates, foreign exchange rates, commodity prices, and equity prices).
  • The level and composition of expenses in relation to the bank's operations. Consider fixed versus variable expenses, the level of cash expenditures for existing or planned contract agreements (employment, equipment, fixtures, premises, etc.), and the adequacy of the cash budgeting and planning process.
  • The level of retained earnings. Evaluate the relationship between retained earnings and realized and anticipated growth. Consider shareholder/parent company expectations for dividends along with their commitment and ability to augment capital, if needed. Also, consider the volume of intangible assets and their affect on capital levels and regulatory capital requirements.
  • The quantity and direction of strategic and reputation risk. Evaluate the volume, type, and growth in managed and non-managed assets. Consider the risks associated with the various product types, business lines, concentrations, investment strategies, and outsourcing arrangements. Evaluate the impact of customer complaints, pending lawsuits, and regulatory actions. Consider the likelihood and magnitude of a loss event along with the opportunity cost of lost business.
  • The quality of risk management processes, including the adequacy of internal and external audit, internal controls, and the compliance management system. Consider the volume and significance of noncompliance with policies and procedures, laws, regulations, prescribed practices, and ethical standards.
  • The quantity of transaction risk from the bank's delivery and administration of asset management products and services. Consider the condition, security, capacity, and recoverability of systems. Also consider plans for conversions, integrations, and system upgrades.
  • The impact of external factors, including economic conditions, competition, evolving technology, legislative changes, and precedent-setting court decisions.

This list is intended to represent factors common to many NTBs. Some factors may not be relevant for each NTB, and additional factors not described here may be appropriate, based on the circumstances of the individual NTB.

Liquidity Management

A NTB must ensure that sufficient liquidity is available at a reasonable cost to meet the bank's obligations when they come due. Liquidity sources for NTBs differ from those available to their commercial bank counterparts. Most NTBs do not take deposits; therefore, this primary funding source used by commercial banks, generally, is not accessible to a NTB. Instead, most NTBs are dependent on fee income as their primary source of liquidity. This fee income tends to fluctuate with the value of assets the NTB manages for its clients. As a result, in periods of volatile or declining financial markets, a NTB may face a decline in revenues and an increase in short-term liquidity needs.

Many NTBs rely on balance-sheet assets, typically in the form of short-term investment securities for secondary liquidity purposes. However, balance-sheet assets that are pledged or encumbered, such as those that are committed to meet the NTB's minimum capital requirement or to meet state pledging requirements, are not an available liquidity source.

All NTBs should develop a comprehensive liquidity risk management program to maintain adequate liquidity at a reasonable cost. The specific analysis and tools that bank management uses to assess liquidity will depend on the complexity of the NTB. At a minimum, a NTB's liquidity program should include a process to analyze current and projected sources and uses of funds. In addition, each NTB should establish limits that quantify the nature and amount of liquidity risk the bank is willing to assume. For instance, a NTB may establish a minimum number of months of current and/or projected operating expenses that must be covered by primary liquidity. Limit exceptions can be early indicators of excessive risk or inadequate liquidity risk management.

Current guidance on sound liquidity risk management requires all banks, including NTBs, to develop and maintain a contingency funding plan (CFP).2 A CFP is a cash flow projection and comprehensive funding plan that forecasts funding needs and funding sources under adverse scenarios. Potential scenarios that may affect the bank's liquidity position include a decline in revenue due to such factors as a prolonged period in which investment prices fall, the loss of a key trust officer, or the loss of a significant account relationship. Litigation, fraud, and other potential impairments3 can also have material impact on a NTB's liquidity needs.

A NTB's CFP should detail contingent sources of liquidity available to meet or exceed funding requirements under adverse conditions. These sources could include: (1) unencumbered on-balance-sheet cash, cash equivalents, or other short-term investments; (2) an irrevocable letter of credit from a third party; or (3) financial support from a parent company, as required by a legally enforceable agreement, such as a Capital Assurance and Liquidity Maintenance Agreement (CALMA). A NTB that is relying upon its owner, an affiliate, or a third party for contingent financial support is expected to review and assess, periodically, the financial capacity of that entity in order to confirm that it has the financial wherewithal to support the NTB.

For more information and guidance on liquidity risk management and the development and maintenance of contingency funding plans, see the Comptroller's Liquidity Handbook.

Supervisory Considerations

The OCC expects capital and liquidity at NTBs to be maintained at levels sufficient to support safe and sound operations. During the normal course of the supervisory process, examiners will evaluate the adequacy of capital and liquidity at NTBs, including the development of, and adherence to, a sound capital and liquidity management process. Examiners will seek corrective action for significant weaknesses or unwarranted risks.

Additional Information

For additional information, contact Asset Management at (202) 647-6360.

Kerri Corn
Director for Credit and Market Risk

*References in this guidance to national banks or banks generally should be read to include federal savings associations (FSA). If statutes, regulations, or other OCC guidance is referenced herein, please consult those sources to determine applicability to FSAs. If you have questions about how to apply this guidance, please contact your OCC supervisory office.

1 For service-oriented NTBs with little or no fiduciary and related assets, the analytical process for determining the level of capital may include a capital floor based on a multiplier of annual revenue, supplemented by an analysis of the applicable factors.

Comptroller's Liquidity Handbook, page 35.

3 NTBs are reminded that there are safety and soundness implications of, and legal impediments to, a bank providing emergency financial support to investment funds advised by the bank, its subsidiaries, or its affiliates. See OCC Bulletin 2004-2 for additional information.