Investment Securities - Office of the Comptroller of the Currency

Assets Investment Securities Comptroller’s Handbook Narrative and Procedures - March 1990 Comptroller of the Currency Administrator of National Banks A (Section 203) Comptroller’s Handbook Investment Securities (Section 203) i Investment Securities (Section 203) Table of Contents Introduction 1 Limitations and Restrictions on National Banks’ Holdings 2 Investment Policy 8 Open Contractual Commitments to Purchase or Sell Securities 15 Unsuitable Investment Portfolio Practices 23 Securities Lending 36 Government Securities Act Requirements 37 International Division Investments 41 Examination Procedures 45 Internal Control Questionnaire 65 Verification Procedures 77 Comptroller’s Handbook Investment Securities (Section 203)1 Investment Securities (Section 203) Introduction This section discusses money market investments and securities purchased by the bank for its own account. Securities purchased primarily for resale to customers, i.e.,

trading account securities, are discussed in a separate section of this handbook. The term “money market” generally refers to the markets for short- term credit instruments, such as commercial paper, bankers’ acceptances, negotiable certificates of deposit, repurchase agreements, and federal funds. Although not carried in the investment account, such instruments generally are handled by the investment officer. The highly liquid nature of such investments allows the bank to employ temporarily idle funds in interest bearing assets that usually can be converted quickly into cash. The speed of conversion, however, depends on the quality of the investment. Quality can be monitored through credit analysis, emphasizing a review of current financial information, the use of specializing rating services, and frequent collateral valuation. Since money market transactions generally involve a large volume of funds, deficiencies in credit or administrative policies can quickly result in serious problems. The investment policy should include limitations on authority of personnel, restrictions regarding asset type, and amount and established credit standards. Compliance with policy guidelines should be assured through adequate internal controls, audit coverage, and internal supervisory review. Investment securities, representing obligations purchased for the bank’s own account, may include United States government obligations; various Federal agency bonds; state, county, and municipal issues, special revenue bonds; industrial revenue bonds; and certain corporate debt securities. Securities included in the investment account should provide a reasonable rate of return commensurate with safety, which must take precedence. Investment considerations should come into play only after provision for all cash needs and reasonable loan demands have been met. Accordingly, an investment account should contain some securities that may be quickly converted into cash by immediate sale or by bonds maturing. Hence, liquidity and marketability are of the utmost importance. A bond is a liquid asset if its maturity is short and if there is assurance that it will be paid at maturity. It is marketable if it may be sold quickly at a price commensurate with its yield and quality. The highest quality bonds have those two desirable qualities. Investment Securities (Section 203) Comptroller’s Handbook2 Investments, like loans, are extensions of credit involving risks that carry commensurate rewards. However, risks in the investment portfolio should be minimized to ensure that liquidity and marketability are maintained. Bank management must recognize that the investment account is primarily a secondary reserve for liquidity rather than a vehicle to generate speculative profits. Speculation in marginal securities...

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