1 us regulatory/compliance orientation what to expect from an examination how to prepare july 16,...
TRANSCRIPT
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US Regulatory/Compliance Orientation
WHAT TO EXPECT FROM AN EXAMINATION HOW TO PREPARE
JULY 16, 2007
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DISCUSSION POINTS
Supervisors
FBO Risk Focused Supervision
SOSA Ranking
ROCA Rating
RFI/C (D) Rating
CAMELS Rating
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FBO SUPERVISORS
FBOs’ potential US regulators FEDERAL RESERVE BANKS (FED) OFFICE OF THE COMPTROLLER OF THE
CURRENCY (OCC) FEDERAL DEPOSIT INSURANCE
CORPORATION (FDIC) STATE BANKING DEPARTMENTS THE SECURITIES & EXCHANGE
COMMISSION (SEC)
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FBO SUPERVISORS - continued
Regulator determined by charter: Branches, agencies, and banks can have a
Federal or State charter Federal chartered institution is regulated by
OCC State chartered institution regulated by the
appropriate Sate Banking Department If a branch or bank has federal deposit
insurance, the FDIC also has a regulatory role Broker/dealers and other financial nonbanks
are regulated by the SEC
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Examination Cycle
Smaller institutions < $250 million Larger institutions > $250 million Ratings matter Joint vs. alternate year
examinations 18 vs. 12 month cycle
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Examination Procedures
On-site planning Scope development Prepare First Day Letter Staff needs determined On-site examination Report writing and vetting Exit meeting with management
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FOCUS
Numbers? Profits? Ability to rely upon Internal Audit
Independence Qualifications of personnel Senior management cooperation Audit program standards Annual audit plan Quality Control Scope of Audits
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Results of Planning
Risk Matrix/Assessment Scope First Day Letter
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Effective Planning
On-going supervisory concerns Prior examination report & transmittal
letter Management’s response to the report Supervisory actions? Specialty exams? Pending applications? Regulatory Reports Public information
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Preparation of First Day Letter
Prepare in advance of examiners arrival
Liaison Officer’s duties Central point for information requests Examiner room Supplies Secure facilities Arrange meetings
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FBO SUPERVISION PROGRAM
Systematic, coordinated approach to the supervising of US operations of Foreign Banking Organizations includes:
SOSA = Strength of Support Assessment of the FBO
ROCA = Rating system for branches and agencies: Risk Management, Operational Controls, Compliance & Asset Quality
Combined Rating = Based on ROCA rating Continuous Monitoring = Regulatory reporting and
periodic visitsSR Letter 00-14
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STRENGTH-OF-SUPPORT ASSESSMENT (SOSA)
Analysis starts with an Institutional Profile based on rating agency reports, annual and interim reports, interviews & meetings, and public information.
Assesses FBO’s ability to support US operations
Places US operations in a larger context Aids risk focused exam process by
highlighting FBOs warranting higher levels of supervisory attention
Disclosed to Institution and Home Supervisor
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SOSA RANKINGS
“1” = low risk that FBO will be unable to support its US Operations
“2” = more than normal review warranted
“3” = significant weaknesses apparent
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SOSA RANKINGS - Continued
Characteristics of “1” Investment Grade Meet or exceeds international capital standards Ample access to US Dollar funding No concerns with home country support & supervision or transfer riskCharacteristics of “2” Non-investment grade Does not meet international capital standards Mitigating factors – home country support and supervision – transfer
risk concernsCharacteristics of “3” Seriously deficient financial profile (government/outside support
maybe required) Lack of supervisory oversight and support Significant transfer risk FBO may be unable to honor US Obligations
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ROCA RATING SYSTEM
R isk Management O perational Controls C ompliance A sset Quality
We also assign a Composite Rating Used for Branches and Agencies Scale 1-5
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“R”- RISK MANAGEMENT
Process of identifying, measuring, controlling, monitoring, and reporting various risks Credit Market Liquidity Operational Reputational Legal
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“O”- OPERATIONAL CONTROLS
Evaluates the effectiveness of all operational controls –
Internal/External Audit Information Technology/Security Funds Transfer Accounting
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“O”- OPERATIONAL CONTROLS CON’D
Internal audit frequency & scope – how often, what areas? adequacy of program – does it cover all areas? head office approval – oversight? independence of reporting line? risk sensitive – focus on areas of greater risk? staffing size and appropriate expertise? audit reporting process
timely reports, findings, opinion of controls tracking responses/resolutions and
escalation process
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o External audit reports will be reviewed Financial audit required annually of
insured branches over $500 million Other “agreed upon procedures.”
o Information Technology/Securityo Appropriate access to systemo Proper controls to ensure customer
privacy, and the integrity of the datao Availability of the systems
“O”- OPERATIONAL CONTROLS CON’D
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“O”- OPERATIONAL CONTROLS CON’D
o Funds transfer proper authorization segregation of duties
o Accounting, financial & general ledger safeguards over assets and records chart of accounts segregation of duties suspense, receivable, dormant, other
accounts, reconciliations
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“C”- COMPLIANCE
Extent of compliance with and understanding of U.S. laws & regulations Policies and procedures Staff training Regulatory Reporting Management responsiveness &
openness Involvement of internal audit Independent compliance officer
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“C”- COMPLIANCE CONT’D
Laws and Regulation USA Patriot Act AML/BSA OFAC - U.S. Treasury rules, dealings
with selected foreigners. Reg K - FBOs in the US; legal lending
limit Reg D - IBF requirements; reserve
requirements Asset Pledge/Maintenance
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“A” - ASSET QUALITY
Numerically driven, unlike “R” Reflects level, trend and severity of
problem credits Policies, Procedures, Credit Files, Watch
Lists, and Credit Administration Ratings of Special Mention, Sub-Standard,
Doubtful, Loss changing with introduction of Basel II – awaiting final guidance
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“A”- ASSET QUALITY CONT’D
Allowance for loan losses Branches not required to maintain
general reserves Must have in place robust
system of identifying losses and either charging them off or setting aside specific reserves for regulatory reporting purposes
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RATING’S DEFINITIONS
1 -- Strong in every respect; requires only normal supervisory attention.
2 -- Satisfactory condition; may have modest weaknesses correctable in normal course of business; normal supervisory attention
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COMPOSITE RATING CONT’D
3 -- Fair; exhibit combination of weaknesses that cause supervisory concern; requires more than normal supervision.
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COMPOSITE RATING CONT’D
4 -- Marginal; serious weaknesses reflected in the components; unsafe & unsound banking practices or operations exist; requires close supervisory monitoring, definitive action by management
5-- Unsatisfactory; high level of severe weaknesses or unsafe, unsound conditions; need urgent restructuring by management
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RFI/C (D) RATING SYSTEM
R isk Management F inancial Condition I mpact C omposite D epository Institution Used for Bank Holding Companies Scale 1-5 See SR Letter 04-18
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“R” RISK MANAGEMENT RATING
Four subcomponent ratings of “R”I. Board and Senior Management
OversightII. Policies, Procedures, and LimitsIII. Risk Monitoring and Management
Information SystemsIV. Internal Controls
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FINANCIAL CONDITION RATING
Evaluate the consolidated organization’s financial strength, inclusive of the Parent Company and non-depository institutions
Focus on ability of the BHC’s resource to support the risks associated with its activities
Evaluate and assign ratings to the four subcomponents of the “F” rating (Capital, Earnings, Asset Quality, Liquidity)
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IMPACT RATING
Assess impact of non-depository entities and parent on the depository institutions
Evaluate both risk management/ controls and financial condition of the non-depository entities Do the non-depository entities provide services
to depository institution, are they critical services?
Consider current and potential issues in overall assessment Potential issues include: growth plans, new
products/services to both 3rd parties, and related depository institution(s)
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COMPOSITE RATING
Represents the overall assessment Encompasses both a forward-
looking and static assessment of the consolidated BHC
Reflects examiner judgment with regard to the relative importance of each RFI component (not an average)
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DEPOSITORY INSTITUTIONS RATING
“D” rating stands outside of the composite rating
Accept the primary/functional regulator’s CAMELS rating
Multi-bank holding company where there are different ratings? Weighted average of composite ratings
scheme, but ambiguous
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“CAMELS” RATING SYSTEM
C apital Adequacy A sset Quality M anagement E arnings L iquidity S ensitivity to Market Risks
We also assign a Composite Rating Used for Financial Institutions Scale 1-5
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OTHER ITEMS
Confidentiality of information Examination ratings are not
negotiated, rather vetted in our offices for uniformity
Examiners do expect management to resolve problems and issues – ideally prior to the examination
Ask rather than guess
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RESOURCES
FOR Manuals:www.federalreserve.gov/boarddocs/supmanual/
FOR SR Letters:www.federalreserve.gov/boarddocs/srletters
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Questions
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Margaret (Meg) L. BonnerSenior Examiner/Relationship SpecialistFederal Reserve Bank of [email protected]
212 (or 646) 720 -2615
Warren HochbaumAssistant Deputy Superintendent of BanksNew York State Banking [email protected]
212 709-1599