WHAT TO EXPECT FROM A REGULATORY EXAMINATION

Transcription

1 WHAT TO EXPECT FROM A REGULATORY EXAMINATION Russell Damitz NYS Department of Financial Services Foreign & Wholesale Banks Division November 4, 2014 New York State Department of Financial Services

2 Foreign Bank Regulators New York State Department of Financial Services Federal Reserve Bank [Most branches & agencies are regulated by the above two agencies] Office of the Comptroller of the Currency [National branches] Federal Deposit Insurance Corporation [Insured branches]

3 Foreign Bank Regulators (cont.) State or Federal license/charter Many banks choose state Multi-state banks choose Federal [Office of the Comptroller of the Currency] Many bank deposits are FDIC insured Bank holding companies regulated by Federal Reserve Bank

4 Foreign Bank Community Nearly 100 branches with over $2 Trillion [total assets] More than 30 Federal branches - $200 Billion About 25 agencies with $60+ Billion [total assets] 1 Federal agency - $436 Million Nearly 50 NYS licensed representative offices

5 Examination Plan FBOs with ROCA ratings of 1 or 2 & under $250 Million Total Assets Typically, 18 month - alternate year cycle FBOs with ROCA ratings of 3 or worse or a Regulatory Action Typically, 12 month - joint cycle Large, Complex Banks over $250 Million Total Assets Typically, 12 month - joint cycle

6 Examination Types Safety & Soundness Examination Comprehensive; all aspects of FBO reviewed; most common examination Targeted Examination Focus on a unique area [e.g., BSA/AML; Compliance; Audit; IT] Limited Scope Examination Limited due to special circumstance [e.g., pre merger]

7 Examination Procedures First Day Letter (FDL) Typically 4-6 weeks prior to entry Examination Typically 4-6 weeks; 4 to 5 examiners (depends on staff availability and institution profile).

8 Bank FDL Responses Specific reporting of changes & trends since the last examination, such as the following: Senior staff Products IT Audit Earnings Strategies

9 Bank Responses (cont.) Liaison Officer should manage - First Day Letter Secure space for examiners Examiner supplies, printer, computer line, etc. Senior level meetings

10 Ratings ROCA: Risk Management Operational controls Compliance Asset Quality

11 ROCA Ratings Rating 1: Strong 2: Satisfactory 3: Fair 4: Marginal 5: Unsatisfactory Regulatory Treatment Usual attention Usual attention Enhanced attention Close monitoring Restructuring

12 Large, Complex FBOs Continuous Supervision Major institutions have dedicated regulators from New York State and/or FRBNY State Central Point of Contact (CPC) FRBNY Senior Supervisory Officer (SSO) Review daily activities of FBO Frequent meetings with senior management Target examinations of specialized areas Rotation of CPCs and SSOs at designated intervals or as necessary

13 Types of Regulatory Concerns MRIA Matters Requiring Immediate Attention High concern; significant risk; immediate action plan; time frame for correction. MRA Matters Requiring Attention Significant issues; to be addressed over time. Observations Informative or advisory matters.

14 Communication Conference of State Bank Supervisors Institute of International Bankers Almost two dozen foreign supervisors have information sharing agreements

15 Current Topics of Interest Liquidity Compliance BSA/AML Trading Asset Quality Cyber-Security

16 Challenges Maintain Asset Quality Expand Funding Resources Maintain strong BSA/AML Procedures Maintain a strong compliance function Ensure a strong Internal Control Environment Ensure a Strong Risk Management Function Regulatory Changes

17 Risk Management Credit Market Liquidity Operational Legal Reputational Country

18 Credit Risk Credit policies/procedures Credit analysis Loan concentration identification and controls Loan review continuity Risk mitigation strategies

19 Market Risk Market risk policies Market risk guidance Rate & price forecast mechanisms Risk mitigation

20 Liquidity Risk Liquidity analysis Liquidity monitoring Funding sources Reliance on short-term vs. long-term funds Stress testing

21 Pledged Assets Liquid assets held at an NYSDFS approved depository to be used for covering the cost of liquidation. High quality securities. Amount is set at: $2 million or 1% of average total liabilities for the prior month. $2 million for smallest FBOs. $100 million for the largest FBOs.

22 Asset Maintenance Superintendent may impose asset maintenance when he believes the FBO has a- Weakened financial condition or there are Difficult circumstances in the home country

23 Operational Risk Information security Data backup Dual control procedures Accounting procedures Audit reviews Audit independence Event management

24 Legal Risk Home office legal advice Local legal assistance Regulatory assistance Adequate insurance Strength of compliance function

25 Reputational Risk Reputational risk is the potential that negative publicity regarding an institution's business practices, whether true or not, will cause a decline in the customer base, costly litigation, or revenue reductions. The biggest threat to reputation is seen to be a failure to comply with regulatory or legal obligations. Failure to deliver minimum standards of service and product quality to customers is a close second. The risk that unethical practices in the organization will be exposed follows closely behind.

26 Country Risk What Does Country Risk Mean? A collection of risks associated with investing in a foreign country. These risks include political risk, exchange rate risk, economic risk, sovereign risk and transfer risk [the risk of capital being locked up or frozen by government action].

27 Available Resources Financial Industry Data Regulatory Manuals BSA/AML