U.S. Supervisory Process. December 2016

Transcription

1 U.S. Supervisory Process December 2016

2 Overview of U.S. Financial Institution Supervisors and Regulators FSOC Identifies risks to the financial stability of the US from activities of large, interconnected financial companies. Authority to gather info from financial institutions. Makes recommendations to the Fed and other primary financial regulatory agencies regarding heightened prudential standards. SEC Regulates securities exchanges, mutual funds, and investment advisors. Examination authority for broker dealers. Authority over security-based swaps, security-based swap dealers and major security-based swap participants. FINRA Regulates brokerage firms and registered securities representatives. Writes and enforces rules. Examination authority over securities firms. CFTC Market oversight and enforcement functions. Authority over swap dealers and major swap participants. Regulates trading markets, clearing organizations and intermediaries. OCC Focus on safety and soundness. Primary regulator of national banks and federal savings associations. Examination authority. Examines loan portfolio, liquidity, internal controls, risk management, audit, compliance, foreign branches. FRB Focus on safety and soundness. Supervisor for BHCs; monetary policy; payment systems. Supervisor for SIFIs and their subsidiaries. Established heightened prudential standards on its own & based on FOSC recommendations. Examination Authority. OFR Office within Treasury which collects data from financial institutions on behalf of FSOC. No examination authority. FDIC Focus on protecting deposits through insurance fund; safety and soundness; manage bank receiverships. Examination authority. Orderly Liquidation of systemically important financial institutions (SIFIs) CFPB Focus on protecting consumers in the financial products and services markets. Authority to write rules, examine institutions and enforcement. No prudential mandate. Page 2

3 Scope of Supervisory Responsibilities and the Examination Process Federal Reserve Bank Holding Companies State Member Banks National Banks (Secondary) Federal Branches and Agencies of Foreign Banks (Secondary) OCC National Banks Federal Branches and Agencies of Foreign Banks FDIC Insured State Nonmember Banks Insured National Banks (Secondary) Insured State Member Banks (Secondary) Insured Branches and Agencies of Foreign Banks (Secondary) State Banking Agencies State Chartered Banks State Licensed Branches and Agencies of Foreign Banks On-site examinations help ensure the stability of depository institutions by identifying undue risks and weak risk management practices Exam findings also help supervisors identify the cause and severity of problems at individual banks and emerging risks in the financial-services industry An examination can be conducted as a comprehensive, fullscope review or as a limited scope assessment, which is generally used to assess changes in an institution s risk profile or to monitor compliance with corrective programs; full scope exams are generally divided between safety and soundness reviews and compliance reviews Examiners pay careful attention to an institution s policies, processes, personnel, and control systems and may use questionnaires and verification procedures to support their assessment and conclusions Institutions are rated using the Uniform Financial Institutions Rating System, which, for domestic institutions evaluates the institution s capital adequacy, asset quality, management capabilities, earnings sufficiency, liquidity position, and sensitivity to market risk (commonly referred to as CAMELS ratings) Federal branches and agencies of foreign banks are evaluated based on their risk management, operational controls, compliance, and asset quality (commonly referred to as ROCA ratings) Page 3

4 Range of Federal Reserve Reviews and Examinations Supervisory/Exam Plan Enhanced Continuous Monitoring Horizontal Reviews Legal Entity Structures Targeted examinations/reviews throughout the year Risk-based examinations, with transactional or procedural-level testing, as necessary Examination scope may range from processes around a product or business unit to risk / compliance-related themes Largest banks are subject to full-time onsite reviews related to management processes and core proficiencies for identifying, measuring, monitoring, and controlling key risks Frequent review of MIS/management updates regarding risk management and financial performance Off-site surveillance Real-time reporting to monitor potential threats to safety and soundness Key risks are credit, market, liquidity, operational, compliance/legal, and reputation Reviews conducted of large complex banking organizations focused on specific issues or practices Outcome of reviews is shared with participating institutions as best practice for leading/ lagging institutions Industry-wide quantitative assessments and stress testing CCAR/DFAST/CLAR Informs policy formulation Reviews may be conducted by business units or by legal entity Page 4

5 Examinations and On-Site Preparation Regulators are beginning to move away from the formal examination process and focus on continuous monitoring and understanding risk management, with emphasis on 3 lines of defense Large International Financial Institutions (LIFI) and Systemically Important Financial Institutions (SIFI) Regional Community and Foreign Institutions (RCFI) Composition Broker-dealer or subsidiary within the U.S. Includes 23 large financial firms that may fall under the IHC 165 All FBOs that are not categorized as LIFI Examinations and Enhanced Continuous Monitoring Targeted point-in-time exams. On-site team is generally small and includes a supervisory manager. Risks are evaluated by examiners responsible for a portfolio of institutions and who specialize in dedicated risk categories (i.e., markets, credit, liquidity) Point-in-time examinations with a focus on operational controls and asset quality. Onsite presence is with one FRB examiner on average responsible for a portfolio of institutions via a portfolio approach Annual assessment Annual assessment letter composed of a ROCA/combined ROCA and a US assessment No U.S. assessment is produced Strength of support assessment Collaboration Annual SOSA rating on the home country ability to support US operations Increasing collaboration with home country regulators Annual SOSA rating on the home country ability to support US operations Increasing collaboration with home country regulators Page 5

6 Key Factors to Consider in Preparation for an On-Site Examination Examiner assessments of risk management and board and senior management drive overall institution ratings, theme of regulatory findings, and tone of formal communications. Documentation remains a regulatory focal point: Policies and procedures Financial systems and regulatory reporting Internal reporting and MIS Formal meeting minutes Organizational structure and chain of command Audit or independent review workpapers Key assumptions for forecasting, modeling How an organization handles CSI confidential supervisory information -- is critical Comprehensive and readily accessible documentation that meets legal and regulatory requirements is essential. However, documents must align with operational reality. Assessment of Risk Management Examination Report Vetting examination findings Examiner meetings with board and senior management. Sample discussion topics: risk oversight, strategy implementation, remediation of previously identified deficiencies. Examiner meetings with on- and off-site regulatory staff. Sample discussion topics: management evaluations, risk management MIS implementation, and documentation practices. Assessment of Board and Senior Management Takeaway: Ability of institution s management to adequately identify, measure, monitor and control risk exposures. Page 6

7 Sound Practices for Examination Preparation Regulatory response to institutions inadequately addressing supervisory requirements and expectations is generally based upon the degree to which institutional safety and soundness is affected: Informal criticism during on-site meetings Written criticism in regulatory communications Downgrade of management and/or risk management ratings Issuance of informal, nonpublic enforcement action Rejection of applications Issuance of formal, public Written Agreement Cease and Desist/ Consent Order Monetary Fines Charter revocation/ nullification Less Severe More Severe Recently identified sound practices: High access to key stakeholders during business unit review Proper documentation provided to regulators upon request in a timely manner Demonstrating effective challenge of the business on risk, control and compliance matters Proactive internal audit and quality assurance review Effective and timely remediation of identified issues Page 7

8 Examination Process Overview: First Day Letter 1 st Day Letter Typical Duration (Weeks) Response Preparation 2-3 Off -Site Review 1-2 On-Site Review 4-6 Soft close Examination Report (MRIAs & MRAs) Initial Kick-off Meeting Requests for Information To be provided requests are those items that need to be sent to the Fed in advance of the on -site examination To be made available requests are those items that should be accessible to the examiners when they arrive on-site. Sample Request Regulatory Reporting Overview of the regulatory reporting policies and processes Overview of systems and subsystems architecture supporting regulatory reporting Accounting policies and procedures Copy of General Ledger and chart of accounts Organization-specific transaction level detail (e.g. intercompany transactions) Organizational charts and regulatory reporting raining calendar New and closed accounts Overview of major infrastructure and reporting processes improvements Recent audit reports (last 2 years) of regulatory reporting Detailed procedures for each regulatory report Regulatory reporting work papers for latest quarter-end Chart of accounts with detailed account descriptions on nature and use of the accounts Description of roles and responsibilities and bios of key personnel Detailed transaction samples Sample of classification of different assets classes and cross reference to static data Resumes for reporting staff and responsibilities Page 8

9 Examination Process Overview: First Day Letter 1 st Day Letter Typical Duration (Weeks) Response Preparation 2-3 Off -Site Review 1-2 On-Site Review 4-6 Soft close Examination Report (MRIAs & MRAs) Initial Kick-off Meeting Regulatory Reporting - Initial Kick-off Meeting Description The initial discussion with examiners typically covers the following: Scope and objectives of the examination An overview of the regulatory reporting process, including people, systems, policies and process maps Identify key points of contact for the examination Provide a project overview and status update on recent initiatives Describe issues being addressed that require multiple-year initiatives to complete Identify institution s key risks, controls and compliance challenges and be able to explain in detail how they are being managed Current significant issues raised by internal or external audit reports, regulatory examinations, and the status of remediation, if any Overriding theme: Examiners will demand documentation If it isn t written down, it doesn t exist Anything described or referenced should be available in hard copy Page 9

10 Examination Process Overview: First Day Letter 1 st Day Letter Typical Duration (Weeks) Response Preparation 2-3 Off -Site Review 1-2 On-Site Review 4-6 Soft close Examination Report (MRIAs & MRAs) Initial Kick-off Meeting Regulatory Reporting - On-Site Review Description Underlying on-site examination theme is the focus on understanding the regulatory reporting process and how regulatory reporting information is compiled, analyzed and reviewed before being submitted to the Federal Reserve. Specific areas of review include: Detailed policies, procedures, and controls around the reporting process and each report Assessment of staff knowledge of the regulatory reporting policies and procedures Focus on areas that have been challenges at other institutions (e.g. intercompany accounts, derivatives, AML) Drill down below general ledger to transaction details, contracts and agreements Analysis and reconciliations to other reports such as 10-Q to FFIEC002 and extend of supporting documentation to follow any reconciliation Documentation of adjustments including commentary over filing periods Status of resolution of prior examination/audit findings Detailed sample testing to review the accuracy of specific line items (i.e. has a transaction been classified on the appropriate line item) - Is it a security or a loan? Review of complex products and transactions Focus on manual and automated processes, and management review and sign-off Page 10

11 Examination Process Overview: First Day Letter 1 st Day Letter Typical Duration (Weeks) Response Preparation 2-3 Off -Site Review 1-2 On-Site Review 4-6 Soft close Examination Report (MRIAs & MRAs) Regulatory Reporting - Examination Report Initial Kick-off Meeting A soft close will be held, as a confirmation of facts, prior to the hand delivered of the transmittal letter to the institution Detailed examination report provided to the banking organization documenting findings with recommendations The examiners observations may generalize/assume that a problem with one report will likely occur with other similar reports May lead to Matters Requiring Immediate Attention (MRIA) or Matters Requiring Attention (MRA) Active periodic follow-up on action plans to address significant deficiencies Re-filing of regulatory reports may be required Civil Monetary Penalties (CMP) can be assessed (willful misreporting is not required for risk of CMP) Page 11

12 Selected FRB Policy Letters Relevant to FBO Supervision Topical Guidance SR FFIEC Cybersecurity Assessment Tool for Chief Executive Officers and Boards of Directors SR Managing Foreign Exchange Settlement Risks for Physically Settled Transactions SR 13-19/CA Guidance on Managing Outsourcing Risk SR 11-6/SR Guidance on Accepting Accounts from Foreign Embassies, Consulates and Missions SR Suspicious Activity Report Filing Requirements for Banking Organizations Supervised by the Federal Reserve SR Interagency Guidance on Transparency and Compliance in Cross-Border Funds Transfers SR Interagency Guidance on Sharing Suspicious Activity Reports with Head Offices and Controlling Companies SR 02-2 Monitoring Compliance with the Restrictions on Foreign Investments Contained in Regulation K and Guidance for Internationally Active Domestic Banking Organizations on Recordkeeping Requirements Regarding Foreign Investments SR 01-1 Application of the Board's Capital Adequacy Guidelines to Bank Holding Companies owned by FBOs SR Report of Assets and Liabilities of U.S. Branches and Agencies of Foreign Banks ("FFIEC 002") - Filing Requirements for "Zero Assets" Branches and Agencies Topical Guidance (cont.) SR Evaluating Activities Under the Responsibility of U.S. Branches, Agencies and Nonbank Subsidiaries of FBOs SR Addressing Internal Control Weaknesses in U.S. Branches and Agencies of FBOs through Special Audit Procedures SR 95-42/SR 95-4 Allowance for Loan and Lease Losses for U.S. Branches and Agencies of FBOs SR Loans to Small and Medium-sized Businesses and Farms to the Activities of U.S. Branches and Agencies of Foreign Banks SR Use of "Points" in Settling Foreign Exchange Contracts The Examination Process SR 12-17/CA Guidance on Consolidated Supervision Framework for Large Financial Institutions [expansionary update anticipated by Q4 2016] SR 08-9/CA Consolidated Supervision of Bank Holding Companies and the Combined U.S. Operations of FBOs SR Enhancements to the Interagency Program for Supervising the U.S. Operations of FBOs SR Extended Examination Cycle for U.S. Branches and Agencies of Foreign Banks SR 97-9 Revised Examination Guidelines for Representative Offices of Foreign Banks Page 12

13 U.S. Regulatory Landscape Page 13

14 Primary objectives of global regulatory reform (1/2) The global regulatory reform agenda is focused on mitigating systemic risk and creating more resilient and transparent financial systems through a combination of institutional reforms and regulation of financial activities and practices in four key areas: Financial Condition, Structural Reform, Conduct and Governance and Controls Institutional reforms are focused on improving the financial condition and governance of financial institutions and addressing their impact on markets (via structural and conduct related reforms) This includes extending the perimeter of prudential regulation to systemically important non-bank institutions Regulation of financial activities and practices are aimed at creating safer, fairer and more efficient markets via structural and conduct related reforms across entire marketplaces Areas being addressed include: derivatives clearing, trading and reporting; consumer finance practices; asset manager activities; and general capital markets trading and settlement infrastructure The global regulatory reform efforts are broadly aligned across the borders, however, jurisdictions vary in the emphasis they place on individual elements, as well as their degree of implementation Page 14

15 Primary objectives of global regulatory reform (2/2) Improve the financial condition of institutions: Make institutions less likely to fail via enhanced supervision, increased capital and liquidity requirements, reduced leverage and stress testing Expand perimeter of prudential regulation to systemically important institutions Improve the governance of institutions: Increase the accountability of boards and management Strengthen the three lines of defense Enhance controls related to data and reporting Capital Risk Governance and Controls Liquidity Regulatory Reporting SIFI Designations Cyber Security Business strategy Recovery and Resolution Planning Culture Institutional Structural Reforms Derivatives, Equity & Fixed Income Market Reforms Market Transparency Compliance Simplify the structure of institutions and strengthen oversight of key markets: Make institutions more resilient via structural reforms and recovery and resolution planning Improve the resiliency, transparency and efficiency of markets more broadly via increased oversight Improve the conduct of institutions and outcomes for consumers/investors: Develop the right culture at institutions Ensure firms do not manipulate markets, treat customers fairly and improve AML controls Ensure that markets operate fairly and efficiently Page 15

16 Regulatory Reform Agenda Key questions supervisors are asking firms Financial condition Structural reform Supervisory questions Is your capital adequate (under stress and BAU), both globally and regionally? Is your liquidity adequate (under stress and BAU), both globally and regionally? Do you have the operational and financial capabilities to support credible recovery and resolution planning? Do your legal entity and business operating models support resolvability? Challenges Fundamental review of the trading book (FRTB), single counterparty credit limits (SCCL), Total loss absorbing capacity (TLAC) Role and scope of standardized floors, restrictions on the use of internal models, RWA standardization Ring-fencing Super-equivalent requirements in various jurisdictions Daily/intraday liquidity reporting Net stable funding ratio (NSFR) Trapped liquidity Credible recovery and resolution plans Aligning business units/strategy with legal entity operations Collateral management/funding in resolution Cross-border implementation of stay on QFCs (derivatives, repo) Revisiting continuity of shared services/creating a service company Conduct Do you have adequate compliance programs and resources? Is senior leadership engaged in promoting an appropriate culture? Changing regulatory expectations with increased scrutiny Competing challenges for limited resources Required investments for new and innovative technology solutions Governance and controls Are you well governed and controlled, both globally and regionally? Management/board accountability, defining risk appetite, risk aligned incentive compensation Strengthening the three lines of defense Legal entity governance Enhancements to modeling, data quality, internal controls, and infrastructure Cyber resiliency/operational continuity Page 16

17 Regulatory Drivers Maturity of regulatory framework and key areas of focus for Financial condition Structural reform Capital: CCAR CFO Attestation; CCAR Amendments Fundamental Review of the Trading Book Total Loss Absorbing Capacity Single Counterparty Credit Limits Liquidity: Liquidity Reporting Net Stable Funding Ratio Funds Transfer Pricing Recovery and Resolution Planning Fed and FDIC feedback on resolution plans OCC recovery plan guidelines Derivatives Reforms Initial and variation margin Fixed Income and Equity Market Reforms T+2 settlement Trade reporting Conduct Continuing improvement of oversight, controls and MIS Expectation to serve the customer fairly Organization culture embodies heightened expectations and behaviors Escalating focus on BSA/AML risk Maturity of regulatory framework Framework nearing completion Rulemaking/ guidance continuing Significant rulemakings/ guidance outstanding Governance and controls Risk Governance Data and Regulatory Reporting/BCBS 239 Cyber Security Incentive Compensation Page 17