US Regulatory/Compliance Orientation Expectations

Transcription

1 US Regulatory/Compliance Orientation Expectations July 16, 2008 Margaret (Meg) L. Bonner 1

2 DISCUSSION POINTS Supervisors FBO Examination Process & ROCA Rating FBO Risk Focused Supervision SOSA Ranking RFI/C (D) Rating CAMELS Rating 2

3 FBO SUPERVISORS FBOs potential US regulators Federal Reserve Banks (FED) State Banking Departments Office of the Comptroller of the Currency (OCC) Federal Deposit Insurance Corporation (FDIC) Securities & Exchange Commission (SEC) 3

4 FBO SUPERVISORS - CON D 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 4

5 Examination Cycle Smaller institutions < $250 million Larger institutions > $250 million Ratings matter Joint vs. alternate year examinations 18 vs. 12 month cycle Complexity 5

6 Examination Process Introductory Letter request for information On-site planning 2 weeks Scope development Prepare Entry Letter Exam staff needs determined On-site examination Report writing and vetting Exit meeting with management & final report 6

7 FOCUS during PLANNING Asset Size? Profits? Losses? Trends? Ability to rely upon Internal Audit Changes to the organization staffing, products, head office, strategic New Information Technology systems Impact of the markets Ability to address regulatory changes Were prior examination findings addressed? 7

8 Results of Planning Risk assessment of the operations Development of a scope that includes areas of higher risk or lower risk areas which have not been reviewed recently Entry Day Letter a tailored request for information not as broad as the Introductory Letter 8

9 Preparation of Entry Letter Prepare in advance of examiners arrival Liaison Officer s possible duties Central point for information requests Examiner room Supplies Access to a printer Secure facilities (lock and key) Arrange meetings 9

10 ROCA RATING SYSTEM How do we evaluate the institution during an exam? R isk Management O perational Controls C ompliance A sset Quality Composite Rating not an average Used for Branches and Agencies Scale

11 R - RISK MANAGEMENT Process of identifying, measuring, controlling, monitoring, and reporting various risks Credit Market Liquidity Operational Reputational Legal 11

12 O - OPERATIONAL CONTROLS Evaluates the effectiveness of all operational controls Internal/External Audit Information Technology/Security Funds Transfer Accounting Operations Disaster Recovery/Business Continuity Vendor Management 12

13 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 13

14 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 14

15 A - ASSET QUALITY Calculated, numerically driven, unlike R Reflects level, trend and severity of problem credits Problem Credits are rated Special Mention, Sub- Standard, Doubtful, Loss (Classifications may change with introduction of Basel II awaiting final guidance) NOTE: Quality of Policies, Procedures, Credit Files, MIS & Watch Lists, and Credit Administration (see R Risk Management) - not part of Asset Quality Rating 15

16 A - ASSET QUALITY CONT D Allowance for loan losses Branches not required to maintain general reserves Must have in place robust system for identifying losses. The losses should either be charged off or off-set with specific reserves 16

17 RATING S DEFINITIONS 1 -- Strong in every respect; requires only normal supervisory attention Satisfactory condition; may have modest weaknesses correctable in normal course of business; normal supervisory attention Fair; exhibit combination of weaknesses that cause supervisory concern; requires more than normal supervision 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. 17

18 SR Letter Priorities of Findings Matters Requiring Immediate Attention ( MRIA )[1] Matters Requiring Attention ( MRA )[2] Observations[3] [1] MRIA constitute matters arising from the examination/inspection that the Federal Reserve is requiring a banking organization to address immediately. MRIAs are supervisory matters of the highest priority. These tend to be matters of significant importance and urgency, and include (1) matters that have the potential to pose significant risk to the safety and soundness of the banking organization; (2) matters that represent significant instances of noncompliance with laws and regulations; and (3) repeat criticisms that have escalated in importance because of insufficient attention or action by the banking organization. MRIAs may relate to safety and soundness or consumer compliance. [2] MRA constitute important matters that the Federal Reserve is expecting a banking organization to address over time. MRAs have a lower priority than MRIAs, but nonetheless are matters that, based on current information, the organization must address over time to preclude a significant issue. [3] Observations include matters that are informative, advisory, or that suggest a means of improving performance or management of the operations of the organization. Observations also may reflect examiner insights about sound emerging practices, which if adopted could make the banking organization more effective or efficient, and better aligned with industry standards. 18

19 Vetting Examination Findings EICs gather the memos which include MRIAs, MRAs, and Observations from the on-site examiners and compose the report Findings are discussed in our offices Exit Meeting with FBO management, deliver report Quarterly between examinations CONTINUOUS MONITORING 19

20 FBO SUPERVISION PROGRAM Systematic, coordinated approach to the supervising of US operations of Foreign Banking Organizations includes: Continuous Monitoring = Regulatory reporting and periodic visits ROCA = Rating system for branches and agencies: Risk Management, Operational Controls, Compliance & Asset Quality Combined Rating = Based on ROCA rating SOSA = Strength of Support Assessment of the FBO Source: SR Letter

21 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 21

22 SOSA RANKINGS 1 = low risk that FBO will be unable to support its US Operations Investment Grade Meet or exceeds international capital standards Ample access to US Dollar funding No concerns with home country support & supervision or transfer risk 2 = more than normal review warranted Non-investment grade Does not meet international capital standards Mitigating factors home country support and supervision transfer risk concerns 3 = significant weaknesses apparent 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 22

23 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

24 R RISK MANAGEMENT RATING Four subcomponent ratings of R I. Board and Senior Management Oversight II. Policies, Procedures, and Limits III. Risk Monitoring and Management Information Systems IV. Internal Controls 24

25 FINANCIAL CONDITION RATING Evaluate the consolidated organization s financial strength, inclusive of the Parent Company and nondepository 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) 25

26 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 3 rd parties, and related depository institution(s) 26

27 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) 27

28 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 28

29 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

30 HELPFUL TIPS Confidentiality of information & our reports 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 30

31 RESOURCES FOR Manuals: FOR SR Letters: FOR BSA/AML: Questions? 31