Download - F INANCIAL S ERVICES V OLUNTEER C ORPS
FINANCIAL SERVICES VOLUNTEER CORPS
Developing Examiner Guidelines for Evaluating Commercial Bank Internal Control(Credit Risk Management)
Banque d’Algerie (BdA)June 14-18, 2009
Presented by:Robert Lyon, Retired Credit Risk Officer FRB
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Credit Risk Management• Do Loans Comply with the Loan Policy?
- Approval process- Collateral valuation- Loan limits- Loan concentrations
IndustryGeographicLoan types
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Lending Controls• Lending Process
• Key Information
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Lending Process• Request• Presentation• Approval• Documentation• Funding• Review• Monitoring
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Key Information• Amount• Purpose• Yield• Term• Collateral• Agreement / Documentation• Repayment schedule
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Sampling of Loan files• Purpose• Disposition of proceeds• Repayment schedule• Financial statements• Memoranda of discussions with
borrower
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Problem Loans• Definition – past due or restructured• Action plan for remediation• Loan loss reserve allocation• Identification and Migration analysis• What did management learn?
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Does the Board Know• Total credit exposure• Lending activities• New credit extensions• Overdrafts• Past due loans• Watch list loans• Insider loans• Anticipated charge-offs
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Internal Loan Review• Internal Loan review thoughts• Loan Review / Rating Objectives• Characteristics of Loan Review
Program• Risk Rating / Credit Grading Systems• Personnel involved Risk Rating
System• Risk Rating Elements
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Loan Review – Loan Rating Objectives
• Consistent application• Are weak loans promptly identified?• What are the trends?• Are internal Credit policies followed?• Provide management with accurate
information– Financial and regulatory reporting– Adequacy of loan loss reserve
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Characteristics of Loan Review• Responsibilities defined• Explicit description and definitions• Capacity for judgment• Freedom to communicate• Performed by skilled personnel
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Credit Grading Systems• Problem Loans – quarterly• Large exposures – quarterly• Sampling size• Performed by
– Loan Officer– Independent credit review specialist
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Credit Grading Systems (continued)
• Assessment independent of the lending function preferred
• If loan officer used for grading, review by:– Peers, superiors, or loan committee– Independent department– External third party consultant
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Risk Rating Elements• Scope of reviews• Depth of reviews• Review of findings• Follow-up – correction action• Report Distribution
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Loans to Directors, Officers, Employees, and Shareholders
• Can be the best loans• Can be the worst loans• Best Practices
– No preferential treatment– Same terms as other borrowers– Annual reporting to the Board and
Supervisor
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Fraud by Insiders• Also called White collar crime• Results from weak internal controls• Dominant insider misuses position• Fails to disclose interests• Diverts bank assets and income• Accepts bribes and gratuities
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Controlling Abuse• Regular internal/external audits• Review of all insider transactions• Follow-up on exceptions• Pre-screening of new officers and
directors• Follow the money
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Examiner Conflict of Interests• Purpose – ensure integrity and
objectivity• Restrictions
– No gifts or gratuities from any bank– Reporting of indebtedness– For EIC, 18 month window for employment– May not participate in an examination where
• A family member employed• A loan from• Previous employment held• Other