forward-looking bank supervision 2010 kansas city region regulatory conference call august 24, 2010
TRANSCRIPT
Forward-Looking Bank Supervision
2010 Kansas City Region
Regulatory Conference Call
August 24, 2010
2
Agenda
• Introduction• Components of an Effective Risk Management
Program• The Impact When Risk Management Practices
Are Weak, and the Components of Forward-Looking Risk Assessments
• Regulatory Policies, Procedures, and Strategies• Banker Recommendations• Question and Answer
3
Risk Management Program
• Emphasis on changing Risk Management (RM) programs to address the current economic cycle
• Applies to all banks• Business strategies/activities must have
effective RM programs, contingency plans, appropriate Capital allocations, and a strong Compliance Management System (CMS)
4
The 5 P’s of Risk Management
• There are five essential elements of a strong RM program:
1) Proactive planning
2) Policies/practices
3) Parameters
4) Protection
5) Prospects
5
Proactive Planning
• Items to consider when assessing the adequacy of your strategic planning process are:– How formal is the process?– Who is involved?– Are the plans realistic?– Are plans periodically back-tested against
actual performance?– Is the planning process dynamic?
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Proactive Planning
• What are the basics of a sound strategic planning process?
- Be realistic.
- Assess external factors.
- Plan to control “controllable” factors.
-Assess adequacy of current staffing.
7
Policies and Practices
• Consider relevance in current economic conditions.
• Update policies and procedures if the strategic plan has changed.
• Avoid gaps in duties/responsibilities as the strategies and goals of the bank change.
• Adjust Compliance Management System (CMS) as warranted.
• Ensure policies are being followed.
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Parameters
• Review existing policy parameters to ensure continued relevance.
• Assess risk tolerances for all types of concentrations, including the funding side of the balance sheet.
• Consider all relevant factors when establishing policy limitations.
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Protection
• Some business activities may require higher levels of capital protection than others.
• Internal controls and independent reviews also provide protection for a bank’s business risks.
• Exit strategies (and how and when to implement them) are very important.
10
Prospects
• Assess all potential outcomes of a particular business strategy.
• Remember, as a bank’s condition deteriorates, so will prospects for raising capital or establishing new borrowing lines.
• Regularly review the bank’s customer base to determine if prospects have deteriorated in light of changing economic conditions.
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Impact of Weak Risk Management
• Common themes of recently failed banks: - Concentration risk - Inadequate credit administration and underwriting - Volatile funding - Deviations from business plan - Underfunded ALLL/poor methodology - Management deficiencies
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Forward-Looking Risk Assessments
• Risk is inherent in banking, but must be properly identified, managed, monitored, and controlled
• Regulatory guidance addresses emerging issues/risks
• There will be a regulatory response to weak risk management programs, including related to consumer compliance programs
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Regulatory Strategies and Policies
• Focus on strategic plan, business model and associated risk
• Increased supervision for high-risk plan, model, and/or profile institutions
• Supervision process may include accelerated exams or interim visitations
• Expect a strong supervisory response if the risks are not being appropriately managed
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Regulatory Strategies and Policies(continued)
• Enhanced Supervisory Procedures for Newly Insured FDIC-Supervised Banks
• CAMELS and Consumer Compliance ratings consider assessment of risk management
• Regulatory emphasis on risk tolerances, planning, and the risk management process
• Management practices impact all of the ratings components
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Recommendations for Bank Management
• Implement an effective risk management program addressing all risks
• Closely review prior examinations, audits, loan reviews, etc. for further guidance
• Address changes in the business cycle and how it impacts your bank
• Attend regulatory and industry events• Communicate with regulators
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Questions?