“Heightened Expectations”for Corporate Governance

AIBA 2nd Annual Compliance SeminarJune 14, 2012

Lester Miller, Senior International Advisor

International Banking Supervision

Agenda

OCC Supervisory Focus:

• Heightened Expectations (HE) for Large Banks(Generally over $50B in total assets)- Progress Assessment- OCC Focus

• Federal Branches

Large Bank Supervision Focus

Heightened Expectations

• Sanctity of the charter.

• Board willingness to provide credible challenge.

• Talent management and compensation.

• Risk appetite – defining and communicating across the company.

• Strong audit and risk management functions.

Large Bank Supervision Focus

HE Progress Assessment

• Banks made notable changes to strengthen governance practices. • Added expertise to their boards. • Reorganized risk functions to improve independence and

oversight. • Invested in technology and talent. • Implemented first generation risk appetite frameworks. • Elevated stature of many independent risk functions.• Lines of business are taking ownership of risk. • Identified ways to enhance internal audit.

Large Bank Supervision Focus

HE Progress Assessment (continued)

• Despite progress, work remains.• Top supervisory priority in our largest banks.

Heightened Expectations

Sanctity of charter – OCC focus

• Assess governance structure to ensure bank safety and soundness.

• Expectation that appropriate control systems are in place.

Heightened Expectations

Board credible challenge – OCC focus

• Discuss risks, issues, and leading practices in risk management with independent board members.

• Determine if board and management have a prudent, principles-based approach to decision-making.

Heightened Expectations

Talent management and compensation – OCC focus

• Talent Management - Ensure the board, management, and risk functions have adequate skills.

• Compensation Practices – Ensure compensation plans:- balance risk/reward,- are compatible with effective controls,- and are competitive for attracting and retaining necessary

talent.

Heightened Expectations

Risk Appetite – OCC focus

• Risk Appetite Statements – Ensure these contain both qualitative and quantitative tolerances, address all relevant risks, and tolerances are reasonable.

• Strategy and Planning Processes – Ensure the bank has a prudent strategic vision and plans align with risk appetite.

• Monitoring – Ensure processes monitor alignment with tolerances and escalate exceptions.

• New or changed products and services – Ensure evaluation against risk tolerance and subject to effective risk management.

Heightened Expectations

Strong audit and risk management – OCC focus

• Clarity of Roles & Responsibilities – Evaluate for business lines, support functions, independent risk, audit, and other control functions.

• Risk Culture - Determine how board and executive management establish & maintain a strong risk culture.

• Suitable Stature/Independence – Evaluate status.

Heightened Expectations

Strong audit and risk management – OCC focus (cont’d)

• Independent Assessment – Determine if these functions provide reliable assessments of risk levels and trends.

• Credible Challenge – Determine whether these functions are providing credible challenge.

• Prioritize Areas – To achieve “strong” risk management and audit ratings.

Heightened Expectations

Federal Branches - OCC focus

• Continued progress under HE.• BSA/AML/OFAC supervision.

Heightened Expectations

Federal Branches - OCC focus (cont’d)

• Audit - Link universe to new products and expanding areas.- Ensure reasonable and supportable frequency of reviews.- Look at backlogs and staffing in operational areas.- OCC will leverage off audit possible.

Summary

In conclusion:

• We are facing numerous complex issues and challenges. • Regulatory changes will have significant impact.• Expectations are high. • HE translate into better governance in managing risks.