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WHAT TO EXPECT FROM A REGULATORY EXAMINATION
Foreign & Wholesale Banks Division
December 14, 2017
ForeignBankRegulators
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• NewYorkStateDepartmentofFinancialServices• FederalReserveBank
[Mostbranches&agenciesareregulatedbytheabovetwoagencies]
• OfficeoftheComptrolleroftheCurrency[Nationalbranches]
• FederalDepositInsuranceCorporation[Insuredbranches]
ForeignBankRegulators(cont.)
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• StateorFederallicense/charter• Manybankschoosestate• Multi-statebankschooseFederal
[OfficeoftheComptrolleroftheCurrency]
• ManybankdepositsareFDICinsured• Bankingholdingcompanies,includingIntermediateHolding
Companies(IHC)regulatedbyFederalReserve
• Nearly100brancheswithover$2.6Trillion[totalasset]
• About25agencieswith$58+Billion[totalasset]
• Nearly50NYSlicensedrepresentativeoffices
ForeignBankCommunity
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ExaminationPlan
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• FBOswithROCAratingsof1or2&under$250milliontotalassets
- Typically,18month-alternateyearcycle
• FBOswithROCAratingsof3orworseoraRegulatoryAction
- Typically,12month-jointcycle+visitation/targetreviews
• Large,ComplexBanksover$250milliontotalassets- Typically,12month–jointcycle
ExaminationTypes
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• Safety&SoundnessExamination- Comprehensive;allaspectsofFBOreviewed;mostcommonexamination
• TargetedExamination- Focusonauniquearea[e.g.,BSA/AML;Compliance;Audit;IT]
• LimitedScopeExamination- Limitedduetospecialcircumstance[e.g.,preMerger]
ExaminationProcedures
• FirstDayletter(FDL)/EntryLetter- Typically4-6weekspriortoentry
• Examination- Typically4-6weeks;4to5examiners
(dependsonstaffavailabilityandinstitutionprofile)
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BankFDLResponses• Specificreportingofchange&trendssincetheprior
examination,suchasthefollowing:• SeniorStaff• Products• IT• Audit• Earnings• Strategies• Riskmanagement
• LiaisonOfficeshouldmanage:• FirstDayLetter• Securespaceforexaminers• Examinersuppliers,printer,computerlines,etc.• Seniorlevelmeetings
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Ratings
ROCA-• RiskManagement• OperationalControls• Compliance• AssetQuality
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ROCARatingsRating
• 1:Strong
• 2:Satisfactory
• 3:Fair
• 4:Marginal
• 5:Unsatisfactory
RegulatoryTreatment
• Usualattention
• Usualattention
• Enhancedattention
• CloseMonitoring
• Restructuring
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Large,ComplexFBOs
• ContinuousSupervision• MajorinstitutionshavededicatedregulatorsfromNewYorkState
and/orFRBNY• State- CentralPointofContact(CPC)• FRBNY- SeniorSupervisoryOfficer(SSO)
• ReviewdailyactivitiesofFBO• Frequentmeetingswithseniormanagement• Targetexaminationsofspecializedareas• RotationofCPCsandSSOsatdesignatedintervalsorasnecessary
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TypesofRegulatoryConcerns
• MRIA• MattersRequiringImmediateAttention
• Highconcern;significantrisk;immediateactionplan;timeframeforcorrection.
• MRA• MattersRequiringAttention
• Significantissues;tobeaddressedovertime
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Communication
• WorkcloselywithFederalRegulators• ConferenceofStateBankSupervisors• InstituteofInternationalBankers• Almosttwodozenforeignsupervisorshaveinformationsharingagreements
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CurrentTopicsofInterest
• BSA/AMLandPart504• Compliance• Cyber-SecurityandPart500• Liquidity• Governance• InternalAudit/OperationalControls• AssetQuality
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Challenges2017-2018
• MaintainAssetQuality• ExpandFundingResources• MaintainstrongBSA/AMLProcedures• Maintainastrongcompliancefunction• EnsureastrongInternalControlEnvironment• EnsureastrongRiskManagementFunction• RegulatoryChanges
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RiskManagement
• Credit• Market• Liquidity• Operational• Legal• Reputational• Country
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CreditRisk
• Creditpolicies/procedures• Creditanalysis• Loanconcentrationidentificationandcontrols• Loanreviewcontinuity• Riskmitigationstrategies
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MarketRisk
• Marketriskpolicies• Marketriskguidance• Rate&priceforecastmechanisms• Riskmitigation
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LiquidityRisk
• Liquidityanalysis• Liquiditymonitoring• Fundingsources• Relianceonshort-termvs.long-termfunds• Concentrationofsources
• Stresstesting
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OperationalRisk
• Informationsecurity• Databackup• Dualcontrolprocedures• Accountingprocedures• Auditreviews• Auditindependence• Eventmanagement
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LegalRisk
• Homeofficelegaladvice• Locallegalassistance• Regulatoryassistance• Adequateinsurance• Strengthofcompliancefunction
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ReputationalriskReputational risk is the potential that negative publicityregarding an institution’s business practices, whether trueor not, will cause a decline in the customer base, costlylitigation, or revenue reductions.
• The biggest threat to reputation is seen to be a failure to complywith regulatory or legal obligations.
• Failure to deliver minimum standards of service and productquality to customers is a close second.
• The risk that unethical practices in the organization will beexposed follows closely behind.
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CountryRisk
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CountryRiskencompassesacollectionofrisksassociatedwithinvestinginaforeigncountry.Theserisksincludepoliticalrisk,exchangeraterisk,economicrisk,sovereignriskandtransferrisk[theriskofcapitalbeinglockeduporfrozenbygovernmentaction].
PledgedAssets
LiquidassetsheldatanNYSDFSapproveddepositorytobeusedforcoveringtheshorttermcostofliquidation.Highqualitysecuritiesordepositoryinstruments.Amountissetat:$2millionor1%ofaveragetotalliabilitiesforthepriormonth.• $2millionminimum• $100millionmaximumiftheFBOisdeterminedtobe“wellmanaged”.
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AssetMaintenance
Superintendentmayimposeassetmaintenanceorotherliquidityrequirementssuchasapositivegapwhenhe/shebelievestheFBOhas:• Weakenedfinancialconditionor• Difficultcircumstancesinthehomecountry
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AvailableResources
FinancialIndustryDatawww.dfs.ny.gov
RegulatoryManualswww.federalreserve.gov/boarddocs/supmanual/
BSA/AMLwww.ffiec.gov/bsa_aml_infobase/default.htm
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