Risk Management Manual of Examination Policies - FDIC

BASIC EXAMINATION CONCEPTS AND GUIDELINES Section 1.1
and control exposure to market risk given the
institution’s size, complexity, and risk profile.
• The nature and complexity of interest rate risk exposure
arising from nontrading positions.
• Where appropriate, the nature and complexity of market
risk exposure arising from trading and foreign
operations.
Ratings
1 A rating of 1 indicates that market risk sensitivity is well
controlled and that there is minimal potential that the
earnings performance or capital position will be
adversely affected. Risk management practices are
strong for the size, sophistication, and market risk
accepted by the institution. The level of earnings and
capital provide substantial support for the degree of
market risk taken by the institution.
2 A rating of 2 indicates that market risk sensitivity is
adequately controlled and that there is only moderate
potential that the earnings performance or capital
position will be adversely affected. Risk management
practices are satisfactory for the size, sophistication, and
market risk accepted by the institution. The level of
earnings and capital provide adequate support for the
degree of market risk taken by the institution.
3 A rating of 3 indicates that control of market risk
sensitivity needs improvement or that there is significant
potential that the earnings performance or capital
position will be adversely affected. Risk management
practices need to be improved given the size,
sophistication, and level of market risk accepted by the
institution. The level of earnings and capital may not
adequately support the degree of market risk taken by
the institution.
4 A rating of 4 indicates that control of market risk
sensitivity is unacceptable or that there is high potential
that the earnings performance or capital position will be
adversely affected. Risk management practices are
deficient for the size, sophistication, and level of market
risk accepted by the institution. The level of earnings
and capital provide inadequate support for the degree of
market risk taken by the institution.
5 A rating of 5 indicates that control of market risk
sensitivity is unacceptable or that the level of market risk
taken by the institution is an imminent threat to its
viability. Risk management practices are wholly
inadequate for the size, sophistication, and level of
market risk accepted by the institution.
Disclosure of Ratings
It is the FDIC's view that disclosure of the CAMELS
component and composite ratings to bank management is
appropriate. The broad range of financial products offered
through the financial services industry magnifies the
importance of sound risk management policies and
procedures. In this environment, the examination process is
incomplete if it focuses solely on the institution’s current
financial condition, and fails to assess its ability to identify
and adapt to changing economic, competitive, and other
factors. Disclosure of the component and composite ratings
encourages a more complete and open discussion of
examination findings and recommendations, and therefore
provides management with useful information to assist in
making risk management procedures more effective.
Additionally, open discussion of the CAMELS component
ratings provides institutions with a better understanding of
how ratings are derived, and enables management to better
address any weaknesses in specific areas.
Discussions with Management
The Examiner-in-Charge (EIC) should discuss the
recommended component and composite ratings with senior
management, and when appropriate the board of directors,
within as close proximity to the conclusion of the
examination as possible. Examiners should clearly explain
that the ratings are tentative and subject to final approval by
the Regional Director.
Examiners should discuss the factors they considered when
assigning the component and composite ratings. Examiners
should also indicate that the composite rating is not based on
a numerical average, but rather that it is based on a
qualitative evaluation of an institution's overall managerial,
operational, and financial performance.
The rating of the management component will be particularly
sensitive and important. The quality of management is often
the single most important element in the successful operation
of an insured institution, and is usually the factor that is most
indicative of how well risk is identified, measured,
monitored, and controlled. For this reason, examiners should
thoroughly review and explain the factors considered when
assigning the management rating. Written comments in
support of the management rating should include an
assessment of the effectiveness of existing policies and
procedures in identifying, monitoring, and managing risk.
Finally, management should be reminded that the composite
and component ratings, whether disclosed verbally or in the
written report of examination, are subject to the
Basic Examination Concepts and Guidelines (12-04) 1.1-8 DSC Risk Management Manual of Examination Policies
Federal Deposit Insurance Corporation