Risk Management Manual of Examination Policies - FDIC

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BASIC EXAMINATION CONCEPTS AND GUIDELINES Section 1.1 Investigations, phone calls, limited scope examinations, correspondence and other forms of customized contact should be made as necessary. The purpose is to identify and obtain corrections in an institution's policies and procedures before serious financial problems develop. Pre-examination activities should include efforts to determine the activities engaged in and the condition of nonbank subsidiaries. If not determinable in advance, this should be conducted early in the examination in order to assess the necessity of and depth of examination of subsidiaries. The success of this effort depends largely on the effectiveness of assignment scheduling and preordination. Examiner resources should be allocated and directed based on the best information available as to potential problems without over emphasizing the mere passage of time. Anticipatory Supervision To effectively prevent serious problems in an institution, the conditions and circumstances that may lead to problems must be identified and corrected early. Corrective action should be taken immediately upon identifying excessive risk taking. History has taught that when corrective action is not taken until conditions have deteriorated; it is often too late to avoid failure. Moral suasion and informal agreements are normally sufficient where the unacceptable risk-taking is identified early, but formal action must be considered, even when an institution is rated 1 or 2, if circumstances warrant. A prospective supervisory approach, entailing criticism of policies and practices before unsafe and unsound conditions actually develop calls for serious thought and studied reaction by examiners. Critical comments must be well-supported and based on logic, prudent banking standards, and the potential for harm. In questionable circumstances where formal action is a possibility, examiners should consult with the Regional Office while the examination is in progress regarding the material needed to support a potential action. Scheduling Process A goal of examinations of 1 and 2-rated institutions is to correct weaknesses before they cause serious difficulties and become a financial risk to the FDIC. Therefore, it is far more important to examine, or otherwise supervise, a bank if there is some reason to suspect a problem than if the bank merely has not been examined in a specified period of time. Moreover, a formal examination may not be the most efficient use of resources in investigating the risk potential a bank may present. The objective is to assess the problem and, if necessary, devise a solution in the quickest, most efficient manner possible. Frequently, a telephone call or brief on-site visit may suffice. Sometimes such preliminary efforts will indicate that a full-scope examination is appropriate. In order for all available information to be considered, it is critical that the Field Office Supervisor and other appropriate personnel be aware of and have access to the scheduling process. Regional Directors should ensure that copies of relevant correspondence and other pertinent information are made available. Procedures should ensure that information that may affect scheduling decisions is documented and made available to the involved personnel. Individuals doing scheduling must review and consider this information. Because of the variety of sources and forms of relevant information available, it is not possible to design a uniform system of information gathering and reporting. However, the list below includes some information that may come to the FDIC's attention and have an influence in prioritizing assignments. Some of these items, such as involvement in FDIC assistance transactions, have supervisory schedules specified in our policy. Others are merely information that, in and of themselves, may or may not raise a concern depending on what else is known about the bank. However, these or similar items may give a signal that requires further follow-up. Such clues should not be ignored. The list, while not all inclusive, indicates a need for supervision to be anticipatory and provides a reminder of some of the common sources of information that may warrant consideration when scheduling. Information to Consider in Scheduling Examinations Effective bank supervision entails the continual assimilation of information from numerous sources, both within and outside the FDIC. The appropriate response, if any, depends on the circumstances, supervisory action already underway, what is known about the institution, and what can be learned from follow-up procedures. In some instances, the information serves as a "red flag," leading to an immediate examination. In less severe situations, the information is retained and factored into the process of scheduling future examinations. It is possible that a given piece of information can be derived from more than one source. Some of the items listed below could be included under more than one source. Offsite Analysis and Monitoring • SCOR Monitoring System • Comprehensive Analytical Reports/Financial Interim Reports • Growth Monitoring System DSC Risk Management Manual of Examination Policies 1.1-13 Basic Examination Concepts and Guidelines (12-04) Federal Deposit Insurance Corporation
BASIC EXAMINATION CONCEPTS AND GUIDELINES Section 1.1 • UBPR Analysis Other: • Loss for the year or an interim period • Rapid growth in assets or deposits • Significant change in asset composition • Significant change in liability composition • Use of brokered funds • Excessive dividends relative to earnings • Excessive bond trading • Other ratios or numbers that are unusual or have changed dramatically • Unusually high Return on Assets (ROA) Applications, Notices or Other Bank Provided Data • Change of control • Merger • Acquisition or establishment of a new subsidiary • Acquiring party in a FDIC arranged transaction • Change in external auditor • Exercise of a new power or a new profit center • Newly insured institution • Affiliation with a 3-, 4- or 5- rated institution or holding company • Cancellation of blanket bond insurance • Large defalcation • Review of CPA audit reports • Large pay down or payoff of previously classified loans Known Characteristics • Excessive salaries • Failure to pay competitive salaries • Compensation linked to future performance such as income, loan volume or deposit growth • Infighting involving senior bank officers and/or directors • Significant litigation against the institution or insiders • Operating at the margin of laws and regulations • Management believed to be less than trustworthy • Self-serving management • Dominating management • Inexperienced management • Substantial outside business interests of a key officer • Conducting business with questionable firms such as certain bond dealers • Lack of diversity in nature of business or other unique business strategy Examinations of Other Banks • Hiring of a dismissed, unethical, or marginal officer • Refinancing poor quality loans • Improper handling of correspondent bank accounts • Advertising above market interest rates • Undercutting on price and credit quality to increase market share of loans • Large blocks of stock in the institution pledged as collateral • Increased or unusual loan participations among affiliated or closely held institutions • Banker with past due loans at another institution Other Bank Regulators • Improper handling of correspondent bank accounts • Increased or unusual loan participations among affiliated or closely held institutions • Large blocks of stock pledged as collateral • Affiliation with a 3-, 4- or 5-rated institution or holding company • Large defalcation • Banker with past due loans at another institution • Loans classified at other institutions Media • New chief executive officer or chief lending officer • Adverse publicity • Loss for the year or an interim period • Adverse economic event in the community • Natural disaster such as a flood, fire or earthquake • Large defalcation • Large financial commitment as sponsor or lead bank in a major project or development • Banker death or disappearance • Announcement of major new activity or department Rumors/Observations/Other • Change in external auditor • High or sudden employee turnover • Significant litigation against the institution or insiders • Unusual activity in stock of the institution (price movement up or down or heavy trading volume) • Institution advertising above market rates • Significant change in the composition of assets or liabilities • Questionable loans being booked • Institution dealing with borrowers of questionable character • Confidential or anonymous tips Basic Examination Concepts and Guidelines (12-04) 1.1-14 DSC Risk Management Manual of Examination Policies Federal Deposit Insurance Corporation
Page 1 and 2: DSC Risk Management Manual of Exami
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Page 9 and 10: BASIC EXAMINATION CONCEPTS AND GUID
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LOANS Section 3.2 Moreover, since t
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LOANS Section 3.2 exercise control
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LOANS Section 3.2 Problems in this
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LOANS Section 3.2 that reveal other
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LOANS Section 3.2 Other loans of qu
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LOANS Section 3.2 be determined whe
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LOANS Section 3.2 time period elaps
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LOANS Section 3.2 individual apprai
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LOANS Section 3.2 controls over its
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LOANS Section 3.2 consistent with t
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LOANS Section 3.2 such funds, the m
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LOANS Section 3.2 security interest
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LOANS Section 3.2 unambiguous terms
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LOANS Section 3.2 Trustees are sele
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LOANS Section 3.2 be valid but cert
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LOANS Section 3.2 Overview of the S
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LOANS Section 3.2 Although some ins
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LOANS Section 3.2 • Portfolio gro
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LOANS Section 3.2 pricing decisions
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LOANS Section 3.2 trends, condition
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LOANS Section 3.2 provide additiona
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SECURITIES AND DERIVATIVES Section
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CASH AND DUE FROM BANKS Section 3.4
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CASH AND DUE FROM BANKS Section 3.4
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PREMISES AND EQUIPMENT Section 3.5
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PREMISES AND EQUIPMENT Section 3.5
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OTHER REAL ESTATE Section 3.6 Under
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OTHER ASSETS AND LIABILITIES Sectio
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OFF-BALANCE SHEET ACTIVITIES Sectio
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MANAGEMENT Section 4.1 INTRODUCTION
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MANAGEMENT Section 4.1 consequently
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MANAGEMENT Section 4.1 overdue, ren
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MANAGEMENT Section 4.1 money launde
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MANAGEMENT Section 4.1 management l
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MANAGEMENT Section 4.1 • An adequ
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MANAGEMENT Section 4.1 • Troubled
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MANAGEMENT Section 4.1 management i
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INTERNAL ROUTINE AND CONTROLS Secti
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RELATED ORGANIZATIONS Section 4.3
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RELATED ORGANIZATIONS Section 4.3 U
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RELATED ORGANIZATIONS Section 4.3 i
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RELATED ORGANIZATIONS Section 4.3 A
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RELATED ORGANIZATIONS Section 4.3 A
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FIDELITY AND OTHER INDEMNITY PROTEC
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VIOLATIONS OF LAWS AND REGULATIONS
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VIOLATIONS OF LAWS AND REGULATIONS
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MISCELLANEOUS BANKING ACTIVITIES Se
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EARNINGS Section 5.1 structure will
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EARNINGS Section 5.1 demand is low)
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EARNINGS Section 5.1 2. Certain dir
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EARNINGS Section 5.1 capital and al
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LIQUIDITY AND FUNDS MANAGEMENT Sect
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INTERNATIONAL BANKING Section 11.1
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APPLICATIONS Section 12.1 Effective
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APPLICATIONS Section 12.1 for compa
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APPLICATIONS Section 12.1 be tantam
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APPLICATIONS Section 12.1 accept sh
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APPLICATIONS Section 12.1 accepted
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APPLICATIONS Section 12.1 The FDIC
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MEMORANDUMS OF UNDERSTANDING Sectio
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CIVIL MONEY PENALTIES Section 14.1
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FORMAL ADMINISTRATIVE ACTIONS Secti
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REPORT OF EXAMINATION INSTRUCTIONS
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BANK OF ANYTOWN ANYTOWN ANY COUNTY
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Examination Conclusions and Comment
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Risk Management Assessment 99999 1.
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Violations of Laws and Regulations
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Information Technology Assessment (
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Fiduciary Activities Assessment (Co
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Comparative Statements of Financial
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Recapitulation of Securities 99999
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Items Subject to Adverse Classifica
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Analysis of Loans Subject to Advers
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Capital Calculations 99999 Tier 1 C
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Confidential - Supervisory Section
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INTERNATIONAL REPORT PAGES AND WORK
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Foreign Exchange Activities 99999 N
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Position Analysis - Other Currencie
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Revaluation and Income/Loss Analysi
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Policy and Procedures 99999 1. (a)
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Policy and Procedures (Continued) 9
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Description of the Transaction INVE
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FINANCIAL HISTORY AND CONDITION Ass
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ADEQUACY OF THE CAPITAL STRUCTURE G
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ADEQUACY OF THE CAPITAL STRUCTURE (
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FUTURE EARNINGS PROSPECTS Assess th
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FUTURE EARNINGS PROSPECTS (Continue
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GENERAL CHARACTER OF THE MANAGEMENT
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IV. GENERAL CHARACTER OF THE MANAGE
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Interview Comments IV. GENERAL CHAR
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RISK TO THE FUNDS As a general matt
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VI. CONVENIENCE AND NEEDS OF THE CO
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OTHER PERTINENT INFORMATION If appl
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Source: Application for Federal Dep
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Service Continuity & Monitoring OTH
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Risk Management Manual of Examination Policies - FDIC

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