Forward-Looking Bank Supervision

2010 Kansas City Region

Regulatory Conference Call

August 24, 2010

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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

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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)

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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

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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.

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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.

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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?