u.s. supervisory process · first day letter initial kick-off meeting response preparation on-site...

U.S. Supervisory Process

December 2016

Overview of U.S. Financial Institution Supervisors and Regulators

Identifies risks to the financial stability of the US from activities of large, interconnected financial companies. Authority to

gather info from financial institutions. Makes recommendations to the Fed and other primary financial regulatory agencies

regarding heightened prudential standards.

Focus on safety and soundness. Primary regulator of national banks and federal savings associations. Examination authority.

Examines loan portfolio, liquidity, internal controls, risk management, audit, compliance, foreign branches.

Office within Treasury which collects data from financial institutions on behalf of FSOC. No examination authority.

Regulates brokerage firms and registered securities representatives. Writes and enforces rules. Examination authority over

securities firms.

Focus on protecting consumers in the financial products and services markets. Authority to write rules, examine institutions

and enforcement. No prudential mandate.

Focus on protecting deposits through insurance fund; safety and soundness; manage bank receiverships. Examination

authority. Orderly Liquidation of systemically important financial institutions (SIFIs)

Focus on safety and soundness. Supervisor for BHCs; monetary policy; payment systems. Supervisor for SIFIs and their

subsidiaries. Established heightened prudential standards on its own & based on FOSC recommendations. Examination

Authority.

Market oversight and enforcement functions. Authority over swap dealers and major swap participants. Regulates trading

markets, clearing organizations and intermediaries.

Regulates securities exchanges, mutual funds, and investment advisors. Examination authority for broker dealers. Authority

over security-based swaps, security-based swap dealers and major security-based swap participants.SEC

FINRA

CFTC

FSOC

OCC

FRB

OFR

FDIC

CFPB

Scope of Supervisory Responsibilities and the Examination Process

► On-site examinations help ensure the stability of depository

institutions by identifying undue risks and weak risk

management practices

► Exam findings also help supervisors identify the cause and

severity of problems at individual banks and emerging risks in

the financial-services industry

► An examination can be conducted as a comprehensive, full-

scope review or as a limited scope assessment, which is

generally used to assess changes in an institution’s risk profile

or to monitor compliance with corrective programs; full scope

exams are generally divided between safety and soundness

reviews and compliance reviews

► Examiners pay careful attention to an institution’s policies,

processes, personnel, and control systems and may use

questionnaires and verification procedures to support their

assessment and conclusions

► Institutions are rated using the Uniform Financial Institutions

Rating System, which , for domestic institutions evaluates the

institution’s capital adequacy, asset quality, management

capabilities, earnings sufficiency, liquidity position, and

sensitivity to market risk (commonly referred to as CAMELS

ratings)

► Federal branches and agencies of foreign banks are evaluated

based on their risk management, operational controls,

compliance, and asset quality (commonly referred to as ROCA

ratings)

Federal Reserve► Bank Holding Companies ► State Member Banks ► National Banks (Secondary)► Federal Branches and Agencies

of Foreign Banks (Secondary)

OCC► National Banks ► Federal Branches and

Agencies of Foreign Banks

FDIC► Insured State Nonmember Banks ► Insured National Banks

(Secondary)► Insured State Member Banks

(Secondary)► Insured Branches and Agencies of

Foreign Banks (Secondary)

State Banking Agencies► State Chartered Banks ► State Licensed Branches and

Agencies of Foreign Banks

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Range of Federal Reserve Reviews and Examinations

► Frequent review of MIS/management updates regarding risk management and financial performance

► Off-site surveillance

► Real-time reporting to monitor potential threats to safety and soundness

► Key risks are credit, market, liquidity, operational, compliance/legal, and reputation

Enhanced Continuous Monitoring

► Reviews conducted of large complex banking organizations focused on specific issues or practices

► Outcome of reviews is shared with participating institutions as best practice for leading/ lagging institutions

► Industry-wide quantitative assessments and stress testing CCAR/DFAST/CLAR

► Informs policy formulation

Horizontal Reviews

► Targeted examinations/reviews throughout the year

► Risk-based examinations, with transactional or procedural-level testing, as necessary

► Examination scope may range from processes around a product or business unit to risk / compliance-related themes

► Largest banks are subject to full-time onsite reviews related to management processes and core proficiencies for identifying, measuring, monitoring, and controlling key risks

Supervisory/Exam Plan

► Reviews may be conducted by business units or by legal entity

Legal Entity Structures

Examinations and On-Site PreparationRegulators are beginning to move away from the formal examination process and focus on continuous monitoring and understanding risk management, with emphasis on 3 lines of defense

Composition

Annual

assessment

Strength of

support

assessment

Examinations

and

Enhanced

Continuous

Monitoring

Large International Financial

Institutions (LIFI) and Systemically

Important Financial Institutions (SIFI)

Regional Community and Foreign

Institutions (RCFI)

Collaboration

Broker-dealer or subsidiary within the U.S.

Includes 23 large financial firms that may fall

under the IHC 165

All FBOs that are not categorized as LIFI

Point-in-time examinations with a focus on

operational controls and asset quality.

Onsite presence is with one FRB examiner

on average responsible for a portfolio of

institutions via a portfolio approach

No U.S. assessment is produced

Annual SOSA rating on the home country

ability to support US operations

Increasing collaboration with home country

regulators

Targeted point-in-time exams. On-site team is

generally small and includes a supervisory

manager. Risks are evaluated by examiners

responsible for a portfolio of institutions and

who specialize in dedicated risk categories

(i.e., markets, credit, liquidity)

Annual assessment letter composed of a

ROCA/combined ROCA and a US

assessment

Annual SOSA rating on the home country

ability to support US operations

Increasing collaboration with home country

regulators

Key Factors to Consider in Preparation for an On-Site Examination► Examiner assessments of risk management and board

and senior management drive overall institution ratings, theme of regulatory findings, and tone of formal communications.

► Documentation remains a regulatory focal point:

► Policies and procedures

► Financial systems and regulatory reporting

► Internal reporting and MIS

► Formal meeting minutes

► Organizational structure and chain of command

► Audit or independent review workpapers

► Key assumptions for forecasting, modeling

► How an organization handles CSI – confidential supervisory information -- is critical

► Comprehensive and readily accessible documentation that meets legal and regulatory requirements is essential. However, documents must align with operational reality.

Examination Report

Assessment of Risk

Management

Assessment of Board and

Senior Management

Vetting examination

findings

Takeaway:

Ability of institution’s management to adequately identify, measure, monitor and control risk exposures.

Examiner meetings with board and senior management. Sample discussion topics: risk oversight, strategy implementation, remediation of previously identified deficiencies.

Examiner meetings with on- and off-site regulatory staff. Sample discussion topics: management evaluations, risk management MIS implementation, and documentation practices.

Sound Practices for Examination Preparation

► Regulatory response to institutions inadequately addressing supervisory requirements and

expectations is generally based upon the degree to which institutional safety and soundness

is affected:

► Informal criticism during on-site meetings

► Written criticism in regulatory communications

► Downgrade of management and/or risk management ratings

► Issuance of informal, nonpublic enforcement action

► Rejection of applications

► Issuance of formal, public Written Agreement

► Cease and Desist/ Consent Order

► Monetary Fines

► Charter revocation/ nullification

► Recently identified sound practices:

► High access to key stakeholders during business unit review

► Proper documentation provided to regulators upon request in a timely manner

► Demonstrating effective challenge of the business on risk, control and compliance matters

► Proactive internal audit and quality assurance review

► Effective and timely remediation of identified issues

Less Severe

More Severe

Examination Process Overview: First Day Letter

Initial Kick-off Meeting

Response

PreparationOn-Site Review

2 -3Typical Duration

(Weeks)

1st Day

Letter

4 - 6

Off -Site

Review

1 - 2

• “To be provided requests” are

those items that need to be

sent to the Fed in advance of

the on -site examination

Requests for Information

• “To be made available

requests” are those items that

should be accessible to the

examiners when they arrive

on-site.

• Overview of the regulatory reporting policies and processes

• Overview of systems and subsystems architecture supporting regulatory reporting

• Accounting policies and procedures

• Copy of General Ledger and chart of accounts

• Organization-specific transaction level detail (e.g. intercompany transactions)

• Organizational charts and regulatory reporting raining calendar

• New and closed accounts

• Overview of major infrastructure and reporting processes improvements

• Recent audit reports (last 2 years) of regulatory reporting

Sample Request – Regulatory Reporting

• Detailed procedures for each regulatory report

• Regulatory reporting work papers for latest quarter-end

• Chart of accounts with detailed account descriptions on nature and use of the accounts

• Description of roles and responsibilities and bios of key personnel

• Detailed transaction samples

• Sample of classification of different assets classes and cross reference to static data

• Resumes for reporting staff and responsibilities

Examination

Report (MRIAs

& MRAs)

Soft

close



Response



(Weeks)

1st Day

Letter

4 - 6

Off -Site

Review

1 - 2

Examination

Report (MRIAs

& MRAs)

Soft

close

The initial discussion with examiners typically covers the following:

• Scope and objectives of the examination

• An overview of the regulatory reporting process, including people, systems, policies and process maps

• Identify key points of contact for the examination

• Provide a project overview and status update on recent initiatives

• Describe issues being addressed that require multiple-year initiatives to complete

• Identify institution’s key risks, controls and compliance challenges and be able to explain in detail how they are

being managed

• Current significant issues raised by internal or external audit reports, regulatory examinations, and the status of

remediation, if any

Overriding theme:

Examiners will demand documentation

“If it isn’t written down, it doesn’t exist”

Anything described or referenced should be available in hard copy

Regulatory Reporting - Initial Kick-off Meeting Description



Response



(Weeks)

1st Day

Letter

4 - 6

Off -Site

Review

1 - 2

Examination

Report (MRIAs

& MRAs)

Soft

close

Underlying on-site examination theme is the focus on understanding the regulatory reporting process

and how regulatory reporting information is compiled, analyzed and reviewed before being submitted to

the Federal Reserve. Specific areas of review include:

• Detailed policies, procedures, and controls around the reporting process and each report

• Assessment of staff knowledge of the regulatory reporting policies and procedures

• Focus on areas that have been challenges at other institutions (e.g. intercompany accounts, derivatives, AML)

• Drill down below general ledger to transaction details, contracts and agreements

• Analysis and reconciliations to other reports such as 10-Q to FFIEC002 and extend of supporting documentation to

follow any reconciliation

• Documentation of adjustments including commentary over filing periods

• Status of resolution of prior examination/audit findings

• Detailed sample testing to review the accuracy of specific line items (i.e. has a transaction been classified on the

appropriate line item) - Is it a security or a loan?

• Review of complex products and transactions

• Focus on manual and automated processes, and management review and sign-off

Regulatory Reporting - On-Site Review Description


Response



(Weeks)

1st Day

Letter

4 - 6

Off -Site

Review

1 - 2

Examination

Report (MRIAs

& MRAs)

Soft

close

• A soft close will be held, as a confirmation of facts, prior to the hand delivered of the transmittal letter to the institution

• Detailed examination report provided to the banking organization documenting findings with recommendations

• The examiners’ observations may generalize/assume that a problem with one report will likely occur with other similar reports

• May lead to Matters Requiring Immediate Attention (MRIA) or Matters Requiring Attention (MRA)

• Active periodic follow-up on action plans to address significant deficiencies

• Re-filing of regulatory reports may be required

• Civil Monetary Penalties (CMP) can be assessed (willful misreporting is not required for risk of CMP)

Regulatory Reporting - Examination Report


Selected FRB Policy Letters Relevant to FBO Supervision

Topical Guidance (cont.)

► SR 96-36 – Evaluating Activities Under the Responsibility of

U.S. Branches, Agencies and Nonbank Subsidiaries of FBOs

► SR 96-27 – Addressing Internal Control Weaknesses in U.S.

Branches and Agencies of FBOs through Special Audit

Procedures

► SR 95-42/SR 95-4 – Allowance for Loan and Lease Losses

for U.S. Branches and Agencies of FBOs

► SR 93-26 –Loans to Small and Medium-sized Businesses and

Farms to the Activities of U.S. Branches and Agencies of

Foreign Banks

► SR 90-22 – Use of "Points" in Settling Foreign Exchange

Contracts

The Examination Process

► SR 12-17/CA 12-14 - Guidance on Consolidated Supervision

Framework for Large Financial Institutions [expansionary

update anticipated by Q4 2016]

► SR 08-9/CA 08-12 – Consolidated Supervision of Bank

Holding Companies and the Combined U.S. Operations of

FBOs

► SR 00-14 – Enhancements to the Interagency Program for

Supervising the U.S. Operations of FBOs

► SR 99-31 – Extended Examination Cycle for U.S. Branches

and Agencies of Foreign Banks

► SR 97-9 – Revised Examination Guidelines for

Representative Offices of Foreign Banks

Topical Guidance► SR 15-9 - FFIEC Cybersecurity Assessment Tool for Chief

Executive Officers and Boards of Directors

► SR 14-4 - Managing Foreign Exchange Settlement Risks

for Physically Settled Transactions

► SR 13-19/CA 13-21 - Guidance on Managing Outsourcing

Risk

► SR 11-6/SR 04-10 - Guidance on Accepting Accounts from

Foreign Embassies, Consulates and Missions

► SR 10-08 - Suspicious Activity Report Filing Requirements

for Banking Organizations Supervised by the Federal

Reserve

► SR 09-09 - Interagency Guidance on Transparency and

Compliance in Cross-Border Funds Transfers

► SR 06-01 Interagency Guidance on Sharing Suspicious

Activity Reports with Head Offices and Controlling

Companies

► SR 02-2 – Monitoring Compliance with the Restrictions on

Foreign Investments Contained in Regulation K and

Guidance for Internationally Active Domestic Banking

Organizations on Recordkeeping Requirements Regarding

Foreign Investments

► SR 01-1 – Application of the Board's Capital Adequacy

Guidelines to Bank Holding Companies owned by FBOs

► SR 97-22 – Report of Assets and Liabilities of U.S.

Branches and Agencies of Foreign Banks ("FFIEC 002") -

Filing Requirements for "Zero Assets" Branches and

Agencies

U.S. Regulatory Landscape

Primary objectives of global regulatory reform (1/2)

► Institutional reforms are focused on improving the financial condition and governance of financial institutions and addressing their impact on markets (via structural and conduct related reforms)

► This includes extending the perimeter of prudential regulation to systemically important non-bank institutions

► Regulation of financial activities and practices are aimed at creating safer, fairer and more efficient markets via structural and conduct related reforms across entire marketplaces

► Areas being addressed include: derivatives clearing, trading and reporting; consumer finance practices; asset manager activities; and general capital markets trading and settlement infrastructure

The global regulatory reform agenda is focused on mitigating systemic risk and creating more resilient and transparent financial systems through a combination of institutional reforms and regulation of financial activities and practices in four key areas: Financial Condition, Structural Reform, Conduct and Governance and Controls

The global regulatory reform efforts are broadly aligned across the borders, however, jurisdictions vary in the emphasis they place on individual elements, as well as their degree of implementation

Improve the

governance

of institutions:

► Increase the

accountability of boards

and management

► Strengthen the three

lines of defense

► Enhance controls

related to data and

reporting

Improve the financial

condition of

institutions:

► Make institutions less

likely to fail via

enhanced supervision,

increased capital and

liquidity requirements,

reduced leverage and

stress testing

► Expand perimeter of

prudential regulation to

systemically important

institutions

Simplify the structure of

institutions and

strengthen oversight of

key markets:

► Make institutions more

resilient via structural

reforms and recovery and

resolution planning

► Improve the resiliency,

transparency and

efficiency of markets

more broadly via

increased oversight

Improve the conduct of

institutions and

outcomes for

consumers/investors:

► Develop the “right” culture

at institutions

► Ensure firms do not

manipulate markets, treat

customers fairly and

improve AML controls

► Ensure that markets

operate fairly and

efficiently

Derivatives, Equity & Fixed Income Market Reforms

Institutional Structural Reforms

Recovery and Resolution Planning

CultureCyberSecurity

Market Transparency

ComplianceRegulatory Reporting

Liquidity

SIFI Designations

Risk Governance and Controls

Capital

Business

strategy

Primary objectives of global regulatory reform (2/2)

Regulatory Reform AgendaKey questions supervisors are asking firms

Supervisory questions Challenges

Financial

condition

► Is your capital adequate (under stress

and BAU), both globally and

regionally?

► Fundamental review of the trading book (FRTB), single counterparty

credit limits (SCCL), Total loss absorbing capacity (TLAC)

► Role and scope of standardized floors, restrictions on the use of

internal models, RWA standardization

► Ring-fencing

► Super-equivalent requirements in various jurisdictions

► Is your liquidity adequate (under stress

and BAU), both globally and

regionally?

► Daily/intraday liquidity reporting

► Net stable funding ratio (NSFR)

► Trapped liquidity

Structural

reform

► Do you have the operational and financial capabilities to support credible recovery and resolution planning?

► Do your legal entity and business operating models support resolvability?

► Credible recovery and resolution plans

► Aligning business units/strategy with legal entity operations

► Collateral management/funding in resolution

► Cross-border implementation of stay on QFCs (derivatives, repo)

► Revisiting continuity of shared services/creating a service company

Conduct ► Do you have adequate compliance

programs and resources?

► Is senior leadership engaged in

promoting an appropriate culture?

► Changing regulatory expectations with increased scrutiny

► Competing challenges for limited resources

► Required investments for new and innovative technology solutions

Governance

and controls

► Are you well governed and controlled,

both globally and regionally?

► Management/board accountability, defining risk appetite, risk–aligned

incentive compensation

► Strengthening the three lines of defense

► Legal entity governance

► Enhancements to modeling, data quality, internal controls, and

infrastructure

► Cyber resiliency/operational continuity

Financial

condition

► Capital:► CCAR CFO Attestation; CCAR Amendments► Fundamental Review of the Trading Book ► Total Loss Absorbing Capacity► Single Counterparty Credit Limits

► Liquidity:► Liquidity Reporting► Net Stable Funding Ratio ► Funds Transfer Pricing

Structural

reform

► Recovery and Resolution Planning► Fed and FDIC feedback on resolution plans► OCC recovery plan guidelines

► Derivatives Reforms► Initial and variation margin

► Fixed Income and Equity Market Reforms► T+2 settlement► Trade reporting

Conduct ► Continuing improvement of oversight, controls and MIS► Expectation to serve the customer fairly► Organization culture embodies heightened expectations and behaviors ► Escalating focus on BSA/AML risk

Governance and

controls

► Risk Governance► Data and Regulatory Reporting/BCBS 239► Cyber Security► Incentive Compensation

Framework

nearing

completion

Rulemaking/

guidance

continuing

Significant

rulemakings/

guidance

outstanding

Maturity of regulatory framework

Regulatory DriversMaturity of regulatory framework and key areas of focus for 2016 - 2017

u.s. supervisory process · first day letter initial kick-off meeting response preparation on-site...

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