Federal Reserve Bank Surveillance and Early Warning System Federal Reserve Bank Surveillance and Early Warning System Kevin Bertsch Deputy Associate Director Surveillance, Financial Trends & Analysis Section Division of Banking Supervision & Regulation Board of Governors of the Federal Reserve System
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Federal Reserve Bank Surveillance and Early Warning System
Federal Reserve Bank Surveillance and Early Warning System
Kevin BertschDeputy Associate Director
Surveillance, Financial Trends & Analysis Section
Division of Banking Supervision & RegulationBoard of Governors of the Federal Reserve System
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Overview
• State Member Bank Watchlist Program• SR-SABR Model• Bank Holding Company Surveillance
Programs• Distribution of Surveillance Results
– BOND Notifications– PRISM Application
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Federal Reserve Supervisory Responsibilities
• Direct oversight of state member banks– Roughly 10 percent of U.S. banks by Number– About 15 percent of U.S. Bank Assets
• Supervisor of BHCs– Supervisory interest in roughly 80 percent of banks by
number– These banks hold more than 95 percent of bank assets
in the U.S.
• U.S. Activities of Foreign Banking Organizations
Role of SurveillanceRole of Surveillance
• Identify deterioration between on-site examinations in a timely manner
• Assist in allocating supervisory and examination resources
• Support pre-exam planning
• Identify banking industry trends
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Surveillance Process
• Compile measures of risk, condition, and performance
• Flag outliers and provide results to Reserve Banks
• Reserve Banks determine action for most screen failures
• But written analysis or on-site exams required if change or deterioration is substantial
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Federal Reserve Surveillance Programs
• State Member Bank Watch List Program (SR 06-2)
• Small Bank Holding Company Surveillance Program (SR 02-01)
• [Large] BHC Surveillance Program (SR 95-43)
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State Member Bank Watch List
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State Member Bank Watch List Criteria
• SR-SABR Rating of 1D, 1F, 2D, or 2F• CAMELS composite, Management component, or
Risk Management rating worse than or equal to 3• “Specialized” exam ratings in either of the worst
two categories
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Additions to Watchlist
• Reserve Banks and Board staff may add banks that do not meet above criteria
• For example, de novo banks, banks reporting rapid asset or loan growth or significant changes in business mix may be added to the watchlist
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Follow-up Requirements
• Assess the financial condition and risk profile of each watchlist state member bank
• Determine whether safety and soundness examination should be accelerated--if yes, commence within 60 days
• Prepare a surveillance write-up for each Watch List bank within 30 days
System Bank Monitoring Screens
System Bank Monitoring Screens
• Capital levels• Dividends• Asset growth• Loan quality• Loan concentrations• Liquidity• Capital Markets Activities
The SR-SABR Model
SR-SABR ModelSR-SABR Model
SR-SABR Model (Supervision and Regulation Statistical Assessment of Bank Risk Model) assigns a two-component rating to each bank:– The first component is the current
CAMELS rating– The second component is a letter
reflecting the model’s assessment of the relative strength or weakness of a bank compared to other banks with similar CAMELS rating
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Interpreting SR-SABR Letter Grades
• “A” denotes strong financial and supervisory indicators compared to other like-rated banks
• “F” signifies particularly weak financial and supervisory indicators compared to other similarly-rated banks
SR-SABR Combines Results from Three Separate Econometric Models
SR-SABR Combines Results from Three Separate Econometric Models
• Two models assign an “adverse change” rating
– The first model estimates the probability of an adverse rating change for banks currently rated CAMELS 1 or 2
– The second model estimates the probability of an adverse rating change for banks currently rated CAMELS 3, 4, or 5
• The third model assigns a “viability” rating, which represents the probability that a bank will fail or become critically undercapitalized within the next two years
• Overall SR-SABR rating is the worst of either the adverse change or the viability rating
Variables in the SR-SABR ModelVariables in the SR-SABR Model
• Financial ratios computed from Call Report data -- many from the Uniform Bank Performance Report
• Examination ratings
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Adverse Change Rating--Supervisory
Variables• For banks rated 1 or 2
– Management Component Worse than Composite CAMELS rating
• For banks rated 3, 4, or 5– Composite CAMELS rating– Asset Quality Component Rating– Management Component Rating– Liquidity Component Rating– Sensitivity to Market Risk Component Rating
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Adverse Change Rating--FinancialVariables
• Tier 1 Leverage Ratio• Nonperforming assets to Equity plus loan
loss reserves• Loans past due 30 to 89 days• Loans past due 90 days or more• Asset Growth• Pre-tax return on average assets• Asset Growth
• Asset Quality Proxies– Loans Past Due 30-89 Days/Total Assets– Loans Past Due 90+ Days/Total Assets– Nonaccrual Loans/Total Assets– Other Real Estate Owned/Total Assets