Office of the Comptroller of the Currency Exam Process U.S. Banking System and Foreign Banking Organization Supervisory Structure December 14, 2017
Office of the Comptroller of the Currency Exam Process
U.S.BankingSystemandForeignBankingOrganization
SupervisoryStructure
December14,2017
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1. InternationalBankingSupervisionOverview
2. FederalBranchSupervision
3. SupervisoryTools
Agenda
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Agenda
1. InternationalBankingSupervisionOverview
2. FederalBranchSupervision
3. SupervisoryTools
LegalVehiclesAvailabletoFBOstoCreateaPresenceintheUnitedStates
OCCSupervised
• FederalBranch– OfficesofforeignbanksthatcanengageinacommercialbankingbusinessintheU.S.includingtheacceptanceofdomesticwholesaledeposits
• LimitedFederalBranch– AfederalbranchthatacceptsonlythosedepositspermissibleforanEdgeActcorporationtoreceive
• FederalAgency – OfficesofforeignbanksthatcanengageinacommercialbankingbusinessintheU.S.butcannotgenerallyacceptdomesticdepositsorexercisefiduciarypowers
• ForeignBankSubsidiary – Companiesowned25%ormorebyabankholdingcompanyorforeignbank
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LegalFrameworkInternationalBankingAct,1978
• Substantiallyequalizedtreatment(“nationaltreatment”)ofU.S.operationsofforeignandU.S.banks
– Madefederallicense,issuedbyOCC,availableforforeignbanks,inadditiontotheexistingstatelicenseoption
ForeignBankSupervisionEnhancementAct(FBSEA),1991
• ExpandedoversightroleoftheFederalReserveincludingpowertoapproveandterminateU.S.operationsofFBOs,includingfederalbranches/agencies
– ApprovalofFBOpresence– applicationprocessandComprehensiveConsolidatedSupervision(CCS)determination
• Prohibitedforeignbranchesfromapplyingfordepositinsurance
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LegalFrameworkRiegle-NealInterstateBankingandBranchingEfficiencyAct,1994.
• EssentiallycreatednationaltreatmentforFBOsininterstatebankingandbranching
Gramm-Leach-BlileyAct(GLBA),1999
• Removedbarriersbetweenthebanking,securities,andinsuranceindustries– AuthorizedFinancialHoldingCompanies(FHC)
Dodd-FrankWallStreetReformandConsumerProtectionAct(DFA),2010
• FocusesonstrengtheningthefinancialstabilityoftheU.S.andincludes:– HeightenedsupervisoryexpectationsforFBOs>$50billionintotalU.S.
assets– Includesenhancedprudentialstandardsforlargebankingorganizations
§ Section165EnhancedPrudentialStandards(EPS)forFBOsfinalizedinFebruary2014
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Pre-DFAApproachtoFBOs
• FBOsallowedtostructureU.S.operationsinamannerthattheyfindmostefficientwithappropriaterestrictions
• RelianceonhomecountrysupervisionoftheFBOsworldwideoperations
• RelianceonstateandfederalfunctionalregulatorstosupervisetherelevantentitiesoperatedbyFBOsintheU.S.
• SignificantrelianceontheparentbanktosupportitsU.S.operations
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• CertainFBOsrequiredtoestablishanintermediateholdingcompany(IHC)
• Enhancedrisk-basedcapitalandleveragerequirements
• Enhancedliquidityrequirements
• Enhancedriskmanagementandriskcommitteerequirements
• Stresstestrequirements
• RequiresenhancedprudentialstandardstoincreaseinstringencybasedonthesizeandcomplexityoftheFBO– RulesgenerallyapplytoFBOswithaU.S.bankingpresenceandtotal
globalconsolidatedassetsgreaterthan$50billion– StandardsincreaseinstringencyforFBOswithcombinedU.S.assets
greaterthan$50billionduetotheincreasedrisktheymayposetotheU.S.financialsystem
Post-DFA– Section165(RegulationYY)EnhancedPrudentialStandardsforFBOs
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Beganin1995asaresultofBankofCreditandCommerceInternational(BCCI)• CoversallforeignbanksoperatingintheU.S.
FocusisonunderstandingtheheadofficeanditsabilitytosupportU.S.operations• HomeCountryFinancialSystem• AccountingAnalysis• InstitutionalOverview• StrengthofSupportAssessment(SOSA)andSOSArating
Communicationofresultstoheadofficemanagementandhomecountrysupervisor
InteragencyFBOSupervisionProgram
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FBOsaredifferent:managementfromadifferentcountry—maylackknowledgeofU.S.customs,culture,laws®ulations.
HostCountryvs.HomeCountrySupervisor– Sharedcommunications.
RoleofHostCountry• EvaluatetheoverallabilityofFBOtosupportitsU.S.operations• Maintainanunderstandingofglobalriskmanagementand
controlsystemsasappliedtoU.S.operations• ProvideaccesstoinformationconcerningU.S.operationsof
FBOs• Exchangeinformationwithhomesupervisorandcoordinate
whensupervisoryfollow-upisnecessary
UniqueFactorsinFBOSupervision
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Waysinwhichinformationisshared:• Adhocmeetings/conversations• Bilateralmeetings/discussions• Supervisorycolleges• Participationinexaminations• AnnualsummaryofconditionletterincludingSOSArating• Sharingofexaminationreports
InformationSharingArrangements• Inplacewithbanksupervisorsinmanyjurisdictionsglobally• Maynotberequiredlegally—andusuallyhasnolegaleffect—
butgenerallyservestoexpeditetheprocess
CommunicationsandCoordinationwithHomeCountrySupervisors
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1. InternationalBankingSupervision
2. FederalBranchSupervision
3. SupervisoryTools
Agenda
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ForeignOwnedSubsidiariesandBranchesForeignOwnedBankingSubsidiaries
• Separatelegalentity
• LocalBoardofDirectorsandPresident
• Separatecapital
• Traditionalbankfundingsources
• FDICinsured
• FDICisresolution/receiver
• FileCallReportForm031or041
• RatedusingCAMELS
Branches
• Notstandaloneentities
• DependentonHeadOfficeBoardorCommittee;LocalGeneralManager
• Capitalequivalencydeposit(CED)
• Primarilyheadofficefunding
• Nodepositinsurance
• OCCisresolutionauthority
• FileCallReportForm002
• RatedusingROCA
SubjecttoOCC’ssupervision-by-riskphilosophy.
Banksupervisorycycleandactivities:
• Afull-scope,on-siteexamination,willoccuratleastonceduringeach12-month period.TheOCCmayextendthisrequirementto18months if:– Thebankhastotalassetsoflessthan$500million– Thebankiswellcapitalizedasdefinedin12CFR6– Atitsmostrecentexamination,RiskManagementwasrated1or2,and
theCompositeratingwasa1or2.– OtherfactorsspecifiedintheBankSupervisionProcessComptroller’s
Handbook
• Quarterlyoffsitemonitoring
• Targetsandfollow-up(ifnecessary)
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ForeignOwnedSubsidiariesandBranches
OCCExamTeams:• Evaluatetheoverallintegrityandeffectivenessofriskmanagementsystems.
• Communicatefindingstolocalmanagement.Forfederalbranches,alsocommunicatewithheadofficeandhomeregulators.
• Assessregulations,policies,andproceduresthatapplytonationalbanks.
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ForeignOwnedSubsidiariesandBranches
RatingSystem
R:RiskManagementO:OperationalControls
C:ComplianceA:AssetQuality
• AppliestoindividualFBObranchesandagencies
• 1-5scale
• AppendixFofthe“BankSupervisionProcess”Comptroller’sHandbook:https://occ.gov/publications/publications-by-type/comptrollers-handbook/banksupervisionprocess.pdf
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RiskManagement• Determinetheextentthatriskmanagementsystemsare
adequateto:
– Controlriskexposuresthatresultfrombranchactivities
– EnsureeffectiveoversightbyHOandbranchmanagementofbranchactivities
§ Includes3rd partyrelationshipssuchasITservicingandoutsourcingarrangements
§ DeterminecompliancewithriskmanagementandcapitalstresstestingrequirementsoftheFBOEnhancedPrudentialStandardsrules
§ ConclusiononBSA/AMLriskmanagementsystems§ Conclusiononcreditadministrationsystems
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OperationalControls
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• Assesstheeffectivenessof:– Internalcontrols,includingaccountingandfinancialcontrols– Internalandexternalauditfunction– Informationtechnology
Compliance
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• Assesscompliancewith:– Safetyandsoundnessregulationsapplicabletothebranchactivities–BSA/AMLrequirements–Consumerregulations,ifthebranchoffersproductsgovernedbyconsumerlaws–Regulatoryreporting–CEDrequirements
AssetQuality
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• Ratingisbasedonthelevelofproblemsassets–AllloandocumentationandanalysesshouldbeinEnglish–Creditriskdefinitionsandregulatoryclassificationsapply–NoALLLrequired– LegallendinglimitisbasedonHOcapital
ROCARatingsforIBSPortfolio
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RiskAssessmentSystem
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RISKCATEGORY
AggregateRisk
(High,Moderate,
Low)
QuantityofRisk
(High,Moderate,Low)
QualityofRiskManagement
(Weak,Insufficient,Satisfactory,Strong)
Direction
(Increasing,Stable,
Decreasing)
Credit InterestRateLiquidity PriceOperationalComplianceStrategicReputation
RiskAssessmentSystemCommunicatesthequantity ofrisk,thequality ofriskmanagement,thelevelofsupervisoryconcern(measuredasaggregate risk),andthedirection ofriskforeightriskcategories.
• QuantityofRisk:Reflectsthelevelofriskassumedinthecourseofdoingbusiness.
• QualityofRiskManagement:Assesseswhetherthebank’sriskmanagementsystemsarecapableofidentifying,measuring,monitoringandcontrollingthatamountofrisk.
• AggregateRisk:Assessthecurrentriskprofile.
• DirectionofRisk:Speakstotheprospectiveviewoftheriskprofile.
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RiskAssessmentSystemTheQualityofRiskManagementassesseshowwellrisksareidentified,measured,controlled,andmonitored.
• Strong:Qualifiedpersonnel,effectiveriskidentificationandanalysis,cleardesignationandappropriateseparationofresponsibilities,accurateandtimelyinformationflow,andestablishedmonitoringandfollow-upprocesses.
• Satisfactory:Overallriskmanagementpracticesaresatisfactoryrelativetotheinstitution'ssize,complexity,andriskprofile.
• Insufficient:Reflectsthepresenceofconcernsthatmayadverselyaffectabank’sconditionifnotcorrected.Theseconcernsprecludeasatisfactoryassessment,butdonotsupportafindingthatriskmanagementisweak.
• Weak:Riskmanagementpracticesarelessthansatisfactoryrelativetotheinstitution'ssize,complexity,andriskprofile.
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RiskAssessmentSystem• UsedinconjunctionwithROCAtoevaluateabank’sfinancialconditionandresilience.
• Includesinformationontheforeignbankingorganizationanditshomecountry’spolitical,economic,andbankingsectorenvironments.
• Allowsexaminerstoidentifyandtakeactiononemergingrisksinatimelymanner,beforesuchrisksmaterializeinabank’sfinancialperformance.
• Riskisdefinedas“thepotentialthateventswillhaveanadverseeffectonabank’scurrentorprojectedfinancialconditionandresilience.”
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RiskAssessmentSystem• EnablestheOCCtomeasureandassessexistingandemergingrisksinabank.
• DrivesOCC’sscopeofexaminationandsupervisorystrategy.
• HelpsthebankandtheOCCreachacommonunderstandingoftherisks,focusonthestrengthsandweaknessesofriskmanagement,andensurethatsupervisoryobjectivesareachieved.
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CapitalEquivalencyDeposit(CED)• Requiredbecausefederalbranchesand
agenciesarenotseparatelycapitalized
• FormofcapitalcushiontocovercostsofanyliquidationanddepositliabilitiesandmaintainedinadepositorybankintheU.S.
• TwotypesofCEDagreements:– AformalCEDagreement– ACED“letter-agreement”
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Due-ToandDue-FromHeadOfficeAccounts• Due-toHObalancereflectsborrowingfromHO
• Due-fromHObalancereflectslendingtoHO,posingcreditandtransferrisk
• Balancesnettedforreportingandexaminationpurposes– Fedbranchesoperateateithernetdue-from(NDF)ornetdue-to(NDT)positions– IBS– NYcloselymonitorsbranches’liquiditypositions– particularlythosewithNDF
positions
• ForbranchesintendingtooperateinNDFpositon,OCCexpectsthemtohaveNDFpolicycoveringthefollowing:– UniquerisksposedbyraisingfundsinU.S.tofundaffiliates,includingHO– Recognitionofbranch’sabilitytooperateinNDFpositiondependsonHO’s
financialstrengthandhomecountryconditions– NDFlimitsandappropriatemetricstomonitorNDFposition
• LimitNDFtodollaramountsorpercentofbalancesheet• DashboardofEarlyWarningIndicators(EWIs)• EWIstriggerdiscussionthatcanleadtoreducedNDFlimit
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NetDue-FromHeadOfficeAccounts
(cont.)
– IdentificationofscenariosandmonitoringvariablestomeasureandidentifyundueNDFexposures
– Appropriatelinkagetocontingencyfundingplan(CFP)andimplementationofliquiditystresstestensuringHOwouldhavesufficientunencumberedliquidassetstosupportbranchandeliminateNDFposition
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1. InternationalBankingSupervision
2. FederalBranchSupervision
3. SupervisoryTools
Agenda
MattersRequiringAttention• MattersRequiringAttention(MRA)describepracticesthat:
– Deviatefromsoundgovernance,internalcontrol,andriskmanagementprinciples,andhavethepotentialtoadverselyaffectthebank’scondition,includingitsfinancialperformanceorriskprofile,ifnotaddressed;or
– Resultinsubstantivenoncompliancewithlawsandregulations,enforcementactions,supervisoryguidance,orconditionsimposedinwritinginconnectionwiththeapprovalofanyapplicationorotherrequestbythebank.
• ConcernsarecommunicatedtotheBoardwhendiscovered,andarenotdeferredpendingbankmanagement’seffortstoaddresstheconcern.
• FailuretoaddressanMRAcouldleadtoenforcementactions.
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MattersRequiringAttention
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• AnMRAaddressesdeficientpractices,includingalackofpractices,whichcouldadverselyaffectthebank’scondition.Thedeficientpracticesmaybeunsafeorunsound.
• Timelydetectionenablestheboardandmanagementtoaddressdeficientpracticesbeforetheyaffectthebank’scondition.
• TheOCCexpectsthebank’sboardofdirectorstoensuretimelyandeffectivecorrectionofthepracticesdescribedinanMRA.
• Examinerswillengageintimelyfollow-upactivities.
MattersRequiringAttention
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MRAsarewritteninthe“FiveC’s”formattofacilitatetimelyandeffectivecorrectiveactionbythebank’sboardandmanagement.
1. Descriptionoftheconcern(s).2. Identificationoftherootcause(s) oftheconcernand
contributingfactors.3. Descriptionofpotentialconsequence(s) oreffectsonthe
bankfrominaction.4. Descriptionofsupervisoryexpectationsforcorrective
action(s).5. Documentationofmanagement’scommitment(s) to
correctiveaction,andthetimeframe(s)andtheperson(s)responsibleforcorrectiveaction.
MattersRequiringAttentionMRAsarenot usedto
• Recommendbestpractices.
• Requireenhancementstobankpracticesthatalreadymeetacceptablestandards.
• ReportadverseconditionsunlesstheMRAincludesactionableitemstoaddressthepracticesthatcontributedtotheconditions,orrequiredtoremedythoseconditions.
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EnforcementActionsActionsusedtocorrectproblems,concerns,weaknesses,ordeficienciesnotedinanationalbank.
• InformalEnforcementActions– GiveabankmoreexplicitguidanceanddirectionthananROE– Requireawrittencommitmentfromthebank’sboardmembers– Examples:commitmentletters,memorandaofunderstanding,andapprovedsafetyandsoundnessplans
• FormalEnforcementActions– Usedwheninformalactionsareineffectiveininfluencingbankmanagementandboardmemberstocorrectidentifiedproblemsandconcernsinthebank’soperations
– Publicdocument– Examples:formalwrittenagreements,consentorders,ceaseanddesistorders,capitaldirectives,PCAdirectives,andsafetyandsoundnessorders,anddecisionstoplaceabankintoconservatorshiporreceivership
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EnforcementActions• Additionalenforcementtoolsareavailabletoaddressconcernswithfederalbranchesandagencies
• Weakhomecountrysupervisionandsupport,increasingcountryrisk,andweakinternalcontrolscandiminishFBO’sabilitytosupportitsU.S.operations
• OCCmayoptto“RingFence”U.S.operationsbyimposingcertainmeasuressuchas:–Assetmaintenancerequirements–Netdue-fromlimits–Minimumliquiditypositions–HigherCEDrequirements–Limitsonbalancesheetgrowthandrelatedpartytransactions
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RecoveryandResolutionPlanning
• Recoveryplanningshouldprovidearoadmapofactionsandthetriggersforthoseactions
• NeedtounderstandhowU.S.branchtiestoHOrecoveryandresolutionplan
• OCCistheResolutionAuthorityfortheU.S.operationsoffederalbranches– OCCdetermineswhoisthereceiver– FDICnotrequiredtobethereceiver
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InternationalBankingSupervision
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• VaughnFolks,DirectorAmericas,Australia,Africa,andMiddleEast– [email protected]– Office:(917)229-2471
• MarkShields,DirectorEuropeandAsia– [email protected]– Office:(917)344-4419