US Regulatory Orientation /
Expectations for Foreign Banking
Offices (FBOs)
November 4, 2014
William F. Hilton III
Federal Reserve Bank of New York
Foreign Financial Institutions
1
DISCUSSION POINTS
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Vetting/Furnishing Examination Results
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Consolidated Supervision
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FBO Supervision Program
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SOSA Ranking
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RFI/C (D) Rating
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CAMELS Rating
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Vetting/Furnishing Examination
Findings and Follow-up
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EICs gather memos, which include MRIAs and MRAs,
from the on-site examiners and compose the report
(Using recently issued SR 13-13 / CA 13-10)
Findings are discussed in our offices
Exit Meeting with FBO management, deliver report
Rating and assessment provided to head office of each
FBO, as well as either a
q
q
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summary of condition of the FBO’s combined US operations, or
SOSA notification letter (single-entity FBOs)
Semiannual visitations/periodic meetings between
examinations
– CONTINUOUS MONITORING
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COMMUNICATION OF
SUPERVISORY FINDINGS
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SR Letter 13-13 (June 17, 2013) supersedes SR
Letter 08-1
Discusses the Fed’s standard language to
communicate exam findings, and improvements
in the consistency and clarity of written
communications to the supervised firms
Discontinuation of using Observations as a
separate category
Reason: To better focus management’s attention
on deficiencies noted during the examination
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CONSOLIDATED SUPERVISION
Primary objectives:
n  Specifies principal areas of focus for consolidated
supervisory activities
n  Provides for consistent Fed supervisory practices
and assessments
Guidance SR 08-9 / CA 08-12
n  Outlines Fed expectations for understanding and
assessing key activities, risks, controls, nonbank
subs
n  Reiterates coordination with and reliance on work of
primary supervisors and functional regulators
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CONSOLIDATED SUPERVISION
(cont’d)
Systematic Approach:
n  Develop assessments of consolidated BHCs and of
combined US operations of FBOs through three principal
processes:
q  Continuous monitoring activities,
q  Discovery reviews, and
q  Testing
Why is this important?
n  Governance, infrastructure, risk management and
internal controls must be sufficiently transparent for US
supervisors to assess their adequacy
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CONSOLIDATED SUPERVISION
(cont’d)
FBO US management’s role
n  Facilitate meetings with appropriate US ops personnel
and supervisors’ requests for the following documents
(particularly for US nonbank operations and material
business lines):
q  Information used to assess inherent risks and internal
control processes
q  Internal and external audit findings
q  MIS and reports on regulatory structure,
strategy, operations, infrastructure
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FBO SUPERVISION PROGRAM
Risk-Focused supervisory framework for US
operations of foreign banking organizations
includes:
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n
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Continuous Monitoring: Regulatory reporting and
periodic visits/meetings
ROCA Rating system for branches and agencies:
Risk Management, Operational Controls,
Compliance, Asset Quality
Composite Rating: Based on ROCA component
ratings
SOSA: Strength-of-Support Assessment of the
parent company
Source: SR Letter 00-14
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STRENGTH-OF-SUPPORT
ASSESSMENT (SOSA)
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n
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Analysis starts with the financial profile and outlook
of the FBO based on Fed-developed financial
system overviews, country studies and accounting
practice reports, as well as interviews & meetings,
rating agency reports and public information.
Assesses FBO’s ability to support US operations
Places US operations in a larger context
Aids risk focused exam process by highlighting
FBOs warranting higher levels of supervisory
attention
Disclosed to Institution and Home Country
Supervisor
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SOSA RANKINGS
n
“1” = low risk that FBO will be unable to support its US
Operations
q
q
q
q
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“2” = more than normal review warranted
q
q
q
q
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Non-investment grade
At or below international capital standards
Managerial oversight and support may be lacking in some respects
Mitigating factor – home country support and supervision
“3” = significant weaknesses apparent
q
q
q
q
n
Investment Grade
Meets or exceeds international capital standards
Ample access to US Dollar funding
No concerns with home country support & supervision or transfer risk
Seriously deficient financial profile (government/outside support maybe required)
Lack of supervisory oversight and support
Significant transfer risk
FBO may be unable to honor US Obligations
Ranking drives supervisory approach and risk-focused
exam process
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RFI/C (D) RATING SYSTEM
n
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R isk Management
F inancial Condition
I mpact
C omposite
D epository Institution
Used for Bank Holding Companies
Scale 1-5
See SR Letter 04-18
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“R” RISK MANAGEMENT RATING
Four subcomponent ratings of “R”
I. Board and Senior Management Oversight
II. Policies, Procedures, and Limits
III. Risk Monitoring and Management Information
Systems
IV. Internal Controls
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FINANCIAL CONDITION
RATING
n
n
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Evaluate the consolidated organization’s financial
strength, inclusive of the Parent Company and nondepository institutions
Focus on ability of the BHC’s resource to support
the risks associated with its activities
Evaluate and assign ratings to the four
subcomponents of the “F” rating (Capital, Earnings,
Asset Quality, Liquidity)
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IMPACT RATING
n
n
Assess impact of non-depository entities and parent
on the depository institutions
Evaluate both risk management/ controls and
financial condition of the non-depository entities
q
n
Do the non-depository entities provide services to
depository institution? Are they critical services?
Consider current and potential issues in overall
assessment
q
Potential issues include: growth plans, new products/
services to both 3rd parties and related depository
institution(s)
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COMPOSITE RATING
n
n
n
Represents the overall assessment
Encompasses both a forward-looking and
static assessment of the consolidated BHC
Reflects examiner judgment with regard to
the relative importance of each RFI
component (not an average)
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DEPOSITORY INSTITUTIONS RATING
n
n
n
“D” rating stands outside of the composite
rating
Accept the primary/functional regulator’s
CAMELS rating
Multi-bank holding company where there are
different ratings?
è
Weighted average of composite ratings scheme,
but ambiguous
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“CAMELS” RATING SYSTEM
n
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C apital Adequacy
A sset Quality
M anagement
E arnings
L iquidity
S ensitivity to Market Risks
We also assign a Composite Rating
Used for Financial Institutions
Scale 1-5
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HELPFUL TIPS
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Confidentiality of information and our reports
Examination ratings are not negotiated, but
rather vetted in our offices for consistency
Examiners expect management to resolve
problems and issues – ideally within
prescribed timeframes for exam issues, and
prior to the next examination for self-identified
issues
Ask rather than guess
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RESOURCES
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FOR Manuals:
www.federalreserve.gov/boarddocs/supmanual/
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FOR SR Letters:
www.federalreserve.gov/boarddocs/srletters
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FOR BSA/AML:
www.ffiec.gov/bsa_aml_infobase/default.htm
Questions?
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