WHAT TO EXPECT FROM A REGULATORY EXAMINATION

Foreign & Wholesale Banks Division

December 14, 2017

ForeignBankRegulators

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• NewYorkStateDepartmentofFinancialServices• FederalReserveBank

[Mostbranches&agenciesareregulatedbytheabovetwoagencies]

• OfficeoftheComptrolleroftheCurrency[Nationalbranches]

• FederalDepositInsuranceCorporation[Insuredbranches]

ForeignBankRegulators(cont.)

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• StateorFederallicense/charter• Manybankschoosestate• Multi-statebankschooseFederal

[OfficeoftheComptrolleroftheCurrency]

• ManybankdepositsareFDICinsured• Bankingholdingcompanies,includingIntermediateHolding

Companies(IHC)regulatedbyFederalReserve

• Nearly100brancheswithover$2.6Trillion[totalasset]

• About25agencieswith$58+Billion[totalasset]

• Nearly50NYSlicensedrepresentativeoffices

ForeignBankCommunity

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ExaminationPlan

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• FBOswithROCAratingsof1or2&under$250milliontotalassets

- Typically,18month-alternateyearcycle

• FBOswithROCAratingsof3orworseoraRegulatoryAction

- Typically,12month-jointcycle+visitation/targetreviews

• Large,ComplexBanksover$250milliontotalassets- Typically,12month–jointcycle

ExaminationTypes

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• Safety&SoundnessExamination- Comprehensive;allaspectsofFBOreviewed;mostcommonexamination

• TargetedExamination- Focusonauniquearea[e.g.,BSA/AML;Compliance;Audit;IT]

• LimitedScopeExamination- Limitedduetospecialcircumstance[e.g.,preMerger]

ExaminationProcedures

• FirstDayletter(FDL)/EntryLetter- Typically4-6weekspriortoentry

• Examination- Typically4-6weeks;4to5examiners

(dependsonstaffavailabilityandinstitutionprofile)

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BankFDLResponses• Specificreportingofchange&trendssincetheprior

examination,suchasthefollowing:• SeniorStaff• Products• IT• Audit• Earnings• Strategies• Riskmanagement

• LiaisonOfficeshouldmanage:• FirstDayLetter• Securespaceforexaminers• Examinersuppliers,printer,computerlines,etc.• Seniorlevelmeetings

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Ratings

ROCA-• RiskManagement• OperationalControls• Compliance• AssetQuality

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ROCARatingsRating

• 1:Strong

• 2:Satisfactory

• 3:Fair

• 4:Marginal

• 5:Unsatisfactory

RegulatoryTreatment

• Usualattention

• Usualattention

• Enhancedattention

• CloseMonitoring

• Restructuring

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Large,ComplexFBOs

• ContinuousSupervision• MajorinstitutionshavededicatedregulatorsfromNewYorkState

and/orFRBNY• State- CentralPointofContact(CPC)• FRBNY- SeniorSupervisoryOfficer(SSO)

• ReviewdailyactivitiesofFBO• Frequentmeetingswithseniormanagement• Targetexaminationsofspecializedareas• RotationofCPCsandSSOsatdesignatedintervalsorasnecessary

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TypesofRegulatoryConcerns

• MRIA• MattersRequiringImmediateAttention

• Highconcern;significantrisk;immediateactionplan;timeframeforcorrection.

• MRA• MattersRequiringAttention

• Significantissues;tobeaddressedovertime

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Communication

• WorkcloselywithFederalRegulators• ConferenceofStateBankSupervisors• InstituteofInternationalBankers• Almosttwodozenforeignsupervisorshaveinformationsharingagreements

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CurrentTopicsofInterest

• BSA/AMLandPart504• Compliance• Cyber-SecurityandPart500• Liquidity• Governance• InternalAudit/OperationalControls• AssetQuality

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Challenges2017-2018

• MaintainAssetQuality• ExpandFundingResources• MaintainstrongBSA/AMLProcedures• Maintainastrongcompliancefunction• EnsureastrongInternalControlEnvironment• EnsureastrongRiskManagementFunction• RegulatoryChanges

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RiskManagement

• Credit• Market• Liquidity• Operational• Legal• Reputational• Country

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CreditRisk

• Creditpolicies/procedures• Creditanalysis• Loanconcentrationidentificationandcontrols• Loanreviewcontinuity• Riskmitigationstrategies

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MarketRisk

• Marketriskpolicies• Marketriskguidance• Rate&priceforecastmechanisms• Riskmitigation

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LiquidityRisk

• Liquidityanalysis• Liquiditymonitoring• Fundingsources• Relianceonshort-termvs.long-termfunds• Concentrationofsources

• Stresstesting

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OperationalRisk

• Informationsecurity• Databackup• Dualcontrolprocedures• Accountingprocedures• Auditreviews• Auditindependence• Eventmanagement

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LegalRisk

• Homeofficelegaladvice• Locallegalassistance• Regulatoryassistance• Adequateinsurance• Strengthofcompliancefunction

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ReputationalriskReputational risk is the potential that negative publicityregarding an institution’s business practices, whether trueor not, will cause a decline in the customer base, costlylitigation, or revenue reductions.

• The biggest threat to reputation is seen to be a failure to complywith regulatory or legal obligations.

• Failure to deliver minimum standards of service and productquality to customers is a close second.

• The risk that unethical practices in the organization will beexposed follows closely behind.

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CountryRisk

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CountryRiskencompassesacollectionofrisksassociatedwithinvestinginaforeigncountry.Theserisksincludepoliticalrisk,exchangeraterisk,economicrisk,sovereignriskandtransferrisk[theriskofcapitalbeinglockeduporfrozenbygovernmentaction].

PledgedAssets

LiquidassetsheldatanNYSDFSapproveddepositorytobeusedforcoveringtheshorttermcostofliquidation.Highqualitysecuritiesordepositoryinstruments.Amountissetat:$2millionor1%ofaveragetotalliabilitiesforthepriormonth.• $2millionminimum• $100millionmaximumiftheFBOisdeterminedtobe“wellmanaged”.

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AssetMaintenance

Superintendentmayimposeassetmaintenanceorotherliquidityrequirementssuchasapositivegapwhenhe/shebelievestheFBOhas:• Weakenedfinancialconditionor• Difficultcircumstancesinthehomecountry

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AvailableResources

FinancialIndustryDatawww.dfs.ny.gov

RegulatoryManualswww.federalreserve.gov/boarddocs/supmanual/

BSA/AMLwww.ffiec.gov/bsa_aml_infobase/default.htm

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