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Risk Management Manual of Examination Policies
Summary of Changes
Part I - Basic Examination Concepts and Guidelines
1.1 Basic Examination Concepts and Guidelines
- Added information regarding Director involvement
- Revised the MERIT guidelines
- Added BSA examination guidance
- Moved the IRC information to the IRC section of the Manual
- Removed redundant material and improved the overall organization of the section
Part II - Camels
2.1 Capital
- Added information on Risk-Based Capital: Market Risk - Appendix C
- Updated the Tier 1 Capital definition
- Added an expanded section for risk-weight calculations
- Added information on risk-weighting asset- and mortgage-backed securities
- Added a section on the treatment of recourse obligations and direct credit substitutes
- Added a chart for PCA
- Included a reference for capital considerations related to subprime lending; capital related recommendations are included in the Loan Section
- Added the Uniform Financial Institution Rating System definitions
3.1 Asset Quality
- Created this section to introduce, evaluate and rate Asset Quality
3.2 Loans
- Added a comment about the need to retain management's response to substantive recommendations and criticisms in the workpapers
- Added guidance on subprime home equity lending
- Added guidance based on the October 27, 2003, Interagency Statement on Appraisals and Evaluations
- Added information about payday lending
- Removed redundant material and improved the overall organization of the section
3.3 Securities and Derivatives
- Updated classification guidance based on the 2004 Uniform Agreement on the Classification of Assets and Appraisal of Securities Held by Banks
- Updated the derivatives regulatory reporting instructions to reference new FASB rules
- Updated the accounting guidance by removing irrelevant FAS statements and including new FAS statements
3.4 Cash and Due from Banks
- Edits and other minor changes were made to omit obsolete references, to reorganize content or otherwise provide clarity, and to promote consistency throughout.
3.5 Premises and Equipment
- Edits and other minor changes were made to omit obsolete references, to reorganize content or otherwise provide clarity, and to promote consistency throughout.
3.6 Other Real Estate
- Eliminated outdated/obsolete references
- SOP 92-3 was rescinded and references were omitted
- Sections referenced under Part 325 have changed, so these references were generalized
- References to FAS 34 and 67 were corrected
- Expanded the definition of ORE to include several other items mentioned in the Call Report Instructions
- Expanded guidance related to the classification of ORE
3.7 Other Assets and Liabilities
- Updated the section on Tax Assets
- Added information regarding risk management procedures and pre-purchase analysis to the section on Bank Owned Life Insurance
- Reformatted and updated the Goodwill section and added additional impairment narrative
- Updated accrued interest receivable on bonds to incorporate FAS 140
3.8 Off-Balance Sheet Activities
- Added an introductory paragraph and reorganized the overall section
- Added sections relating to derivatives, asset sale accounting, and recourse and direct credit substitutes
- Added information on FIN 45, and FAS 140, 133, and 149
- Included information on allowances for off-balance sheet items and their segregation from the ALLL
- Added information to include a description for all letters of credit types
- Deleted the specific guidance on how to complete Report pages relating to off-balance sheet items and referred users to the Bank of Anytown and Report instructions
4.1 Management
- Eliminated guidance pertaining to the prohibition of securities brokers acting as bank directors (Section 78 of 12 USC)
- Added comments referencing Section 8 of the FDI Act
- Added a section detailing areas for consideration in examinations of "One Man Bank" situations
- Added a reference to Bank Owned Life Insurance (BOLI)
- Edits and other minor changes were also made to omit obsolete references, to reorganize content or otherwise provide clarity, and to promote consistency throughout
4.2 Internal Routine and Controls
- Expanded internal audit guidelines, including outsourcing and removed the old guidance
- Added additional types of external audits from SOP
- Added detail on when external auditors workpapers are required to be reviewed
- Briefly updated Part 363 requirements
- Added Corporate Governance section
- Revised IT guidance to reflect MERIT and FFIEC Information Technology Systems Handbook references
- Revised Lost and Stolen Securities program (SEC Rule 17f-1) to include revised provisions
- Changed reference to SAS 85
4.3 Related Organizations
- Expanded discussion of the "source of strength" provided to a subsidiary bank by the managerial and financial capabilities of the parent company
- Added additional guidance on parent companies and affiliates that are not bank holding companies regarding such things as examination authority and unique characteristics of these parent companies
- Included a discussion of the factors discussed in the Summer 2004 Supervisory Insights article on ILCs
- Included a discussion of possible sources for examiners to obtain relevant financial ratios when analyzing non-bank holding companies and commercial parents
- Improved the organization of the overall section
4.4 Fidelity and Other Indemnity Protection
- Edits and other minor changes were made to omit obsolete references, to reorganize content or otherwise provide clarity, and to promote consistency throughout
4.5 Violations of Laws and Regulations
- Edits and other minor changes were made to omit obsolete references, to reorganize content or otherwise provide clarity, and to promote consistency throughout
4.6 Miscellaneous Banking Activities
- Edits and other minor changes were made to omit obsolete references, to reorganize content or otherwise provide clarity, and to promote consistency throughout
5.1 Earnings
- Changed the overall flow of chapter utilizing an earnings trail analysis which focuses on UBPR ratios to analyze earnings performance
- Added an "earnings analysis trail"
- Rearranged the order of several sections and deleted or combined redundant material
- Removed detailed information already contained in the Call Report instructions; instead, referred the reader to the Call Report instructions
- Added very general Subchapter S discussion and referred reader to other outstanding guidance
- Expanded discussion on strategic planning
6.1 Liquidity and Funds Management
- Added two additional guidelines under the "Liquidity Contingency Plan":
- Assess potential liquidity events (i.e., scenario analysis) that an institution may encounter (e.g., a credit rating downgrade)
- Test the institution's ability to borrow from established backup lines
- Addressed the increased use and risk of wholesale funds, including the potential need for enhanced measurement and monitoring systems
- Added comments noting the importance of reputation risk and its potential impact on managing liquidity
- Provided guidance for when deposits obtained through a listing service would or would not be considered brokered
- Explained the changes that have occurred in the Federal Reserve's discount window program
7.1 Sensitivity to Market Risk
- Added a variance analysis section
- Added a Glossary of technical terms
- Expanded the measurement system review discussion
- Expanded the independent review section
- Added the Evaluation of Sensitivity to Market Risk section
Part III - Other Examination Issues
8.1 Bank Secrecy Act/Anti-Money Laundering/Office of Foreign Assets Control
- Completely revised and reorganized the entire section in order to provide comprehensive guidance and incorporate changes to outstanding regulations
- Eliminated exemption guidelines related to the "old system" (exemptions granted prior to May 1, 1996)
- Provided detailed examples of regulatory expectations to satisfy the minimum requirements under Section 326.8 of the FDIC Rules and Regulations
- Enhanced and expanded guidelines for monitoring overall BSA compliance
- Significantly expanded guidance related to apparent violations of the BSA to include detailed examples and references
- Eliminated references to "Know Your Customer" and replaced with guidelines related to "Customer Due Diligence" programs and "Customer Identification Program" (CIP) regulations
- Significantly enhanced the procedures pertaining to the Treasury's Office of Foreign Assets Control (OFAC)
- Enhanced guidance related to Suspicious Activity Reports (SARs).
- Added detailed lists of "money laundering red flags" and "terrorist financing red flags"
- Added detailed guidance related to various potentially high risk activities:
- Non-bank financial institutions (NBFIs);
- Money service businesses (MSBs);
- Foreign correspondent banking relationships;
- Payable-through accounts;
- Private banking activities;
- Numbered accounts;
- Pouch activities;
- Special use account;
- Wire transfer activities; and
- Electronic banking activities.
- Added guidance related to Section 314 of the USA PATRIOT Act
9.1 Bank Fraud and Insider Abuse
- This section was last updated in April 1998
10.1 Suspicious Activity and Criminal Violations
- Rearranged the order of several sections and deleted or combined redundant material
- Moved U.S.C. references to end of chapter and added several more U.S.C. references as requested by other sections (RMAS and SAS)
- Added reference to procedures established between FDIC and OIG (with regard to criminal investigations) and a reference to related outstanding guidance
- Changed SAR language to match current instructions on SAR form
11.1 International Banking
- Reorganized the entire section
- Expanded the guidance on country risk management to address exit strategies which emanated form the Argentine sovereign default
- Expanded the section on investments to include information on emerging market debt instruments and accompanying risk management guidelines
- Revised the section on foreign exchange to coincide with FRB guidance
- Added a section on "Supervision of U.S. Operations of Foreign Banks and Other International Banking Entities," which covers foreign banking organizations and new guidance on parallel-owned banking organizations
- Eliminated the section on "Cable Department"
- Added FinCEN Advisories and OFAC and the USA PATRIOT Act to the section on "Laws and Regulations"
- Updated and expanded the "Glossary of International Banking Terminology"
12.1 Applications
- This section was last updated in February 2002
Part IV - Administrative and Enforcement Actions
13.1 Memorandums of Understanding
- This section was last updated in April 1998
14.1 Civil Money Penalties
- This section was last updated in February 2000
15.1 Formal Administrative Actions
- This section was last updated in April 1998
Part V - Examination Report
16.1 Report of Examinations - Instructions
17.1 Report of Examination - Bank of Anytown
- Incorporated IT MERIT guidance
- Incorporated Trust MERIT guidance
- Updated instructions regarding BSA
- Added International Pages and Workpapers
- Revised PBO guidance
- Added listing of abbreviations
- Eliminated the SAER as a ROE page
18.1 Report of Investigation - Instructions
- Incorporated outstanding guidance
19.1 Report of Investigation - Bank of Anytown
- Incorporated outstanding guidance
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