Background
A
bank formally appealed the composite CAMELSI (capital, asset
quality, management, earnings, liquidity, sensitivity to market
risk, and information technology) rating of 3 assigned at the most
recent examination and asked the ombudsman
to restore the composite rating to 2.
Discussion
The
basis of the appeal is the most recent safety and soundness
examination in which the bank's composite rating was downgraded from
2 to 3. The bank did
not dispute all of the examination conclusions and stated that the
primary conflict with the supervisory office was the difference in
computing the impact of a 3-percent shock to the agency step-up
bonds held in its portfolio.
According to the appeal, the supervisory office's
computations did not consider the step-up features and thus produced
an unfavorable result regarding earnings at risk and interest rate
risk (IRR) management.
The appeal further states that the bank's computations were
done by Bloomberg, resulting in a more favorable outcome than those
produced by the supervisory office.
The
supervisory office stated that the board of directors was advised,
as far back as 1998, about the need to improve its IRR management
systems and controls.
The supervisory office further stated that neither management
nor the board demonstrated sufficient knowledge of step-up bond
features and the impact to earnings at risk. As such, this made it
difficult for them to assess the aggregate level of IRR. Additionally, weak earnings
performance and deficiencies in risk management of information
technology also factored into the composite downgrade.
Conclusion
The ombudsman acknowledged that the
bank's risk exposure resulting from a 3-percent shock to the agency
step-up bonds, as computed by the supervisory office and Bloomberg,
was not an absolute.
However, the bank's risk management processes relative to IRR
did not provide management with the assurances that it could
withstand significant fluctuations associated with this product.
Additionally, the ombudsman's review noted a combination of
weaknesses in the areas of IRR and information technology that
reflected a need for enhanced supervision by the board and
management. The
ombudsman opined that the conclusions reached by the supervisory
office were well supported by the facts at the time of the
examination and met the definition of a composite 3 bank as
prescribed by the Uniform Financial Institutions Rating
System.