U.S. Banking System and Foreign Banking Organization

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&regulations.

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– vaughn.folks@occ.treas.gov– Office:(917)229-2471

• MarkShields,DirectorEuropeandAsia– mark.shields@occ.treas.gov– Office:(917)344-4419