05 Apr Read Between the Lines April 2014
Read Between the Lines
Each month Bank Insights reviews news from regulators and others to give perspective on regulatory challenges.
Expect Examiner Focus to Remain Strong
Comptroller of the Currency Thomas J. Curry told an OCC-Boston University conference that the “cornerstone of a healthy financial system” is supervision and examiner judgment, especially “examiner boots on the ground.” He also cited rules, stress tests, capital levels and data analytics as keys ways regulators should evaluate a bank’s health.
Third-Party Oversight Reasons Revealed
Why are regulators so concerned about third-party due diligence? Deputy Comptroller for Operational Risk Carolyn DuChene offered some clues in a speech before OpRisk America. She said regulators began seeing “misaligned compensation and incentive schemes” in third-party relationships involving direct marketing activities to bank customers. Banks were also becoming lax in risk management of outsiders because they didn’t have the expertise to know how to spot risky activity or to negotiate dispute resolutions.
Community banks need strong audit functions and “robust governance and oversight” when leveraging third parties, she said. “Frankly, as a supervisor, I’ve seen numerous examples where the quality of risk management simply hasn’t always kept pace with the velocity and breadth of change and the rapidly evolving threats in the environment,” she warned. Do not silo risk controls to one area of the bank, she said. Include risk awareness, identification, assessment and controls throughout the organization.
FDIC Letter Reminds Banks about Technology Outsourcing
In other signs of a sharpened emphasis on third-party risks, the FDIC sent out a financial institution letter on April 7, reissuing three documents that community banks can use to help guide them in selecting technology service providers. The documents remind banks to make sure that confidential bank information is protected and that any outsourcing meets the bank’s objectives and strategic plans. One document details how banks can develop service level agreements to measure performance and monitor risk.
The law firm of Bryan Cave notes that “it is increasingly plain that we are seeing a significant sea change in how regulators approach the relationships between banks and their third party vendors. Examiners are digging deeper — especially into the content of bank contracts – and the scope of review is extending to more and more vendors.”
Understanding Asset-based Lending
Credit risk is the biggest risk associated with asset-based lending, according to a new OCC handbook designed for examiners. The handbook notes that ABL “requires intensive controls and supervision.” Even though the risk of loss might be less than with other type of lending, bankers must have a “thorough understanding of the borrower’s business, good reporting systems, and in-depth knowledge and evaluation of the collateral.”
Standards for Appraisal Management Companies
All the bank regulators have issued a proposed rule that sets out standards for states that will oversee appraisal management companies.
Bank Director Liability Leading to Resignations
More than 15 percent of banks responding to an American Association of Bank Directors survey said they either had a director resign over fear of personal liability or had a candidate refuse to serve on the board for that reason, the AABD revealed in a comment letter to the OCC.
The letter, written in response to the OCC’s proposed rule to increase director responsibilities at large banks, points out that many community banks have parent companies with identical boards. The OCC has said the proposal could be applied to banks of any size if they were deemed risky. “Forcing those institutions to have bank directors who cannot serve on the parent company does not make much sense,” the AABD writes.