OCC Embraces Forward-Looking Analytics

The OCC issued a memo to examiners in 2011, noting that one of the tenets of good forward-looking supervision is assigning an adverse rating to the management component of a CAMELS composite before a bank had deteriorated financially, a 2013 OCC audit revealed. The memo noted that the M score should focus on actions and results, not commitments.

Of all the regulators, the OCC has been the most vocal in advocating for forward-looking community bank analytical tools. It issued guidance for community bank stress testing in 2012, reiterating that “some form of stress testing or sensitivity analysis of loan portfolios on at least an annual basis” was a key part of sound risk management for community banks. In June 2012, the OCC also issued revised guidance on capital planning. The document said capital planning must be “forward-looking in incorporating changes in a bank’s strategic focus, risk tolerance levels, business plans, operating environment, or other factors that materially affect capital adequacy.”

Then, in December of 2015, the OCC announced that it had updated its guidance for its Risk Assessment System to clarify the “forward-looking elements” of both the system and CAMELS. The guidance “broadens the concept of risk” to include its impact on a bank’s projections. It also expands the definition of strategic and reputation risk assessments to include both the quantity and quality of risk management. The guidance notes that under the new definitions, “financial condition includes impacts from diminished capital and liquidity,” and that capital includes potential impacts from losses, reduced earnings and market value of equity.

Community banks need to be proactive to ensure they are ready for examiners armed with forward-looking risk analytics. Even if your bank doesn’t have CRE concentrations, use forward-looking risk analytics to stress test your capital, your strategic plans and any potential acquisition you might be considering. Present the results to regulators. Invictus’ clients that have used stress testing results with examiners have seen their capital requirements decrease and their management piece of their CAMELS composite increase.

Forward-looking risk analytics are here, and their use will only expand. Embrace them to smooth the regulatory path, and give your bank a competitive edge in the marketplace.

Editor’s Note: This Bank Insights article is adapted from a forthcoming Invictus Consulting Group white paper. For more information on Invictus’ forward-looking risk analytics and how they can help your bank, please contact George Dean Callas at gcallas@invictusgrp.com.