Alert September 29, 2009

Federal Banking Agencies Issue Proposed Guidance on Correspondent Concentration Risks

The FDIC, FRB, OCC and OTS (the “Agencies”) jointly issued proposed guidance (the “Proposed Guidance”) concerning correspondent concentration risks.  The Agencies state that concentration risks can occur in correspondent relationships when a financial institution (“FI”) engages in a significant volume of activities with another FI.  These relationships can result in credit (asset) concentration risks and funding (liability) concentration risks.  The Agencies note that correspondent risks represent a lack of risk diversification, and the Proposed Guidance states that the Agencies generally consider credit exposures of more than 25% of Tier 1 capital as concentrations and funding exposures as low as 5% of an FI’s liabilities as concentrations.  The Proposed Guidance provides that management of FIs should (1) identify an FI’s aggregate credit and funding exposures to other FIs and their respective affiliates; (2) specify what information, ratios or trends will be monitored for each correspondent; (3) set prudent correspondent concentration limits and tolerances for factors being monitored and plan for managing concentrations in excess of those limits; and (4) conduct an independent analysis before entering into any credit or funding transactions with another FI.  The Proposed Guidance would supplement rather than supersede prior regulatory guidance.  Comments on the Proposed Guidance are due no later than October 26, 2009.