The FDIC, FRB, OCC and OTS (the “Agencies”) jointly issued final guidance (the “Guidance”) concerning correspondent concentration risks. A proposed version of the Guidance (the “Proposed Guidance”) was discussed in the September 29, 2009 Alert. 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. The Guidance focuses on the need for FIs to identify, monitor and manage correspondent concentration risk on a stand-alone and enterprise-wide basis. Appropriate due diligence should be performed, say the Agencies, “on all credit exposures to, and funding transactions with, other [FIs] as part of their risk management policies and procedures.” Correspondent 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 Guidance states that the Agencies generally consider credit exposures equal to or more than 25% of total capital as concentrations and funding exposures as low as 5% of an FI’s liabilities as concentrations. In the Proposed Guidance, 25% or more of Tier 1 capital (rather than total capital) was regarded as a concentration. The 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. FIs should be in a position to react quickly to changing circumstances in the level of risk posed by a correspondent relationship. The Guidance supplements rather than supersedes prior regulatory guidance. The Guidance is effective May 4, 2010.
Alert May 04, 2010