The Risk Management Flash - Vol 2 Issue 1

A summary of risk management developments for regional and community financial institutions

Topics Covered in this Issue
  • Federal Reserve Supervision and Regulation Report
  • Agencies Propose Rule Exempting Community Banks from Volcker Rule
  • FDIC Updates
  • FFIEC Regulatory Update For Community Bank Organizations
  • FDIC Offers New Cybersecurity Preparedness Resources/FSSCC Cybersecurity Tool
  • De Novo Bank Application Process and Handbook Update
  • FDIC Approves Three-Year Phase-In for CECL Regulatory Capital Effects
  • Regulators Proposed New Approach for Calculating Counterparty Credit Risk
  • Regulatory Capital Rule: Capital Simplification for Qualifying Community Bank Organizations
  • Innovations Update
  • Asset Size Does Not Matter: Enterprise Risk Management Expectations for Financial Institutions Less Than $10 Billion
  • CECL and Complying With the Regulatory Guidance on Model Risk Management
Federal Reserve Supervision and Regulation Report

The Federal Reserve issued its inaugural Supervision and Regulation Report, which summarizes current banking system conditions and regulatory and supervisory developments. The report states that more than 40 percent of major U.S. lenders have not met the Federal Reserve’s expectations in key areas of risk management; the report also details how risks may come from mismanagement, cyberattacks and failures to protect the banking system. Those faults are contributing to many firms failing to make the top two of the five categories of strong or satisfactory, which measure a bank’s strength. Among the key findings was that less than six percent of regional and community banking organizations (RBOs and CBOs) are rated less-than-satisfactory. Opportunities for improvement in risk management have been identified, and examiners have observed some deterioration in RBO liquidity positions. Common risk factors across the RBO portfolio that will be considered as a part of the 2019 supervisory cycle include the following: credit risk - concentrations of credit; commercial real estate and construction and land development; underwriting practices; operational risk - merger and acquisition risks; information technology and cybersecurity; sales practices and incentive compensation; and Bank Secrecy Act/anti-money laundering (BSA/AML). For CBOs, similar to RBOs, areas of emerging risk include the management of concentrations of credit, rising interest rates and increased liquidity risk. Supervisory priorities in 2019 will focus on the same issues identified for RBOs and also operational risks from IT and cybersecurity and BSA/AML. See link to report, bit.ly/TheFed-SupervisionRegReport.

Agencies Propose Rule Exempting Community Banks from Volcker Rule

The financial regulatory agencies issued a proposed rule to implement a section of the Economic Growth, Regulatory Relief and Consumer Protection Act (S. 2155) that grants an exemption from the Volcker Rule for community banks. To qualify for the exemption, community banks and their controlling entities must have $10 billion or less in total consolidated assets, as well as trading assets and liabilities of five percent or less of total consolidated assets. The exemption became effective upon the law’s implementation; therefore, the agencies announced in June that they would no longer enforce the Volcker Rule for those banks while waiting for the rulemaking to be finalized. See proposed revisions, bit.ly/ProposedRevisions.