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Federal Reserve Bank
of Dallas


July 15, 1999
Notice 99-56

TO: The Chief Executive Officer of each
financial institution and others concerned
in the Eleventh Federal Reserve District

Risk-focused Supervision of
Large, Complex Banking Organizations
The Board of Governors of the Federal Reserve System has issued guidance to supervisory staff and bankers on overseeing large, complex banking organizations during a time of
dramatic change in the financial system. The guidance, issued in a supervisory letter, emphasizes the importance of assessing key risk management processes and ongoing monitoring of an
institution’s risk profile, as well as tailoring the supervision program to an institution’s principal
business lines and risks.
Copies of the Board’s press release and supervisory letter are attached.
For more information, please contact Basil Asaro at (214) 922-6066. For additional
copies of this Bank’s notice, contact the Public Affairs Department at (214) 922-5254.

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal
Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012;
Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.



SR 99-15 (SUP)
June 23, 1999


Risk-Focused Supervision of Large Complex Banking Organizations

The rapid evolution and growing complexity of banking and financial markets calls for continuing
refinement of the Federal Reserve System's supervisory approach to ensure the oversight of banking
organizations is effective, comprehensive and implemented in a way that does not unnecessarily intrude on an
organization's day-to-day management. Specifically, larger domestic and foreign banking organizations with
particularly complex operations and dynamic risk profiles demand a heightened level of planning, coordination
and innovative techniques to implement an effective supervisory program. These organizations typically have
significant on and off-balance-sheet risk exposures, offer a broad range of products and services at the domestic
and international levels, are subject to multiple supervisors in the United States and abroad, and participate
extensively in large-value payment and settlement systems. These institutions are referred to as large complex
banking organizations (LCBOs).
This SR letter builds upon the Federal Reserve's existing risk-focused supervision program by
providing more specific guidance on the applicability of this program to LCBOs. Many aspects of the LCBO
program are already in place; others are being introduced and refined in line with major developments in
banking and financial markets. Given the speed with which risk profiles can change, the Federal Reserve's
approach to LCBOs continues the evolution to a more continuous supervisory process, placing increased
emphasis on an organization's internal systems and controls for managing risk.
An important aspect of the LCBO program is the assessment and evaluation of banking practices
across a group of institutions with similar business lines, characteristics, and risk profiles. This "portfolio"
approach to supervision will (i) support and enhance timely judgments about individual institutions, including the
identification of possible "outliers"; (ii) facilitate peer group assessments; (iii) provide an improved framework for
discerning industry trends; (iv) foster more consistent supervision of institutions with similar businesses and risk
profiles; (v) contribute substantially to the maintenance of a highly informed and skilled supervisory staff; and
(vi) promote the development and sharing of best supervisory practices within the Federal Reserve and the
supervisory community more broadly.

Over the last several years, the federal banking agencies have revised, enhanced, and streamlined
their supervisory and regulatory programs in line with rapid changes occurring in domestic and international
financial markets. In addressing these changes, the agencies have worked individually and cooperatively at the
federal level, and with state banking authorities. Regulators have also worked actively at the international level
to strengthen supervisory policies and practices in the major industrial and emerging market countries.
Within this broader context, the Federal Reserve has taken a number of steps in recent years to
sharpen the focus, strengthen the substance, and reduce the burden associated with its supervisory programs.
Major elements of these changes include: (i) increased emphasis on assessing internal policies and processes
for identifying, measuring, monitoring, and controlling risks; (ii) a clearer focus on a banking institution's principal
business lines and risks; (iii) improved techniques for monitoring financial developments on an ongoing basis;
(iv) sufficient transaction testing to determine a financial institution's compliance with sound banking practices
and banking laws and regulations; and (v) introduction of more streamlined, cost-effective and less burdensome
supervisory techniques.
While no system of supervision can be failsafe or preclude "surprises," particularly in an increasingly
volatile and complex world, these changes have improved the effectiveness of supervisory programs and made
possible a better allocation of limited supervisory resources. By adapting supervisory programs to changing

circumstances, these steps advance two fundamental objectives of the Federal Reserve -- promoting a safe and
sound banking system and assuring financial stability. These changes also serve as the foundation of the
LCBO program, while incorporating approaches specific to the unique characteristics of these large

Overview of Systemwide Supervisory Approach for LCBOs
The Federal Reserve's supervisory approach recognizes that dramatic changes in the financial,
technological, legal, and regulatory environment necessitate a flexible supervisory framework that includes the
ongoing review and assessment of LCBO risk profiles and the continual adjustment of supervisory plans and
programs for individual institutions. Environmental factors that have had a significant impact on the nature of
LCBO operations and the financial system more generally include:
Financial innovation and deregulation
The increased range, volume, and complexity of traditional banking businesses and the
movement of banking organizations into non-traditional and potentially more complex financial
activities and services, such as securitizations, securities underwriting and dealing, trading,
derivatives, and other capital markets activities.
Increasing competitive pressures
The blurring of distinctions between financial products, and intensified competition in national
and global markets between banking organizations, nonbank financial firms, and diversified
financial services conglomerates.
Geographic expansion and globalization
The continued expansion by banking organizations, both nationally and globally, and the
integration of financial markets, increasing the challenges associated with assessing and
supervising the worldwide activities of U.S. banking organizations and the U.S. operations of
foreign banking organizations.
Revolution in information technology
The dramatic changes in information and telecommunications technology that have increased the
speed, complexity, geographic scope, and volume of financial transactions, and that have made
possible new techniques for banking organizations to both take on and manage risks.
These environmental factors have resulted in the potential for swift and dramatic changes in the risk
profiles of LCBOs and have provided avenues for the more rapid transmission of financial shocks. These
developments in turn have required supervisors to employ more continuous and risk-focused supervision
processes. Key elements of the Federal Reserve's supervisory approach for LCBOs include the following:
Greater emphasis on the organization's management processes and core proficiencies for
identifying, measuring, monitoring and controlling key risks, including credit, market, and
operational risks, and less emphasis on traditional "point-in-time" balance sheet assessments.
Continuous monitoring and assessment, including a formal re-evaluation of the organization's
risk profile and an update of the supervisory plan on at least a quarterly basis.
Encouragement of banking organizations to continually review and enhance their public
disclosures in order to promote transparency and foster effective market discipline.
Review of internal management and board reports, internal and external audit reports, and
publicly available information to supplement existing supervisory processes.
Communication and, when necessary and appropriate, coordination of the major aspects of the
supervisory process among the principal supervisory authorities involved with the LCBO (e.g.,
banking, securities, and insurance authorities).
Enhanced information sharing Systemwide and on an interagency basis, and the use of an
information technology platform that fosters more effective collaboration and communication.
Designation of a senior level Central Point of Contact (CPC) for each LCBO as the focal point for
developing and implementing the Federal Reserve's supervisory program.
Assignment to each LCBO of a dedicated supervisory team and staff with specialized skills,
knowledge and experience tailored to the unique profile of the particular institution.

An effective program of regular and meaningful contacts with bank management to maintain a
current understanding of the institution's risk profile and risk management processes, without
imposing undue burden, interfering with legitimate management prerogatives, or compromising
the objectivity of the supervisory process.
The remainder of this SR letter provides additional information on several important aspects of the
Federal Reserve's supervisory approach for LCBOs. These include maintaining a current understanding of the
banking organization's characteristics and risks; the design, maintenance and execution of an up-to-date
supervisory plan; the coordination of supervisory activities among principal regulatory authorities; and the
organization and deployment of dedicated supervisory teams.

Understanding a Banking Organization and Assessing Its Risks
The process of maintaining a current understanding of an LCBO and its major risks relies heavily
on gathering information from a wide variety of public and confidential sources, including supervisory reviews
and evaluations and discussions with management and other supervisors. One of the primary objectives of this
enhanced supervision method is to generate a flow of meaningful information that promotes, on a continual
basis, a comprehensive understanding of the LCBO, its major business lines and strategies, the risks inherent in
its business activities, and the quality and effectiveness of its risk management systems. The maintenance of an
up-to-date understanding of an LCBO's risk profile reduces the time-consuming and burdensome discovery
process associated with conducting on-site examinations. Similarly, it can also facilitate timely and efficient
processing of major regulatory applications, including acquisitions and mergers, and other requests from
banking organizations.
Publicly available information, internal management reports, discussions with management,
regulatory reports, information from internal and external auditors, and information from other supervisors are
examples of the sources used to develop and maintain a current understanding of the organization. With
respect to management reports, electronic access by supervisors may be less burdensome for the banking
organization and should be employed where feasible and appropriate.
It is important that the principal risk-focused supervisory tools and documents, which include an
institutional overview, risk matrix, and risk assessment for the LCBO remain current.1 Accordingly, the CPC
should distill and incorporate significant new information into these documents on at least a quarterly basis.
Factors such as emerging risks, new products, and significant changes in business strategy, management,
condition, or ownership may warrant more frequent updates. In general, the more dynamic the LCBO's
operations and risks, the more frequently the CPC should update the risk assessment, strategies, and plans.

Design and Execution of a Supervisory Plan
Effective risk-focused supervision requires the development and maintenance of a supervisory plan
that is current and relevant to the organization's changing risk profile. In addition to addressing all key
supervisory objectives, the supervisory plan should also be individually tailored for each banking organization to
reflect its particular organizational and operational structure, as well as, where appropriate, the activities of other
principal or functional supervisors. The supervisory plan and attendant supervisory activities, including on-site
examinations and supervisory reviews, should be sufficiently robust to maintain an up-to-date and thorough
understanding of the banking organization's operations and risks, as well as the quality of its risk management
Ongoing assessments of the LCBO's major risks (e.g., credit, market, liquidity, operational, legal, and
reputational risks) should be used to formulate, revise and update the supervisory plan. The Federal Reserve's
supervisory plan should endeavor to take into account the nature and scope of major activities conducted by
other regulators involved in the LCBO, and any actions necessary to address existing or emerging supervisory
concerns, including follow-up on past supervisory issues. For institutions supervised by the Federal Reserve, a
combination of full and limited scope examinations, targeted reviews, meetings with management, and analyses
of public and supervisory information should be used to maintain an up-to-date risk assessment and to reduce
unnecessary regulatory burden. The necessary level of transaction testing and the degree of reliance on
sampling should be fully explained in the supervisory plan's scope documents and should adequately address
the types and level of risks in the organization's business lines. Instances in which efficiencies can be gained
through reliance on the work of other regulators, internal and external auditors, and the internal risk
management function should, where appropriate, also be specified in the plan and incorporated in the
supervisory program.
The CPC should review and revise the supervisory plan whenever necessary (but in no case less

frequently than quarterly) to reflect any significant new information or emerging banking trends or risks. The
supervisory plan and any revisions should be periodically discussed with representatives of the principal
regulators of major affiliates to reconfirm agreement on the overall plan and to coordinate its implementation,
where warranted.
This communication process can serve as the basis for executing a comprehensive supervisory
approach that capitalizes on the mandates and resources of the various supervisory authorities, while
minimizing possible duplication and burden on the institution. The objective is for supervisors to work
cooperatively in developing supervisory plans and scope documents and, where possible and appropriate,
carry out important supervisory activities on a joint or coordinated basis. Coordination and communication
among supervisors can reduce the burden on banking organizations and result in a more efficient deployment of
supervisory resources.
An important element of the LCBO program is effective communication between the Federal
Reserve and the banking organization's management throughout the supervision cycle. Communication with
the LCBO can take various forms, including formal and informal meetings with management and the board of
directors, as well as the issuance of periodic and annual supervisory reports, including examination reports, to
the organization's management and board. The objective of these reports is to identify significant risks and
summarize the Federal Reserve's view of the financial condition and effectiveness of the LCBO's risk
management processes.
As part of the LCBO program, bank management should be encouraged to continue and, if
warranted, strengthen communications with Reserve Bank management, CPCs, and the supervisory teams,
particularly with respect to providing information to supervisors on a timely basis regarding material financial or
operational issues or problems. Prompt notification to supervisors of emerging problems can facilitate their
resolution in a way that minimizes disruptions. Strong two-way communications and information flows between
supervisors and the LCBO's senior management, including key business line and risk managers, are essential
to the success of the LBCO program. In carrying out this program, the Federal Reserve will continue to attach
the highest priority to information security and to protecting the integrity of sensitive, confidential supervisory and
examination information.
The success of the LCBO supervisory framework also requires that results and findings of
supervisory activities conducted throughout the supervisory cycle be continually evaluated and reflected in the
Federal Reserve's current understanding and assessment of the organization's risk profile. Reports of
examination/inspection or letters to the LCBO's management and board of directors should routinely be
prepared when examinations and targeted reviews are completed and, if necessary, the organization's
supervisory ratings should be revised in a timely manner based on the findings of these examinations and
reviews.2 Management and composite supervisory ratings should be adjusted appropriately if material
weaknesses in risk management systems or controls exist, even if these weaknesses have not yet affected the
organization's reported financial results.
At least annually, a comprehensive summary supervisory report should be prepared that supports
the organization's assigned ratings and encompasses the results of the entire supervisory cycle. This report
should convey the Federal Reserve's view of the condition of the LCBO and its key risk management processes;
communicate the composite supervisory rating(s); discuss each of the major business risks; summarize the
supervisory activities conducted during the supervisory cycle and the resulting findings; and assess the
effectiveness of any corrective actions taken by the LCBO. This report will satisfy supervisory and legal
requirements for a full-scope examination. Reserve Bank management, as well as Board officials, where
warranted, will meet with the LCBO's board of directors to present and discuss the contents of the report and the
Federal Reserve's assessment of the condition of the banking organization.

Coordination Among Supervisory Authorities
Information sharing and coordination within the Federal Reserve and with supervisors of major
affiliates are critical elements of the LCBO program and are essential to successful supervision of LCBOs. Most
LCBOs, regardless of their business lines and functional management structure, operate through a variety of
legal entities that may be under the jurisdiction of different licensing and supervisory authorities in the United
States and abroad.
To maximize efficiency and reduce regulatory burden, the risk assessment and supervisory planning
processes should make use of and leverage off the efforts of other principal supervisors to the extent possible
and consistent with achieving the Federal Reserve's key supervisory objectives. The Reserve Bank responsible
for the supervision of the LCBO should have regular contacts with supervisors of important affiliates of the
organization to discuss and coordinate matters of common interest, to develop supervisory plans and, where
appropriate, to coordinate the scheduling and conduct of examinations and targeted reviews. Consistent with

the supervisory needs and responsibilities of the Federal Reserve and the other supervisors, information may be
exchanged as permitted by law, and in accordance with applicable rules and policies of the Board. In addition,
meetings should be held at reasonable intervals with internal and external auditors to review audit plans,
evaluate significant audit findings and other control assessments, and foster opportunities to leverage off the
auditors' work. Building on the work of auditors, where appropriate, can enhance supervisory efficiency and
reduce burden on the LCBO.
The Federal Reserve's supervisory approach for LCBOs will continue to utilize enhanced
information technology. Timely and user-friendly access to a full range of internal and third-party information
and mechanisms to foster collaboration among Federal Reserve staff and other supervisors are essential to
effective risk-focused supervision for LCBOs. The Banking Organization National Desktop (BOND), an
information technology platform currently under development, is intended to provide the high degree of
automated information access and collaboration necessary for supervision of individual LCBOs, as well as to
facilitate the comparative analysis of institutions with similar business lines and risk characteristics.
Effective and timely information flows, facilitated by the use of enhanced information technology, can
provide a way for supervisors to "harvest" and share the core knowledge and experience gained through the
conduct of supervisory activities and through ongoing contacts with banking organizations. Ready access to the
collective knowledge, insights, and current assessments of fellow supervisors, bank management, financial
markets, and other relevant third parties can enhance the ability of supervisors to identify problems in a timely
manner and formulate effective supervisory responses. To this end, the Federal Reserve's information sharing
and information technology strategies will continue to be aimed at broadening and strengthening the role of the
CPCs and others responsible for conducting and overseeing the System's supervisory programs, including the
LCBO program.

Organization of Federal Reserve Supervisory Teams
A principal component of the supervisory framework is the assignment to each LCBO of a dedicated
supervisory team comprising individuals with specialized skills based upon the organization's particular
business lines and risk profile. This full time, dedicated cadre will be supplemented by other specialized System
staff, as necessary, to participate in examinations and targeted reviews.
In addition to designing and executing the supervisory strategy for an LCBO, the CPC also has
responsibility for managing the supervisory team. Important objectives in managing the supervision resources
for a particular LCBO are to maximize institutional knowledge and minimize burden to the banking organization,
while maintaining an objective ongoing understanding of the institution's risk profile. The CPC serves as the
Federal Reserve's primary day-to-day contact for a particular LCBO and has, together with other members of the
Reserve Bank management team, primary responsibility for communicating with senior officials of the LCBO.
The supervisory team's major responsibilities are to maintain a high level of knowledge of the
banking organization and to ensure that supervisory strategies and priorities are consistent with the identified
risks and the LCBO's institutional profile. The team should include supervisors with broad-based knowledge
and experience in banking, as well as specialists with technical skills and market knowledge that bring depth
and perspective to highly focused reviews of selected LCBO activities.

Implementation and Other Considerations
Management of the CPCs and the supervisory teams will continue to reside at the Reserve Banks,
which have responsibility under delegated authority from the Board of Governors for carrying out the Federal
Reserve's day-to-day supervisory activities. With regard to LCBOs, the Board will continue to provide program
direction, as well as oversight and coordination of Reserve Bank supervision activities in order to foster
consistency, quality, and compliance with Board policies and procedures. In addition, Board staff will continue
to work closely with Reserve Banks in monitoring developments affecting individual LCBOs and industry trends.
Board analysts will be assigned to work with the LCBO supervisory teams and participate in the
development and execution of supervisory plans and programs, including, where appropriate, the conduct of
examinations and other supervisory reviews. Board staff will continue to facilitate an understanding of risks and
risk management practices across the portfolio of LCBOs with similar business activities. Board officials will also
continue to play an active role with respect to any situations or institutions that pose significant risks, or that are
otherwise of special interest or importance to the Board of Governors, or the System more generally. A major
objective of the LCBO program will remain keeping the Board and Reserve Bank presidents informed of
significant banking developments on a timely basis.
The arrangements described in this letter are intended to provide a flexible framework that can

respond to changes taking place in the financial system and adapt to the risk profile of individual banking
organizations, while still achieving all key supervisory objectives. The LCBO program should also improve
supervisory coordination and efficiency and lessen burden on banking organizations. Looking ahead,
supervisory programs will have to continue to adjust to changing financial practices and risk management
techniques, and to the revolution in telecommunications and information technology. By focusing on risk and
risk management processes, the framework outlined in this letter can provide a basis for addressing the broad
array of developments affecting the banking and financial system.
The effectiveness of the LCBO program will depend on continued close collaboration,
communication and coordination within the Federal Reserve and among the supervisory community more
broadly. It will also depend on the continued commitment of adequate resources and individuals with the
requisite expertise, skills and experience. Another factor critical to the program's success is effective and timely
communication between bank management and supervisors. In this regard, Reserve Banks are asked to
distribute this SR letter to Federal Reserve-supervised domestic and foreign institutions with LCBO
Reserve Banks, in close collaboration with the Board of Governors, are responsible for ensuring that
the program discussed in this letter is successfully and fully implemented. Questions regarding the
implementation of this program may be addressed to the Office of the Director at (202) 452-2773;
William A. Ryback, Associate Director, at (202) 452-2722; Stephen M. Hoffman, Jr., Deputy Associate Director, at
(202) 452-5271; or Deborah P. Bailey, Manager, Global Supervision Section, at (202) 452-2634.

Richard Spillenkothen

Cross reference: SR 97-24 (SUP)

1 These tools and documents are discussed in more detail in SR letter 97-24, “The Framework for
Risk-Focused Supervision of Large Complex Institutions.” SR letter 97-24 describes the Federal Reserve’s
general risk-focused framework for institutions with assets in excess of $1 billion, including the documents and
supervisory tools necessary to the program’s success.
2 The supervisory ratings include the BOPEC, CAMELS, and an FBO’s combined U.S. operations rating.

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Last update: June 24, 1999 4:00 PM

Federal Reserve Release

Press Release
Release Date: June 24, 1999

For immediate release

The Federal Reserve has issued guidance to supervisory staff and bankers on overseeing large
complex banking organizations during a time of dramatic change in the financial system. The
guidance, issued in a supervisory letter, emphasizes the importance of assessing key risk
management processes and ongoing monitoring of an institution's risk profile, as well as tailoring the supervision program to an institution's principal business lines and risks.
Key elements of the program include designating a senior supervisor as the central point of
contact for each institution and establishing a dedicated supervisory team with specialized skills
and experience suited to each institution.
The approach recognizes that a small number of large and highly complex institutions account
for a growing share of total banking assets. These institutions have moved into nontraditional
activities including securities underwriting and dealing, derivatives trading, and loan securitizing.
They are expanding their activities across both state and international borders. And, ongoing
advances in information technology have increased the speed, complexity and volume of
financial transactions, and thus have heightened the potential for swift changes in the risks
confronting these institutions.
Under the approach outlined in the letter, the supervisory team will update its supervisory plan
at least quarterly by reviewing a steady flow of relevant information, including internal management reports, internal and external audits and publicly available information. In some cases,
supervisors may have direct online access to management information.
These streamlined techniques, emphasizing oversight of an institution's internal procedures for
identifying and managing risk in contrast with traditional point-in-time examinations, should
reduce the cost and burden of regulation. This approach also considers an institution's performance and risk-management procedures in relation to the performance and procedures of its
To minimize duplicative regulatory effort, the approach requires close consultation with other
domestic banking agencies, state insurance commissioners, securities regulators and foreign
bank supervisors. The Federal Reserve is developing an information system, the Banking
Organization National Desktop, to be introduced next year, to provide supervisors a userfriendly way of sharing information.
The supervisory letter is attached.