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Guidelines for
Implementing the Interagency Program for Supervising the
U.S. Operations of Foreign Banking Organizations
(the FBO Supervision Program)
RISK-FOCUSED FRAMEWORK
The FBO Supervision Program is a risk-focused supervisory framework designed to
provide an efficient, rational, and uniform approach for supervising the U.S. operations of
foreign banking organizations, particularly those with numerous entities across multiple U.S.
supervisory jurisdictions. The Program consists of four integral and interrelated components: (1)
understanding the institution; (2) assessing its risks; (3) planning supervisory activities; and (4)
determining the overall condition of its U.S. operations. Carrying out this risk-focused
supervisory program results in the development of nine FBO Supervision Program products,
which are listed below under their respective risk-focused Program components.
§
Understanding the FBO
1. Review of Home Country Financial System
2. Review of Home Country Accounting Practices
3. Institutional Overview
4. Strength-of-Support Assessment (SOSA)
§
Assessing the FBO's Risks
5. Risk Matrix
6. Risk Assessment
§
Planning Supervisory Activities
7. Supervisory Plan
8. Examination Program
§
Determining the Overall Condition of the FBO's U.S. Operations
9. Summary of Condition and Assignment of a Combined U.S. Operations
Rating
Preparation of these FBO Program products provides the U.S. supervisory agencies
with the means, when applicable, of sharing their risk assessments, examination results, and
proposed supervisory follow-up actions. As a result, supervisory efforts can be well-coordinated
while avoiding duplication of efforts.
To ensure that an appropriate level of uniformity is achieved for all elements of the
Program, basic outlines for the products dealing with (a) understanding the FBO and (b)
determining the overall condition of the FBO's U.S. operations are provided here.1 Each U.S.
1
Please refer to the companion procedural AD letter to this SR letter for guidance relating to the
Program products dealing with (1) assessing the FBO's risks and (2) planning supervisory
activities, which are cross referenced in SR letter 97-24 and its companion handbook.
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supervisory agency participating in the Program may use judgment in determining which
elements of any product should be emphasized depending upon the situation for a particular
FBO, its U.S. operations, and its home country banking and regulatory environment.
UNDERSTANDING THE FBO
COUNTRY PRODUCTS
Two important components of the FBO Supervision Program are the reviews of the
home country financial system and accounting practices for each country with banking
representation in the United States. These reviews provide important reference and background
information about an FBO's home country environment and financial reporting practices. As
discussed earlier, these reviews frequently highlight broad issues that may be factored into the
SOSA for an FBO, and consequently influence the supervisory strategy for its U.S. operations.
Review of the Home Country Financial System
This review, which should be prepared for each country with FBO representation in
the United States, consists of the following three separate sub-documents, which, as deemed
necessary, may be updated independently with separate as-of-dates. (Please refer to the outline
in Appendix I for details.)
1. Financial System Structure - This section should incorporate information on
the make-up of a country's financial sector, including the types of financial
institutions allowed, the range of their permissible activities, and any related
ownership restrictions; the current degree and trend of concentration within
the financial sector; and the current degree and trend of foreign financial
institution participation in the domestic market.
2. Operating Environment - This section should discuss the following matters
as they may impact the country's banking system: the current economic
situation and outlook, the political environment to the extent that it has a
significant impact on the economic situation, and any systemic banking issues.
3. Bank Supervision - This section should focus on key banking laws, the
agencies involved in banking supervision, including their respective
responsibilities and the extent of any local interagency coordination; on-site
and off-site supervisory and examination practices; the extent to which the
supervisors receive sufficient information on banking institutions and their
affiliates that would allow evaluation on a consolidated basis; and the
treatment of problem/failed institutions, also under applicable law.
Review of Home Country Accounting Practices
A review of the significant accounting policies and procedures for each country with
banking representation in the United States should be prepared to highlight significant
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differences with U.S. GAAP and their supervisory implications. At a minimum, the review
should cover the following areas: (1) asset valuation; (2) income and expense items; (3)
consolidation rules; (4) off- versus on-balance-sheet items; (5) tax considerations; and (6)
disclosure rules. (Please refer to the outline in Appendix II for details.)
Institutional Overview
Preparation of the Institutional Overview is a critical step in tailoring the FBO
Supervision Program in accordance with the characteristics of the organization. The Institutional
Overview communicates information pertaining to the institution’s current condition and current
and prospective risk profiles, and also highlights key issues and past supervisory findings. The
Institutional Overview consists of four components described below (please refer to Appendix III
for details):
1. Structure - Includes a description of the FBO’s organizational and ownership
structure, with comments on the legal and business units, and changes through
mergers, acquisitions, divestitures, consolidation or charter conversion since
the prior review.
2. Business Strategy and Operations - Describes the FBO’s strategy, business
processes, and financial performance. It should contain a summary of the
organization’s strategic direction with comments on key business lines,
product mix, customer composition, target market clientele, marketing
emphasis, growth areas, acquisition or divestiture plans, and new products
introduced since the prior review. The description of the business processes
focuses on all aspects of risk management, with particular attention given to
the management of concentrations and capital markets activities, including the
underwriting, distribution, and trading of securities and derivative
instruments, as well as proprietary investment positions. The review of
financial performance will include an analysis of the FBO’s consolidated
condition, including earnings, capital, asset quality, liquidity, and other
financial factors.
3. Funding and Liquidity - Includes an analysis of the depth of local money
and capital markets, the components of the FBO’s capital structure, and the
FBO’s funding sources, reliance on volatile funds, and market ratings.
4. Governance - Assesses the depth and quality of the FBO’s financial
transparency; the independence and usefulness of its outside directors;
intercompany lending and intercompany transactions generally; issues relating
to insider lending; the independence and skills of auditors (if possible, of
internal auditors as well); and the managerial oversight of overseas operations.
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Strength-Of-Support Assessment for Foreign Banking Organizations
with U.S. Operations
Overview
The strength-of-support assessment provides a general framework for evaluating and
assimilating significant financial and managerial factors related to an individual FBO as well as
key environmental or external factors. The SOSA provides important information to the
supervisory agencies that is taken into account in reaching decisions regarding the scope and
frequency of examinations and other supervisory assessment initiatives. In this regard, the
SOSA provides for the efficient utilization of scarce, expert supervisory resources. The SOSA
addresses the overall financial viability of the FBO, as well as several external factors such as the
strength of its management oversight and the degree of supervision the FBO receives from its
home country supervisor.
Factors considered in assigning the ranking include the FBO's financial condition, the
system of supervision in the FBO's home country, the record of home country government
support of the banking system or other sources of support for the FBO, and any transfer risk
concerns. Therefore, the Review of the FBO's Home Country Financial System and the Review
of Home Country Accounting Practices, together with the Institutional Overview, serve as the
analytical building blocks for understanding the FBO and deriving the SOSA ranking.
Also included are managerial factors that raise questions about the FBO’s oversight of
its U.S. operations, such as internal controls and compliance procedures at its U.S. operations;
and current activities (e.g., a recent merger, significant other expansion or changes in operations,
or reported control problems at non-U.S. operations) that may pose a potential risk to the U.S.
operations. In assigning the ranking, all relevant factors should be weighed and evaluated. The
assessment ranking is on a scale of "1" to "3" with "1" representing the lowest level of
supervisory concern, and "3" representing the highest. Standards and criteria for the assessment,
including the three possible strength-of-support rankings, are discussed in greater detail below.
Strength-of-Support Assessment Indicators
There are three possible rankings for the strength-of-support assessment:
1. Assessment of "1" - The financial profile and outlook are consistent with a low
risk that the FBO will be unable to support its U.S. operations. The FBO is viewed as
investment grade or equivalent, capital ratios are at or above internationally accepted minima,
and access to U.S. dollar funding is readily available. There are no material issues related to
management oversight of, or support for, its U.S. operations. The home country has a good
record of supervising financial institutions and dealing with problem institutions, and transfer
risk is not an issue of concern.
An FBO whose financial profile is consistent with an assessment of "1" could be
assigned an assessment of "2" or lower if its home country has a supervisory system that is
lacking in significant respects or significant transfer risk considerations exist.
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2. Assessment of "2" - The current operating performance of the FBO and its
immediate financial outlook, although not posing significant concerns about the ability of the
organization to honor its U.S. liabilities, may warrant more than normal review based on such
factors as the lack of an investment grade rating, capital ratios at or below internationally
accepted minima, or other factors that are considered less than adequate by international
standards. Managerial oversight and support of U.S. operations may be lacking in some respects,
but are not critically deficient. While the FBO currently may not meet all international financial
standards, the home country has demonstrated an ability and willingness to support the FBO or
similar financial institutions.
Conversely, the financial profile of the FBO may appear to warrant a stronger ranking;
however, supervision by the home country regulator(s) is lacking in material respects or
important transfer risk considerations exist.
3. Assessment of "3" - Significant financial or supervisory weaknesses are apparent.
The FBO may be expected to continue as a going concern due primarily to government support,
ownership, or other significant factors, although resource constraints, transfer risk
considerations, operating structure, or other factors may place important limitations on that
support. In the most extreme cases, a seriously deficient financial profile and/or poor operating
practices, together with the absence of sufficient oversight and support, suggests the possibility
that the FBO will be unable to honor its U.S. obligations in the near future or is otherwise
considered to present a hazard to U.S. financial markets.
Conversely, the financial profile, based on available information, may imply a higher
assessment, but home country supervision is deemed to be substantially or wholly deficient, or
there are significant transfer risk concerns.
Strength-of-Support Assessment Factors
Determining whether an individual FBO has the internal or external resources to
provide the necessary financial and managerial support to its U.S. operations depends to a great
extent upon its financial condition, operating record, and general outlook. A good financial
condition combined with capable management is generally sufficient to ensure that support.
However, the degree of certainty about the ability of an FBO to provide any necessary financial
support may be limited by weaknesses in its home country supervisory system, deficiencies in
financial disclosure, or a significant degree of transfer risk associated with its major operations.
Accordingly, the FBO strength-of-support assessment takes into consideration five
factors:
1. The financial profile of the FBO based on its present financial condition and
outlook, including capital ratios and access to U.S. dollar liquidity;
2. The FBO's home country banking supervisory system;
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3. The demonstrated capabilities of the home country in dealing with banking
problems;
4. The degree of transfer risk associated with the FBO's home country and any other
countries in which the FBO has major operations; and
5. Any other factors pertaining to the FBO's ability to effectively manage its U.S.
operations.
All assessment factors are considered as a whole in assigning the strength-of-support
assessment. None of the factors should be assigned a separate "ranking" or be considered a
discrete component of the final assessment.
The factors used to justify a SOSA ranking will be presented as bullet point comments
(as shown in Appendix IV). Full and detailed analysis will be contained in other FBO
Supervision Program products, principally, the Institutional Overview and the Review of the
Home Country Financial System.
1. Financial Profile - The financial profile of the FBO is based on the institution's
current financial condition and outlook. A review of the FBO's financial condition is based on
the level and trend in financial performance indicators relating to the FBO's capital, profitability,
liquidity, and asset quality. To the extent possible, these indicators should be evaluated in the
context of peer performance and knowledge of the FBO's home country financial system and
accounting policies and practices.
The financial outlook should consider a broad range of external and internal factors,
such as the home country banking system, systemic banking sector issues, and the FBO's
political and economic environment, business strategy, market position, risk matrix, ownership,
corporate governance, and management. (Detailed information on these topics is contained in
the Review of the Home Country Financial System and the Institutional Overview.)
Generally, the FBO's short-term and long-term market ratings are good indicators of
its financial outlook. An FBO with the highest market ratings should be able to demonstrate a
sound financial condition and outlook. The FBO would likely be assigned an assessment of "1"
if other factors are consistent with the assessment. Notwithstanding the significance of market
ratings, the FBO's financial profile and resultant assessment should not be based on market
ratings alone. Rather, the ratings should serve as a reference point for the independent
assessment of the institution, because market ratings may not always reflect the most current
view of the FBO, or the supervisory authorities may have information not directly or indirectly
available to the market. For example, examination findings of the U.S. operations could raise
questions about the FBO's overall operations and management that could lead to a strength-ofsupport assessment lower than that indicated by the FBO's market ratings. However, any
significant difference between the assessment and market ratings should be fully analyzed and
justified. (An FBO's market ratings are contained in the Funding and Liquidity section of the
Institutional Overview.)
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2. System of Home Country Supervision - A review of the home country
supervisory system is essential to ensure that the FBO is subject to an appropriate level of
supervision of its global operations. In assigning a SOSA ranking, the review of the system of
home country supervision should concentrate on the supervisor’s general policies and how the
supervisory framework applies in practice to the individual FBO. In this context, the mere
existence of a home country supervisor is not considered sufficient.
The FBO's home country supervisory system should be evaluated based on those
general principles and practices that ensure monitoring of the FBO's principal operations and
activities, including those outside the home country. These general supervisory principles and
practices usually include some level of periodic reporting, on-site and/or off-site review,
prudential guidelines (including capital adequacy requirements), and supervisory enforcement
powers. Effective supervisory systems may take many forms; however, the regulatory system of
any country should ensure that the internationally active banks operating under that system are
subject to a sufficient level of supervision that results in sound oversight of its global operations
and activities.
Supervisory systems may also vary with respect to the type of institution. Therefore,
the analysis of the supervisory system should evaluate actual practices as applied to the
individual FBO. This assessment should be based largely on the information that has been
accumulated over time by the U.S. banking supervisory agencies. It is expected that this
assessment will be enhanced as additional information on supervisory systems is obtained
through improved contacts and informational exchanges.
Note that the analysis of Home Country Supervision as applied to the FBO in question
is contained in the Review of the Home Country Financial System.
3. Record of Home Country Support - Related to home country supervision is the
matter of the home country's record of ensuring the solvency of its financial institutions,
particularly those that operate internationally. This record of support will vary by country with
respect to structure, coverage of banks, resources, and supervisory authority as provided under
local laws and regulations. Such support may be either direct or indirect in nature and may be
widespread or only applicable to banking institutions with specific characteristics.
Some countries are able to take whatever steps are necessary to support their banks
unequivocally, while others will have a more limited degree of support for their banks due to
legal restrictions or financial constraints. These factors should be reviewed, giving particular
emphasis to past performance and an assessment of the country's financial resources.
The detailed analysis of home country support also is discussed in the Review of the
Home Country Financial System.
4. Level of Transfer Risk - Transfer risk, which relates to the FBO's ability to access
and transmit U.S. dollars, is an essential factor in determining whether the FBO can support its
U.S. operations. For some FBOs, transfer risk is increased due to home country heavy debt
servicing obligations or other financial restraints, which, in the past, has led to exchange controls
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and hard currency restrictions in some countries. As a result, these FBOs may have limited
ability to provide the necessary support to their U.S. operations.
The assessment of transfer risk for individual countries is uniformly handled by the
federal bank supervisory agencies through the Interagency Country Exposure Review Committee
(ICERC). As available, these ICERC assessments should be relied upon in determining the level
of transfer risk for strength-of-support purposes. However, the ICERC rating should not be
explicitly disclosed in the SOSA. For those countries not evaluated by the ICERC, the
assessments of transfer risk will be made in the same manner as conducted by the ICERC 2.
Generally, FBOs from countries rated substandard or worse by the ICERC would be
accorded an assessment of no better than "2." However, a high level of transfer risk associated
with the FBO's home country could be mitigated by other considerations that clearly indicate that
the FBO has broad access to U.S. dollars.
5. Other Factors - Determining whether an FBO poses any managerial or operational
control risks to its U.S. operations can be influenced by a broad range of qualitative factors. One
example of such control risks is an FBO that would otherwise have a strength-of-support
assessment of "1" but may be experiencing certain operational problems, not necessarily in the
United States. The FBO may be undergoing extensive expansion into new markets or products
that, over time, could place a strain on its financial and managerial resources. The FBO also
could be experiencing well-publicized internal control problems at offices outside the United
States. Although these control problems would not necessarily affect the ability of the FBO to
meet its obligations, they may be symptomatic of larger control problems that also might exist in
the U.S. offices. Any such concerns should be explored to the extent possible, particularly as
they may influence the supervisory strategy and examination plan for the FBO's U.S. operations.
Disclosure of SOSAs to FBOs and their Home Country Supervisors
The SOSAs and supporting analyses are for U.S. supervisory use only. These
evaluations are to be kept strictly confidential by each of the agencies, in part to ensure that the
sharing of information between the agencies for purposes of analyzing the condition of the FBO
and assigning its strength-of-support assessment will not violate state or federal regulations.
However, the U.S. bank supervisory agencies now have agreed to disclose to each
FBO, and its home country supervisor, its SOSA ranking and a summary of the key points
supporting the ranking. This step is being taken for three principal reasons: (1) supervisors have
developed a high level of confidence in the quality and consistency of SOSA rankings over the
past five years; (2) the rankings have been used to support supervisory decisions requiring a view
of an FBO, such as payment system risk actions; and (3) it is believed that many FBOs have
been able to derive their SOSA ranking based on the posture taken by U.S. supervisors with
respect to their U.S. operations. Therefore, given the expanded use and importance of the SOSA,
the U.S. bank supervisory agencies believe it is appropriate that the SOSA process -specifically, the ranking-- should be made fully transparent to each FBO and its respective home
2
For further information about ICERC’s assessment of transfer risk, see SR letter 99-35.
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country supervisor. As discussed further and shown in Appendices V and VI, the SOSA ranking,
and the rationale for the ranking, will be disclosed to the FBO in the Summary of Condition
letter, which is, in turn, transmitted to the home country supervisor via a separate transmittal
letter.
ASSESSING THE FBO’S RISKS
Risk Matrix and Risk Assessment of the U.S. Operations of
Foreign Banking Organizations
As introduced in this document, the risk-focused framework for the supervision of
FBOs is intended to provide a coordinated, thorough, and efficient approach for supervising the
U.S. operations of FBOs that conduct their business in the United States through multiple
operating entities. As such, all operations of an FBO located in the United States, including bank
holding companies and commercial banks, should be included in the risk-focused supervisory
program for each FBO. Of note is that bank holding companies and commercial banks owned or
controlled by an FBO should be subject to an individual analysis in accordance with the
Framework for Risk-Focused Supervision of Large Complex Institutions (SR letter 97-24) or the
companion guidance for Risk-Focused Supervision of Community Institutions (SR letter 97-25.)
Commercial banks supervised by another federal bank supervisory agency would be subject to
the risk-focused products adopted by that agency.
The products developed for FBO-owned or -controlled bank holding companies and
commercial banks under the risk-focused program for large complex institutions or community
institutions should be included as identified items in the products developed for the FBO’s U.S.
operations so that, in effect, there will be a complete set of documents for an FBO’s entire U.S.
operations on a combined basis. For example, a risk assessment for an FBO that operates (1) a
bank holding company, (2) several branches and agencies, and (3) a directly-owned Edge
corporation, should include a risk assessment of the FBO’s combined U.S. operations and, within
the same document, a separate risk assessment for the bank holding company.
PLANNING SUPERVISORY ACTIVITIES
Development of a Supervisory Strategy
As established under the FBO Supervision Program, one of the principal goals of the
SOSA is to identify those FBOs that may pose risks to their U.S. operations or to U.S. financial
markets due to any inherent financial or managerial weaknesses and/or external constraints. In
this regard, the SOSA ranks all FBOs according to the degree to which they can support their
U.S. operations and the level of supervisory attention these operations may require.
Accordingly, the SOSA serves as the initial building block for setting the supervisory strategy
for the FBO's U.S. operations. In conjunction with the Risk Assessment for the FBO’s U.S.
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operations, a strong foundation is created for determining the supervisory activities to be
conducted as part of the Supervisory Plan and Examination Program.3
Therefore, the SOSA, together with the Risk Assessment, should strongly influence
the Supervisory Plan and the Examination Program. Ultimately, the SOSA is considered in
implementing supervisory follow-up action for the U.S. operations as well. No automatic
supervisory strategy, however, is mandated. An assessment of "1" generally would imply little if
any concern relating to the ability of the FBO to meet its obligations. If an FBO does raise
liquidity or solvency concerns, the FBO should not be accorded an assessment of "1". Moreover,
an assessment of "2" or worse implies a level of concern that would, in many cases, subject the
FBO's U.S. offices to at least periodic monitoring of its due from/due to positions. Any
additional supervisory steps, such as imposing an asset pledge or an asset maintenance
requirement, would be implemented based largely on the condition and nature of the U.S.
operations. An FBO accorded an assessment of "3" would indicate a higher level of concern,
with a presumption of a net due position or possibly asset maintenance regardless of the
condition of its U.S. operations.
Suggested guidelines for supervisory follow-up action for each assessment category
are as follows:
Assessment of "1" - Normally, any supervisory follow-up action for FBOs with a
strength-of-support assessment of "1" would be applied only if warranted by the condition of
their U.S. operations. Typically, asset maintenance would not be required for branches and
agencies of these FBOs; however, supervisory actions would be undertaken, if necessary, to
resolve safety and soundness issues such as deficiencies in risk management, operations and
internal controls, or compliance at any of the U.S. offices.
Assessment of "2" - FBOs in this category may require heightened monitoring of
funding sources for their U.S. operations, and of their overall liquidity positions, balance sheet
composition, growth, and/or other financial factors. The due to/due from position would be
closely monitored and any substantial due from position would be fully analyzed for risk
implications. If warranted by the condition of the combined U.S. operations or the asset quality
at the U.S. offices of such an FBO, asset maintenance would be considered for branches and
agencies, and U.S. subsidiary banks could be required to operate at capital levels above the
minima.
Assessment of "3" - The FBO would be more closely monitored and may be placed
under continuous surveillance and reporting requirements and/or face supervisory restrictions.
For example, there would be a strong presumption of a net due to requirement or possibly asset
maintenance for branches and agencies of an FBO in this category, and U.S. bank subsidiaries
should operate at strong capital levels.
3
The Risk Assessment should apply to the six principal risks, credit, market, liquidity,
operational, legal, and reputational, that an institution confronts.
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DETERMINING THE OVERALL CONDITION OF THE FBO’S U.S. OPERATIONS
Summary of Condition and Assignment of a Rating for
the Combined U.S. Operations
An important component of this program is the integration of individual examination
findings into an assessment of an FBO's entire U.S. operations. At a minimum, following the
conclusion of the last examination of an FBO's U.S. operations in a given annual supervisory
cycle, a Summary of Condition should be prepared for all FBOs with multiple U.S. operations.
(Please see Appendix V for a sample Summary of Condition letter. Please also note that for
FBOs whose U.S. operations include a commercial bank supervised directly by the OCC or the
FDIC, the Reserve Bank drafting the Summary of Condition should include appropriate language
in the document identifying the primary supervisory agency for the bank, and that agency’s
appropriate contact person.) The responsible Reserve Bank, or other U.S. bank supervisory
agency, should prepare an evaluation of the condition of the FBO’s U.S. operations, which will
lead to the assignment of a single-component rating between "1" and "5" for those operations on
a combined basis.
This evaluation should include an assessment of all risk factors, and (1) all elements of
the ROCA rating system, (2) quality of risk management oversight employed by all levels of
management in the FBO's U.S. operations, and (3) the examinations of all entities of the FBO
conducted during the year. The Summary of Condition and rating of the FBO's combined U.S.
operations represent important tools in reaching decisions regarding the scope and frequency of
future examinations and appropriate supervisory measures. This information also should provide
the basis for a more efficient utilization of supervisory resources (i.e., recognizing, where
appropriate, a low or high level of supervisory concern for the FBO’s combined U.S. operations).
In arriving at the rating for the combined U.S. operations of the FBO, all of the FBO's
U.S. entities should be considered; however, this rating should not be based merely on an
arithmetic average of the examination ratings of the entities examined. The strengths or
weaknesses exhibited within individual entities should be evaluated based on their size and
importance relative to the FBO's overall U.S. operations, and the materiality and extent of the
weaknesses.
The five ratings are defined as follows:
Combined Rating of "1" - The overall operations are fundamentally sound in every
respect. They cause no supervisory concern and require only normal supervisory attention.
Combined Rating of "2" - The combined U.S. operations operate in a basically
sound manner, but may have modest weaknesses that can be corrected by management in the
normal course of business. They do not require more than normal supervisory attention.
Combined Rating of "3" - Overall U.S. operations are weak in risk management,
operational controls, and compliance, or have numerous asset quality problems that in
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combination with the condition of the FBO cause supervisory concern. U.S. and/or head office
management may not be taking the necessary corrective actions to address any weaknesses. This
rating may also be assigned when either risk management, operational controls, or compliance is
individually viewed as unsatisfactory. Generally, these operations raise supervisory concern and
require more than normal supervision to address their weaknesses.
Combined Rating of "4" - The combined U.S. operations have a significant volume
of serious weaknesses. Serious problems or unsafe and unsound banking practices or operations
exist, which have not been satisfactorily addressed or resolved by U.S. or head office
management. These operations require close supervisory attention and surveillance monitoring,
and a definitive plan for corrective action by head office management.
Combined Rating of "5" - The combined U.S. operations have so many severe
weaknesses or unsafe and unsound conditions that they require urgent restructuring by head
office management.
Disclosure
The Summary of Condition is prepared as a letter addressed to the FBO's head office
management; it highlights those areas of overall strength and supervisory weaknesses in the
FBO's combined U.S. operations. This letter also is used to disclose to the FBO the combined
rating of its U.S. operations and its SOSA ranking. In the event of a mid-cycle SOSA ranking
change, a new Summary of Condition letter should be prepared that discloses the revised SOSA
ranking and provides updated information on the U.S. supervisors’ view of the FBO's U.S.
operations. This information is also transmitted to the FBO's home country supervisor via a
cover letter. (Please see Appendices V and VI for a sample of each letter.)
RATING SYSTEM FOR U.S. BRANCHES AND AGENCIES OF
FOREIGN BANKING ORGANIZATIONS
The rating system for U.S. branches, agencies and commercial lending companies5 of
foreign banking organizations is a management information and supervisory tool designed to
assess the condition of a branch and to identify significant supervisory concerns at a branch in a
systematic, consistent fashion. The rating system (ROCA) was specifically designed to assess
the condition of a branch within the context of the FBO, of which it is an integral part, and to
pinpoint the key areas of concern in a branch office.
For evaluation purposes, the rating system divides a branch's overall activities into
three individual components: risk management, operational controls, and compliance. These
components represent the major activities or processes of the branch that may raise supervisory
5
Branches, agencies, and commercial lending companies are hereafter collectively referred to as
branches.
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concern. The rating system also provides for a specific rating of the quality of the branch's stock
of assets as of the examination date.
A. Composite Rating
The overall or composite rating indicates whether, in the aggregate, the operations of
the branch may present supervisory concerns and the extent of any concerns. While the
individual component ratings will be taken into consideration in arriving at the branch's overall
assessment, the composite rating should not be considered merely an arithmetic average of the
individual components. The examiner should assign and justify in the report a composite rating
using definitions provided below as a guide.6
The composite rating is based on a scale of one through five in ascending order of
supervisory concern. Thus, one represents the lowest level of supervisory concern while five
represents the highest level. The five composite ratings are defined as follows:
Composite Rating of "1" - Branches in this group are strong in every respect. These
branches require only normal supervisory attention.
Composite Rating of "2" - Branches in this group are in satisfactory condition, but
may have modest weaknesses that can be corrected by branch management in the normal course
of business. Generally, they do not require additional or more than normal supervisory attention.
6
Assessment of asset quality is an integral part of any examination; however, under certain
circumstances, it may be appropriate to give the individual asset quality rating component greater
or lesser weight in arriving at an overall composite rating. In ensuring the protection of branch
creditors, an important factor is the strength of the FBO. As the financial strength of the FBO
weakens, it becomes increasingly important to look to the quality of the assets booked in the
United States as the source of protection for local creditors, and, at a certain point, asset
maintenance should be imposed. Similarly, where the FBO is strong, and the need to look to
local assets for protection of creditors seems remote, the relative weighing of the asset quality
component in the overall evaluation diminishes.
It also should be recognized that different offices of the FBO can be assigned widely different
roles in the FBO's overall strategy. Thus, an individual office that books very few loans, but is
otherwise poorly managed should not be given undue credit for having good asset quality.
Alternatively, a branch that is designated to hold problem assets generated by other offices of the
FBO, in order to better manage the workout process, should not be penalized, so long as the FBO
has the ability to support the level of problem assets.
Finally, it should be recognized that asset quality tends to be a "trailing" indicator of branch
performance. In instances where risk management systems are weak, but problem assets are
currently nominal, it is realistic to assume there will be future deterioration in asset quality. By
the same measure, management should be given credit in the overall evaluation where the causes
of past asset quality problems have been corrected.
Page 13 of 32
Composite Rating of "3" - Branches in this group are viewed as fair due to a
combination of weaknesses in risk management, operational controls, and compliance, or asset
quality problems that, in combination with the condition of the FBO or other factors, cause
supervisory concern. In addition, branch and/or head office management may not be taking the
necessary corrective actions to address substantive weaknesses. This rating may also be assigned
when risk management, operational controls, or compliance is individually viewed as
unsatisfactory. Generally, these branches raise supervisory concern and require more than
normal supervisory attention to address their weaknesses.
Composite Rating of "4" - Branches in this group are in marginal condition due to
serious weaknesses as reflected in the assessments of the individual components. Serious
problems or unsafe and unsound banking practices or operations exist, which have not been
satisfactorily addressed or resolved by branch and/or head office management. Branches in this
category require close supervisory attention and surveillance monitoring and a definitive plan for
corrective action by branch and head office management.
Composite Rating of "5" - Branches in this group are in unsatisfactory condition due
to a high level of severe weaknesses or unsafe and unsound conditions, and consequently require
urgent restructuring of operations by branch and head office management.
B. Disclosure
Following approval of the rating by appropriate senior supervisory officials at the
examining agency, the composite numeric rating should be disclosed in the open, summary
section of the examination report. In disclosing the rating, its meaning should be explained
clearly using the appropriate composite rating definition. The report should also make it clear
that the rating is part of the overall findings of the examination and is thus confidential. Pending
receipt of the report of examination, any composite rating disclosed or discussed at an
examination closeout meeting should be clearly conveyed as preliminary by the examiner-incharge.
C. Component Evaluations
Similar to the composite rating, the individual rating components are evaluated on a
scale of one to five, where one represents the lowest level of supervisory concern and five
represents the highest. Each component is discussed below followed by a description of the
individual performance ratings.
D. Risk Management
Risk is an inevitable component of any financial institution. Risk management, or the
process of identifying, measuring, and controlling risk, is therefore an important responsibility of
any financial institution. In a branch, which is typically removed from its head office by location
and time zone, an effective risk management system is critical not only to manage the scope of
its activities, but to achieve comprehensive, ongoing oversight by branch and head office
management. In the examination process, examiners will therefore determine the extent to
Page 14 of 32
which risk management techniques are adequate (i) to control risk exposures that result from the
branch's activities and (ii) to ensure adequate oversight by branch and head office management,
and thereby promote a safe and sound banking environment.
The primary components of a sound risk management system are a comprehensive
risk assessment approach; a detailed structure of limits, guidelines, and other parameters used to
govern risk-taking; and a strong management information system for monitoring and reporting
risks.
The process of risk assessment includes the identification of all the risks associated
with the branch's balance sheet and off-balance-sheet activities and grouping them into
appropriate risk categories. These categories broadly relate to credit, market, liquidity,
operational, and legal risks.7 All major risks should be measured explicitly and consistently by
branch management; risks should also be reevaluated on an ongoing basis as underlying risk
assumptions relating to economic and market conditions vary and as the branch's activities
change. The branch's expansion into new products or business lines should not outpace proper
risk management or supervision by head office. Where risks cannot be explicitly measured,
management should demonstrate knowledge of their potential impact and a sense of how to
manage such risks.
Risk identification and measurement are followed by an evaluation of the tradeoff
between risks and returns to establish acceptable risk exposure levels, which are stated primarily
in the branch's lending and trading policies subject to the approval of head office management.
These policies should give standards for evaluating and undertaking risk exposure in individual
branch activities as well as procedures for tracking and reporting risk exposure to monitor
compliance with established policy limits or guidelines.
Head office management has a role in developing and approving the branch's risk
management system as part of its responsibility to provide a comprehensive system of oversight
for the branch. Generally, the branch's risk management system, including risk identification,
measurement, limits or guidelines, and monitoring should be modeled on that of the FBO as a
whole to provide for a fully-integrated risk management system.8
In assigning the risk management rating, examiners should evaluate the current,
ongoing situation and concentrate on developments since the previous examination. The rating
should not concentrate on past problems, such as those relating to the current quality of the
7
While operational risks are identified as part of the branch's overall risk assessment process, the
effectiveness of the branch's operational controls is separately evaluated under ROCA.
8
For a more detailed overview of the risk management process in trading operations, refer to the
Federal Reserve's Trading Activities Manual.
Page 15 of 32
branch's stock of assets, if risk management techniques have improved significantly since those
problems developed.9
More specifically, in rating the branch's risk management procedures, examiners
should consider the following points:
§
The extent to which the branch is able to manage the risks inherent in its lending,
trading, and other activities; specifically, its ability to identify, measure, and
control these risks.
§
The soundness of the qualitative and quantitative assumptions implicit in the risk
management system.
§
Whether risk policies, guidelines, and limits at the branch are consistent with its
lending, trading, and other activities; management's experience level; and the
overall financial strength of the branch and/or the FBO.
§
Whether the management information system and other forms of communication
are consistent with the level of business activity at the branch and sufficient to
accurately monitor risk exposure, compliance with established limits, and
sufficient to enable the head office to monitor the real performance and risks of
the branch.
§
Management's ability to recognize and accommodate new risks that may arise
from the changing environment, and to identify and address risks not readily
quantified in a risk management system.
For example, in the lending area, a branch would be expected to have (1) experienced
lending officers, an effective credit approval and review function, and, where appropriate, credit
work-out personnel; (2) a credit risk evaluation system that was viewed as adequate in assessing
relative credit risks; (3) branch officer lending limits, lending guidelines, and portfolio policies
consistent with the abilities of branch personnel and the financial expertise and resources of the
FBO; (4) a system that identified existing and potential problem credits, a method for assessing
the likely impact of those credits on existing and future profits, and procedures for accurately
informing head office of the credit quality of the portfolio and possible credit losses; and (5)
procedures for assessing the impact on the portfolio of specific or general changes in the
business climate.
A rating of "1" indicates that management has a fully-integrated risk management
system that effectively identifies and controls all major types of risk at the branch, including
9
Thus, for example, the change in the level of problem assets since the previous examination
would normally be more important than the absolute level of problem assets. At the same time, a
loan portfolio that has few borrowers experiencing debt service problems does not necessarily
indicate a sound risk management system because weak underwriting standards may make the
branch vulnerable to credit problems during a future economic downturn.
Page 16 of 32
those from new products and the changing environment. This assessment, in most cases, will be
supported by a superior level of financial performance and asset quality at the branch. No
supervisory concerns are evident.
A rating of "2" indicates that the risk management system is fully effective with
respect to almost all major risk factors. It reflects a responsiveness and ability to cope
successfully with existing and foreseeable exposures that may arise in carrying out the branch's
business plan. While the branch may have residual risk-related weaknesses, these problems have
been recognized and are being addressed by the branch and/or head office. Any such
weaknesses will not have a material adverse affect on the branch. Generally, risks are being
controlled in a manner that does not require additional or more than normal supervisory
attention.
A rating of "3" signifies a risk management system that is lacking in some important
measures. Its effectiveness in dealing with the branch's level of risk exposures is cause for more
than normal supervisory attention, and deterioration in financial performance indicators is
probable. Current risk-related procedures are considered fair, existing problems are not being
satisfactorily addressed, or risks are not being adequately identified and controlled. While these
deficiencies may not have caused significant problems yet, there are clear indications that the
branch is vulnerable to risk-related deterioration.
A rating of "4" represents a marginal risk management system that generally fails to
identify and control significant risk exposures in many important respects. Generally, such a
situation reflects a lack of adequate guidance and supervision by head office management. As a
result, deterioration in overall performance is imminent or is already evident in the branch's
overall performance since the previous examination. Failure of management to correct risk
management deficiencies that have created significant problems in the past warrants close
supervisory attention.
A branch rated "5" has critical performance problems that are due to the absence of an
effective risk management system in almost every respect. Not only are there a large volume of
problem risk exposures, but the problems are also intensifying. Management has not
demonstrated the ability to stabilize the branch's situation. If corrective actions are not taken
immediately, the operations of the branch are severely endangered.
E. Operational Controls
This component assesses the effectiveness of the branch's operational controls,
including accounting and financial controls. The assessment is based on the expectation that
branches should have an independent internal audit function and/or an adequate system of head
office or external audits as well as a system of internal controls consistent with the size and
complexity of their operations. In this regard, internal audit and control procedures should
ensure that operations are conducted in accordance with internal guidelines and regulatory
policies, and that all reports and analyses provided to the head office and branch senior
management are timely and accurate.
Page 17 of 32
The rating of operational controls should include the following items:
§
The adequacy of controls and the level of adherence to existing procedures and
systems. (These are separate but related factors.)
§
The frequency, scope, and adequacy of the branch's internal and external audit
function, relative to the size and risk profile of the branch, and the independence
of the internal audit function from line management.
§
The number and severity of internal control and audit exceptions.
§
Whether internal control and audit exceptions are effectively tracked and resolved
in a timely manner.
§
The adequacy and accuracy of management information reports. This assessment
should be based primarily on whether reports and analyses are sufficient to
properly inform head office management of the branch's condition on a timely
basis, and whether there are sufficient procedures to ensure the accuracy of those
reports.
§
Whether the system of controls is regularly reviewed to keep pace with changes in
the branch's business plan and laws and regulations.
A branch that is rated "1" has a fully comprehensive system of operational controls
that protects against losses from transactional and operational risks and ensures accurate
financial reporting. Branch operations are fully consistent with sound market practices. The
branch also has a well-defined and independent audit function that is appropriate to the size and
risk profile of the branch. No supervisory concerns are evident.
A rating of "2" may indicate some minor weaknesses, such as the presence of new
business activities where some modest control deficiencies exist, but which management is
addressing. Some recommendations may be noted. Overall, the system of controls, including
the audit function, is considered satisfactory and effective in maintaining a safe and sound
branch operation. Only routine supervisory attention is required.
A rating of "3" indicates that the branch's system of controls, including the quality of
the audit function, is lacking in some important respects, particularly as indicated by continued
control exceptions and/or substantial deficiencies in or failure to adhere to written policies and
procedures. As a result, more than normal supervisory attention is required.
A branch that is rated "4" signifies that the system of operational controls has serious
deficiencies that require substantial improvement. In such a case, the branch may lack control
functions, including those related to the audit function, that meet minimal expectations;
therefore, adherence to bank and regulatory policy is questionable. Head office management has
failed to give the branch proper support to maintain operations in accordance with U.S. norms.
Close supervisory attention is required.
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A branch that is rated "5" lacks a system of operational controls to such a degree that
its operations are in serious jeopardy. The branch either lacks or has a wholly deficient audit
function. Immediate substantial improvement is required by branch and head office
management, along with strong supervisory attention.
F. Compliance
In addition to maintaining an effective system of operational controls, branches should
also demonstrate compliance with all applicable state and federal laws and regulations, including
reporting and special supervisory requirements. To the extent possible, given the size, risk
profile and organizational structure of the branch, these responsibilities should be vested in a
branch official or compliance officer whose function is separate from line management. Branch
management should also ensure that all appropriate personnel are properly trained in meeting
regulatory requirements on an ongoing basis. The scope of the branch's audit function also
should ensure that the branch is meeting all applicable regulatory requirements.
Accordingly, the branch's level of compliance should be rated based on the following
factors:
§
The level of adherence to applicable state and federal laws and regulations and
any supervisory follow-up actions.
§
The effectiveness of (i) written compliance procedures and (ii) training of line
personnel charged with maintaining compliance with regulatory requirements.
§
Management's ability to submit required regulatory reports in a timely and
accurate manner.
§
Management's ability to identify and correct compliance issues.
§
Whether the internal audit function checks for compliance with applicable state
and federal laws and regulations.
A branch accorded a rating of "1" demonstrates an outstanding level of compliance
with applicable laws, regulations, and reporting requirements. No supervisory concerns are
evident.
A rating of "2" indicates that compliance is generally effective with respect to most
factors. Compliance monitoring and related training programs are sufficient to prevent
significant problems. Minor reporting errors may be present, but they are being adequately
addressed by branch management. Only normal supervisory attention is warranted.
A branch that is rated "3" has deficiencies in management and training systems that
result in an atmosphere where significant compliance problems could and do occur. Such
deficiencies could include a lack of written compliance procedures, no system for identifying
Page 19 of 32
possible compliance issues, or a substantial number of minor or repeat violations or deficiencies.
More than normal supervisory attention is warranted.
A rating of "4" indicates that compliance matters are not given proper attention by
branch and head office management and close supervisory attention is warranted. The lack of an
effective compliance program, including an ongoing training program, may be evident along
with a failure to meet significant regulatory requirements and/or significant, widespread
inaccuracies in regulatory reports.
A rating of "5" would signal that attention to compliance matters is wholly lacking at
the branch to the extent that immediate supervisory action is warranted.
G. Asset Quality
Generally, asset quality is evaluated to determine whether a financial entity has
sufficient capital to absorb prospective losses and, ultimately, whether it can maintain its
viability as an ongoing entity. The evaluation of asset quality in a branch does not have the same
result because a branch is not a separately capitalized entity. Instead, a branch relies on the
financial and managerial support of the FBO as a whole.
Nonetheless, the evaluation of asset quality is important both in assessing the
effectiveness of credit risk management and in the event of a possible liquidation of a branch.
However, as indicated above, a branch is not strictly limited by its own internal and external
funding sources in meeting solvency and liquidity needs. The ability of a branch to honor its
liabilities ultimately is based upon the condition and level of support from the FBO, a concept
that is integral to the FBO supervision program.
This concept states that if the condition of the FBO is satisfactory, the FBO is
presumed to be able to support the branch with sufficient resources on a consolidated basis. As a
result, the assessment of asset quality in such circumstances would not in and of itself be a
predominant factor in the branch's overall assessment, if existing risk management techniques
are satisfactory. If, however, support from the FBO is questionable, the evaluation of asset
quality should be carefully considered in determining whether supervisory actions are needed to
improve the branch's ability to meet its obligations on a stand-alone basis. In cases where a
branch is subject to asset maintenance, it is expected that asset quality issues will be addressed
by disqualifying classified assets as eligible assets.
The quality of the branch's stock of assets is evaluated based on the following factors.
Generally, credit administration concerns should be addressed in rating risk management in light
of:
§ The level, distribution, and severity of asset and off-balance-sheet exposures
classified for credit and transfer risk.10
10
For specific guidance on evaluating the amount of risk inherent in classified assets and offbalance-sheet or contingent exposures, examiners should refer to the Federal Reserve
examination manuals and any applicable supervisory policies.
Page 20 of 32
§
The level and composition of nonaccrual and reduced rate assets.
A branch accorded a rating of "1" has strong asset quality.
A branch accorded a rating of "2" has satisfactory asset quality.
A branch accorded a rating of "3" has fair asset quality.
A branch accorded a rating of "4" has marginal asset quality.
A branch accorded a rating of "5" has unsatisfactory asset quality.
H. Assignment of a Combined ROCA Rating
The U.S. bank supervisors will assign a combined ROCA rating for all of the FBO’s
U.S. branches, agencies, and commercial lending companies. This composite assessment of risk
management, operational controls, compliance, and asset quality at the FBO’s U.S. branch,
agency, and commercial lending company operations will in turn be factored into the FBO’s
overall combined U.S. operations rating.
Page 21 of 32
LIST OF APPENDICES
I.
OUTLINE FOR THE REVIEW OF THE HOME COUNTRY FINANCIAL SYSTEM
II.
OUTLINE FOR THE REVIEW OF HOME COUNTRY ACCOUNTING PRACTICES
III.
OUTLINE FOR THE INSTITUTIONAL OVERVIEW
IV.
STRENGTH-OF-SUPPORT ASSESSMENT EXAMPLE
V.
SUMMARY OF CONDITION LETTER TO FBO MANAGEMENT
VI.
TRANSMITTAL LETTER TO THE HOME COUNTRY SUPERVISOR FOR THE
SUMMARY OF CONDITION
Note: Samples of the products for the risk-focused supervisory process are included in the
handbook on Framework for Risk-Focused Supervision of Large Complex Institutions, which is
attached to SR letter 97-24.
Page 22 of 32
Appendix I
OUTLINE FOR THE
REVIEW OF THE HOME COUNTRY FINANCIAL SYSTEM
I.
Financial System Structure
A.
Types of institutions
1.
Permissible activities/investments
2.
Ownership restrictions
B.
Concentration of the banking market
C.
Existence of financial conglomerates
D.
II.
III.
Presence of foreign banks
Operating Environment
A.
Condition of economy and political environment
B.
Systemic banking issues
C.
Transfer risk
Bank Supervision
A.
Key banking law(s)
B.
Agencies involved in banking supervision
C.
Supervisory techniques
1.
Chartering criteria
2.
Prudential rules (including an in-depth discussion of capital requirements
and permissible capital components)
3.
Examinations vs. reliance on external auditors
4.
Reporting requirements/off-site surveillance
5.
Corrective measures/sanctions
6.
Powers of intervention
D.
Extent to which supervisor assesses the consolidated worldwide operations
E.
Treatment of problem/failed institutions:
1.
History of government support of individual banking institutions
2.
Lender of last resort
3.
Deposit insurance program
4.
Bankruptcy laws
5.
Other legal issues
Page 23 of 32
Appendix II
OUTLINE FOR THE
REVIEW OF HOME COUNTRY ACCOUNTING PRACTICES
I.
Asset Valuation
A.
Nonperforming definition/accrual practices
B.
Provisioning policies
C.
Charge-off policies
D.
Revaluation reserves
1. Fixed assets
2. Securities portfolio
E.
Undisclosed reserves
F.
Inflation accounting/monetary correction
G.
Intangibles/goodwill
H.
Accounting for subsidiaries and affiliates
II.
Income and Expense Items
A.
Provisioning policies
B.
Income recognition and accrual methods
C.
Inflation accounting/monetary correction
III.
Consolidation Rules
A.
Accounting for subsidiaries and affiliates
B.
Accounting for intercompany transactions
IV.
Off- versus On-Balance Sheet Items
V.
Tax Considerations
VI.
Disclosure Rules
A.
Adoption of internationally accepted accounting standards
B.
Financial reporting requirements
C.
Comparability to recommended disclosures of the Basel Committee on Banking
Supervision
Page 24 of 32
Appendix III
OUTLINE FOR THE INSTITUTIONAL OVERVIEW
A significant portion of the information required to complete the SOSA analysis will be found in
the Institutional Overview. The Overview provides a logical, concise assessment of the FBO’s
organization, business strategy, and financial performance. It should be noted, however, that in a
number of developing countries there is limited available information and disclosure. As such,
credible information for all of these topics may not be available for all FBOs.
I. Structure - This section should provide background information on the FBO. Information
contained in this section will not necessarily change substantially from year to year unless
there is a significant acquisition, divestiture, or strategic reorganization.
A.
B.
C.
D.
Description of the FBO (including type of charter) and organization.
Ownership.
Comments on key business units, subsidiaries, affiliates, and joint ventures.
Changes through merger, acquisition, divestitures, consolidation or charter conversion.
II. Business Strategy and Operations - This section should provide information on the FBO’s
global business strategy, especially as it relates to its U.S. operations; a description of key
business lines and major new initiatives as they are introduced; and identification of key risk
management issues in pursuit of business objectives.
A. Business strategy: Marketing emphasis, growth areas, acquisitions, and assessment of
market position and prospects.
B. Major business activities and related risk management processes: Key business lines;
product mix; customers and counterparties for credit products; trading, proprietary
investment, and capital markets activities; and other significant business activities, such
as asset management, trust, and custodial.
C. Financial performance and financial outlook: Consolidated financial information
including earnings, capital, asset quality, and other financial performance factors; peer
comparisons; transfer risk concerns; market reviews; and internal and market-based
projections, if available.
III. Funding and Liquidity - This section analyses the depth of local money and capital
markets; components of the FBO’s capital structure; other funding sources; reliance on, and
types of, market funding; and credit agency and market ratings.
IV. Governance - This section provides an assessment of financial disclosure; composition,
background, and involvement of outside (i.e., non-executive) directors; intercompany
transactions (especially intercompany loans); auditors; and management oversight of foreign
operations.
Page 25 of 32
Appendix IV
STRENGTH- OF- SUPPORT ASSESSMENT EXAMPLE
Ranking and Rationale:
Bank of Country X (BCX) is assigned a Strength-of-Support Assessment ranking of "2" based on
declining capital ratios, deteriorating earnings, and weakening but better-than-peer asset quality.
The ranking is further supported by BCX's uncertain financial prospects following the sectorwide mergers, during which time BCX is expected to absorb much smaller and weaker
institutions and, as a result, damage its financial condition even further. Generally, external
factors, such as the home country supervisory system and lender of last support issues, are
consistent with the SOSA ranking of "2." A number of uncertainties for BCX remain,
particularly the possibility of increased interference from government shareholders in lending
decisions.
Given the continuance of the "2" SOSA ranking, no changes to BCX's supervisory strategy are
recommended at this time. (Please see the Supervisory Plan for a full discussion of BCX's
supervisory strategy.)
Financial Condition:
Capital:
Reported total and tier 1 capital ratios of 8.7 percent and 4.1 percent, respectively, are
only slightly above Basel minima.
Asset Quality:
Better than the industry average, but markedly affected by the domestic economic
downturn.
Earnings:
ROAA declined to 0.5 percent from 0.8 percent prior year, while overhead remains high.
Liquidity:
Adequate.
Structure and Governance:
BCX possesses a large retail network and conducts a complex range of banking activities.
However, the government of Country X has frequently interfered in the lending decisions of
BCX by instructing the bank to lend to government-supported industries. Not surprisingly,
BCX was chosen to remain intact in the government’s merger plan and absorb four much smaller
institutions. The new board of directors will likely retain the former BCX members.
Funding:
As the largest bank in Country X, BCX relies on an extensive branch network that provides
ample and dependable core deposit funding.
Financial System Structure:
By year-end 2000, the country’s 15 domestic financial institutions are to be merged into 4 anchor
banks. ABC, one of the surviving institutions, just completed a merger at the end of June 2000.
Page 26 of 32
Economic and Political Environment:
The Country X economy is recovering along with those of its neighbors, driven by exports. In
addition, the government was reelected for another four-year term, which provides continuity to
economic policies. There are no transfer risk concerns associated with Country X.
Banking Environment:
Government control of the banking sector is absolute, as seen by the central bank’s merger plan
for all domestic financial institutions, regardless of ownership type. On the other hand, although
the central bank has imposed a 3 percent annual loan growth target since 1998, no banks were
penalized for failing to meet this target.
Bank Supervision:
Banks are supervised by the Central Bank of Country X, which requires the approval of the
Minister of Finance for certain actions. Although a rigid supervisory structure is in place, rules
and regulations can be, and are, adjusted by the central bank, if advantageous to the country or
the banking system. In all these respects, the two agencies appear to present a united front.
Country X bank supervisors have a solid record of supporting troubled financial institutions.
Accounting Issues:
In response to the regional economic crisis, the central bank relaxed some accounting standards
for banks. Separately, bank annual reports must be approved by the central bank prior to
publication, so public information may be filtered. For additional information, see the February
1999 Country X Accounting System Review.
Page 27 of 32
Appendix V
SUMMARY OF CONDITION LETTER
TO FBO MANAGEMENT
[ADDRESSEE]
(Letter to appropriate head office management of the FBO with copies to appropriate
management in the United States responsible for the FBO’s U.S. operations.)
Dear [Name of FBO Official]:
This letter summarizes the Federal Reserve’s Assessment of the Combined U.S.
Operations of [Name of FBO ("FBO")] and also provides notification of the Strength-of-Support
Assessment ("SOSA") ranking of FBO.
ASSESSMENT OF COMBINED U.S. OPERATIONS
Scope
(Suggested Text:)
The evaluation of U.S. operations was prepared by the Federal Reserve Bank of XXX
("FRBXX"), using the most recent reports of examination and inspection of your bank's U.S.
operations, which were conducted as of (coordinated as of date), updated with available financial
information to (appropriate later date). A copy of this letter also has been sent to FBO's regional
management in (regional headquarters location).
The scope of our review included all banking and nonbanking activities of FBO in the
United States, and focused on risk management, operations, compliance, and asset quality. This
process involved reviewing reports of examination and inspection of the U.S. operations of FBO;
conducting any necessary financial and regulatory analysis; and holding discussions about the
condition of FBO's U.S. operations with other Federal regulatory agencies and Reserve Banks,
State Banking Departments, and with staff of the Board of Governors.
Overall Condition
[Indicate overall condition, referencing overall evaluations of risk management,
operations, compliance, and asset quality. Cite composite ratings of individual units if
appropriate. Identify weaknesses in critical areas (see below for individual headings). State
whether these weaknesses are considered correctable in the normal course of business, and if not,
cite specific results required to resume satisfactory operations. Conclude with qualitative
evaluation of overall operations.]
Page 28 of 32
Trading Risk Management
Credit Risk Management
Operations and Audit
Compliance
Asset Quality
Other Matters
[Discuss other matters relating to non-ROCA component ratings of insured banks or
nonbanks.]
Combined U.S. Rating
(Suggested Text:)
As noted earlier, we consider the U.S. operations to be [qualitative evaluation.]
Specifically, we have accorded a rating of [numeric rating] to FBO's combined U.S. operations.
In general, a [numeric rating] rating is assigned when… (See section V, Summary of Condition
and Assignment of a Rating for the Combined U.S. Operations, of this SR letter for the
appropriate description of the assigned 1-5 component rating.)
Combined ROCA Rating
The ROCA rating system is designed to assess the condition of FBO's branch and
agency network in the United States and to pinpoint the key areas of concern. For evaluation
purposes, the rating system divides the branch network's overall activities into three individual
components: risk management, operational controls, and compliance. These components
represent the major activities or processes that may raise supervisory concern. The rating system
also provides for a specific rating of the quality of the stock of assets as of the examination date.
The overall or composite rating indicates whether, in the aggregate, the operations of the branch
network may present supervisory concerns and the extent of these concerns. We have accorded a
rating of [numeric 5 digit rating] to FBO’s branches and agencies [and commercial lending
companies if applicable] only on a combined basis.
Corrective Actions
[Describe action taken to date to address weaknesses outlined earlier in the
assessment. Acknowledge, where appropriate, any other previous contact, i.e., meetings,
conference calls or correspondence, in which these overall findings and corrective action may
have been discussed.]
Page 29 of 32
Outstanding U.S. Supervisory Action
[For existing actions, discuss any areas of partial or noncompliance, and related
remedial action.]
STRENGTH-OF-SUPPORT ASSESSMENT
In assigning the Strength-of-Support Assessment (“SOSA”) ranking, a number of
factors are considered, including FBO’s financial condition and outlook, managerial oversight of
its U.S. operations, and factors relating to the home country banking and supervisory systems of
FBO.
The SOSA ranking, which is one element in the development of a supervisory strategy
for the U.S. operations of FBO, is based on a scale of “1” to “3”, with “1” representing the
lowest level of supervisory concern and “3” representing the highest. The assessment of FBO
resulted in the assignment of a SOSA ranking of [“1,” “2” or “3”]. [Select the appropriate
sentence corresponding to the SOSA ranking: (a) In general, an institution assigned a ranking of
“1” is a foreign banking organization whose financial profile and outlook pose a low risk that it
will be unable to support its U.S. operations. (b) In general, an institution assigned a ranking of
“2” possesses a current operating performance and immediate financial outlook that, although
not posing significant concerns about its ability to honor its U.S. liabilities, may warrant more
than normal supervisory attention. (c) In general, an institution assigned a ranking of “3”
possesses significant financial or supervisory weaknesses, and a high degree of supervisory
oversight of its U.S. operations may be warranted.] Provide a brief summary of the key points
supporting the SOSA ranking.
DISCLOSURE
(Required Text:)
Please note that the assessment and rating of FBO's U.S. operations, combined ROCA
rating, and its SOSA ranking, are parts of the overall findings of U.S. supervisory activities. The
contents of this letter are subject to the rules of the Board of Governors of the Federal Reserve
System regarding disclosure of confidential supervisory information. Under no circumstances
shall the bank or any of its directors, officers, or employees disclose or make public in any
manner this letter, the combined U.S. rating, combined ROCA rating, or the SOSA ranking. A
copy of the "The Interagency Program for Supervising the U.S. Operations of Foreign Banking
Organizations", SR letter 00-XX, is available through the Federal Reserve Board's web site.
Please direct any questions or comments to [Name of Contact] at [phone number] or [e-mail
address].
(Signed) Senior Officer for BS&R
cc:
Regional U.S. FBO management
BOG Staff
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Appendix VI
TRANSMITTAL LETTER TO THE HOME COUNTRY SUPERVISOR FOR
THE SUMMARY OF CONDITION
[HOME COUNTRY SUPERVISORY CONTACT]
[NAME OF SUPERVISORY AGENCY]
[ADDRESS]
[CITY, COUNTRY]
Dear:
The enclosed letter summarizes the Federal Reserve System’s assessment of the
combined U.S. operations, combined ROCA rating, and Strength of Support Assessment ranking
of [Name of FBO ("FBO")], and was recently sent by this Reserve Bank to FBO. This
evaluation reflects the examination findings for the entities operated by FBO, which were
examined during [year of examination, or as of examination date]. A listing of the entities
examined also is enclosed. As a result of these examinations, FBO was assigned a Combined
U.S. Operations Rating of [numerical rating]. An institution whose U.S. operations are rated a
[numerical rating] has [definition of the numerical rating]. Furthermore, a combined ROCA
rating of [numeric 5-digit rating] has been accorded to FBOs U.S. [branches, agencies and
commercial lending companies (select appropriate text)].11
Please take particular note of the following matters of supervisory significance:
[discuss briefly as necessary].
This letter also serves to notify you of the Strength-of-Support Assessment (“SOSA”) for
FBO prepared by the [name of U.S. bank supervisory agency]. In assigning a SOSA ranking, a
number of factors are considered, including FBO’s financial condition, managerial oversight of
its U.S. operations, and the condition of the banking system in which FBO operates.
The SOSA ranking is based on a scale of “1” to “3”, with “1” representing the lowest
level of supervisory concern and “3” representing the highest. The assessment of FBO resulted
in the assignment of a SOSA ranking of [“1,” “2” or “3”]. [Select the appropriate sentence
11
The ROCA rating system is designed to assess the condition of FBO's branch and agency
network in the United States and to pinpoint the key areas of concern. For evaluation purposes,
the rating system divides the branch network's overall activities into three individual
components: risk management, operational controls, and compliance. These components
represent the major activities or processes that may raise supervisory concern. The rating system
also provides for a specific rating of the quality of the stock of assets as of the examination date.
The overall or composite rating indicates whether, in the aggregate, the operations of the branch
network may present supervisory concerns and the extent of these concerns.
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corresponding to the SOSA ranking: (a) In general, an institution assigned a ranking of “1” is a
foreign banking organization whose financial profile and outlook pose a low risk that it will be
unable to support its U.S. operations. (b) In general, an institution assigned a ranking of “2”
possesses a current operating performance and immediate financial outlook that, although not
posing significant concerns about its ability to honor its U.S. liabilities, may warrant more than
normal supervisory attention. (c) In general, an institution assigned a ranking of “3” possesses
significant financial or supervisory weaknesses, and a high degree of supervisory oversight of its
U.S. operations may be warranted.] Provide a brief summary of the key points supporting the
SOSA ranking.
The Federal Reserve is providing this supervisory information to you with the
understanding that your agency will maintain its confidentiality to the extent possible under
applicable law, and that such information will be used only for lawful supervisory purposes.
We have advised FBO that the contents of the letter providing the Federal Reserve
System’s summary assessment and supervisory rating of its U.S. operations, combined ROCA
rating, as well as its SOSA ranking, are subject to the rules of the Board of Governors of the
Federal Reserve System regarding disclosure of confidential supervisory information, and that
under no circumstances should the bank disclose or make public in any manner the contents of
the attached letter.
Please direct any questions regarding this letter to [name of Reserve Bank Official, Title],
at [phone number and/or email address].
Sincerely,
Name of Reserve Bank Official]
[Title]
Enclosures
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