By Elva Coffey-Sears
On June 8, 2016 the Federal Reserve issued an update to its Supervisory Guidance for assessing risk management at institutions with less than $50 billion in assets. The guidance (SR 16-11) re-affirms the Federal Reserve Boards’s “long-standing supervisory approach that emphasizes the importance of prudent risk management” but includes updates to core risk management principles, as well as extending applicability to savings and loan holding companies and U.S. operations of foreign banking organizations (FBO) within the stated asset-size category. While this guidance supersedes the prior guidance (SR 95-51) for institutions with less than $50 billion in assets, the prior guidance continues to apply to institutions with $50 billion or more in assets until superseding guidance is issued.
The new guidance retains the credit, market, liquidity, operational and legal risk categories defined in the 1995 guidance. Reputational risk has been removed, and compliance risk added. Compliance risk is defined as “the risk of regulatory sanctions, fines, penalties or losses resulting from failure to comply with laws, rules, regulations, or other supervisory requirements applicable to a financial institution.”
The expectation that an institution’s risk management processes are commensurate with the size and complexity of the institution remain unchanged. However, the new guidance specifically discusses applicability to smaller organizations. For a small community banking organization (CBO) with management actively involved in day-to-day operations, a basic risk management system comprised of internal controls, information systems, and internal audit in accordance with the Interagency Guidelines for Establishing Standards for Safety and Soundness may be appropriate. Risk management processes for a regional banking organization (RBO) should typically contain more detailed guidelines and defined limits, as well as enhanced information reporting systems. For U.S. operations of FBOs, the standards applied to similarly situated domestic organizations will be applied, but with an added focus on the efficacy and transparency of management.
The four elements of risk management are maintained, but are updated to provide examiners with considerations more relevant to smaller organizations, and to caution examiners that the considerations are guidelines to assist in evaluating risk management processes rather than a checklist of requirements applicable to all small institutions.
We encourage you to review the guidance (link below) and to re-evaluate your risk management system in terms of the revised examination approach.
https://www.federalreserve.gov/bankinforeg/srletters/sr1611.pdf
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