Risk-focused
Examination Process
Bank Analysis and Examination School
Objectives for Risk-focused
Examinations
 Understand importance of the process
 Develop an understanding of the process
 Understand the planning process for each
financial institution
What are Risk-focused
Examinations?
 Examinations that emphasize the greatest
risk in an organization and then assess
the institution’s risk management systems
to identify, measure, monitor and control
the risk.
Risk-focused Examination
Objectives
 Ensure effective supervision
 Provide maximum flexibility
 Provide ongoing supervision
 Facilitate the efficient use of resources
Risk-focused Examination
Objectives (Continued)
 Sharpen supervisory focus on:
 areas which pose the greatest risk to safety
and soundness, and
 assessment of management processes to
identify, measure, monitor, and control risk
Risk-focused Examination
Process
 Understand the Institution
 Assess the Institution’s risk
 Plan & schedule supervisory
activity
 Define examination activity
 Perform examination
procedures
 Report the findings
Risk-focused Framework
 Degree of riskfocused
documentation and
exam procedures
depend on complexity
of institution.
 Large complex
institutions
 Community bank
Source: SR97-24 Risk-focus Framework for Large Complex Institutions
SR97-25 Risk-focus Framework for Community Banks
Large Complex Institutions
 Generally functional management
structure,
 Broad array of products, services, and
activities
 Operations that can span multiple
supervisory jurisdictions,
 Consolidated assets of $1 billion or
more,
 U.S. Bank holding companies, state
member banks, branches and agencies
of FBOs.
Source: SR 96-24
Risk-focus Framework for Large Complex Institutions
Risk-focused Exam ProductsLarge Complex Institutions
 Steps:
 Understanding the
institution
 Assessing the
institution’s risk
 Plan & schedule
supervisory activity
 Defining examination
activities
 Perform examination
procedures
 Reporting the findings
 Products:
 Institutional
Overview
 Risk Matrix and Risk
Assessment
 Supervisory Plan
and Exam Program
 Scope Memorandum
and Entry Letter
 Functional Exam
Modules
 Examination Report
Risk-focused Exam ProductsCommunity Banks
 Steps:
 Products:
 Understanding the
institution
 Assessing the institution’s
risk
 Plan & schedule
supervisory activity
 Defining examination
activities
 Perform examination
procedures
 Reporting the findings





No relevant product
Scope Memorandum
Scope Memorandum
Scope Memorandum
Elvis Examination
Modules
 Examination Report
Understanding the Institution
 Sources of Information




Federal Reserve
Other supervisors
Institution
Public organizations
 Preparation of the Institutional
Overview or Scope
Memorandum
Assessing the Institution’s
Risk
 Approach differs depending on type of
institution
 Products:
 Large: Risk Matrix & Risk Assessment
 Community: Scope Memorandum
 Performed by:
 Large: CPC on an ongoing basis
 Community: EIC prior to examination
Assessing the Institution’s
Risk
 Assessment of the overall risk
environment
 Management’s risk appetite
 Internal risk management
 Adequacy of information technology
systems
 Risk and business activities
Assessing Risk in Large
Complex Institutions
 Preparation of the Risk Matrix
 Identify significant activities
 Determine type and level of inherent risk of
significant activities
 Assess adequacy of risk management for
significant activities
 Determine composite risk of significant
activities
Assessing the Institution’s
Risk
Inherent Risk
Composite Risk
Risk Management Systems
Assessing the Large Complex
Institutions’ Risk
Reputation
Legal
Operaitoal
Liquidity
Market
Inherent Risk
Credit
Functional Volume
Activities
or
Relative
Weight
Risk
Comp
Mgmt
System
Lending
60%
Mod/Low/Low/Mod/Mod/Low Accep
Mod
Treasury &
Invest
20%
Low/Mod/Low/Low/Low/Low Accep
Low
New Technology
High
Overall Composite Risk:
/Low/
/Mod/Mod/Mod Accep
Mod
Mod
Assessing the Institution’s
Risk
 Preparation of Risk Assessment based on
results of Risk Matrix
Plan and Schedule Supervisory
Activity
 Large: Supervisory Plan
 Supervisory activities to be conducted
 Logistics
 Testing and reliance on risk management systems
 Community: Scope Memorandum
 Summarize audit and internal control environment
 Summarize examination procedures
 Summarize loan review
Plan and Schedule Supervisory
Activity
 Large: Exam Program
 Schedule of activity
 Agencies participating in the supervisory activity
 Planned product
 Specialty examiner skills
 Community: Scope Memorandum
 Summary of exam procedures
 Job staffing
Defining Examination
Activities
 Scope Memorandum
 Large Complex:
 Statement of objective
 Overview of activities and risk
 Internal risk management systems
 Internal/external audit findings
 Planned procedures and sampling processes
 Off-site work
 Describe use of target exam findings
Defining Examination
Activities
 Scope Memorandum
 Community Bank:
 Objectives of on-site exam
 Preliminary Risk Assessment
 Summary of pre-examination meeting
 Summary of audit & internal control environment
 Summary of examination procedures (ED)
 Summary of loan review
 Job staffing
Defining Examination
Activities
 Entry Letter
 Reflect risk-focused supervision objectives
 Effective use is highly dependent upon the
planning and scoping processes
Performing Examination
Procedures
 Large Complex Bank
 10 functional areas
 Community Bank
 ED Modules
 Jointly developed by FRB and FDIC
 7 primary modules
 6 supplemental modules
 Loan portfolio management module
Risk-focused Examination
Process
Let’s review….
 Step 1
 Understanding the
institution
 Product
 Community: None
 Large: Inst. Overview
 Prepared by CPC
Risk-focused Examination
Process
Let’s review….
 Step 2
 Assess the risk
 Product
 Community: Scope
Memorandum
 Prepared by EIC
 Large: Risk Matrix &
Assessment
 Prepared by CPC
Risk-focused Examination
Process
Let’s review….
 Step 3
 Plan & schedule
supervisory activity
 Product
 Community: Scope
Memorandum
 Prepared by EIC
 Large: Supervisory
Plan and Exam
Program
 Prepared by CPC
Risk-focused Examination
Process
Let’s review….
 Step 4
 Defining
examination
activities
 Product
 Community: Scope
Memorandum
 Prepared by EIC
 Large: Scope
Memorandum
 Prepared by EIC
Risk-focused Examination
Process
Let’s review….
 Step 5
 Perform examination
procedures
 Product
 Community: ED
Exam Modules
 Prepared by
examiners
 Large: Functional
Exam Modules
 Prepared by
examiners
Risk-focused Examination
Process
Let’s review….
 Step 6
 Reporting the
findings
 Product
 Community:
Examination Report
 Prepared by EIC
 Large:
Examination Report
 Prepared by EIC
Can you keep them straight?
 Risk-focused exam process
 Risk assessment
 Risk management rating