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OCC Launches Supervision by Risk' Program

WASHINGTON, D.C. — Comptroller of the Currency Eugene A. Ludwig tonight announced the Comptroller's Office is expanding, enhancing and standardizing the way examiners evaluate risk in national banks. Mr. Ludwig said the Comptroller's Office has defined specific categories of risk it will use in assessing risks in bank activities and will in the future be using these risk categories as the basis for its supervision and examination. The announcement was made in a speech by Mr. Ludwig at Georgetown University's Center for Business-Government Relations.

"After an extensive review of the OCC's bank supervision policies and procedures, we have come to the conclusion that we must fundamentally change the approach we have been using to supervise banks," Mr. Ludwig said. "Supervision by risk puts the focus squarely on what matters — evaluating the quantity of risk exposure in an institution and determining the quality of the risk management systems in place to control that risk."

"Supervision by risk" builds on OCC examiners' experience in incorporating risk assessment in bank supervision in recent years, Mr. Ludwig said. To achieve more comprehensive and efficient examinations of national banks, the OCC has defined nine categories of risk inherent in bank activities that will be evaluated by OCC examiners. These definitions enable OCC to treat the same risks consistently in all banks and across various products and activities, Mr. Ludwig said. In addition, the definitions clarify for bankers the kinds of risk OCC will be assessing in their institutions.

The nine categories of risk are:

  1. Credit risk — from a debtor's failure to meet the terms of any contract with the bank or otherwise fail to perform as agreed.
  2. Interest rate risk — from movements in interest rates.
  3. Liquidity risk — from a bank's inability to meet its obligations when they come due, without incurring unacceptable losses.
  4. Price risk — from changes in the value of portfolios of financial instruments.
  5. Foreign exchange risk — from movement of foreign exchange rates.
  6. Transaction risk — from problems with service or product delivery.
  7. Compliance risk — from violations or non-conformance with laws, rules, regulations, prescribed practices or ethical standards.
  8. Strategic risk — from adverse business decisions or improper implementation of those decisions.
  9. Reputation risk — from negative public opinion.

Risk profiles prepared for each bank will help focus examiner attention on the most serious concerns within a bank and focus OCC resources on banks where the need is greatest. For example, Mr. Ludwig said, if a bank has significant interest rate risk exposure, the OCC may include economists and analysts on an examination team to help evaluate the bank's interest rate risk models. Examiners will determine whether a bank has identified the risks associated with particular activities and has put in place the necessary systems and controls to manage that risk. Where risk is not properly managed, the OCC will work with bank management to ensure corrective action is taken so that the bank is managed in a safe and sound manner.

Mr. Ludwig said supervision by risk would help the OCC do a better job of responding to current and future risks to banks and the country's financial system. "Rather than seeing regulation as a ball and chain weighing them down, or supervision as a shackle holding them back," he said, "I want the industry to view OCC examiners as adding value to their business without imposing needless burden.

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