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F INANCIAL S ERVICES V OLUNTEER C ORPS

F INANCIAL S ERVICES V OLUNTEER C ORPS. Developing Examiner Guidelines for Evaluating Commercial Bank Internal Control ( Credit Risk Management ) Banque d’Algerie (BdA) June 14-18, 2009 Presented by: Robert Lyon, Retired Credit Risk Officer FRB. Credit Risk Management.

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F INANCIAL S ERVICES V OLUNTEER C ORPS

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  1. FINANCIALSERVICESVOLUNTEERCORPS Developing Examiner Guidelines for Evaluating Commercial Bank Internal Control (Credit Risk Management) Banque d’Algerie (BdA) June 14-18, 2009 Presented by: Robert Lyon, Retired Credit Risk Officer FRB

  2. Credit Risk Management • Do Loans Comply with the Loan Policy? - Approval process - Collateral valuation - Loan limits - Loan concentrations Industry Geographic Loan types

  3. Lending Controls • Lending Process • Key Information

  4. Lending Process • Request • Presentation • Approval • Documentation • Funding • Review • Monitoring

  5. Key Information • Amount • Purpose • Yield • Term • Collateral • Agreement / Documentation • Repayment schedule

  6. Sampling of Loan files • Purpose • Disposition of proceeds • Repayment schedule • Financial statements • Memoranda of discussions with borrower

  7. Problem Loans • Definition – past due or restructured • Action plan for remediation • Loan loss reserve allocation • Identification and Migration analysis • What did management learn?

  8. Does the Board Know • Total credit exposure • Lending activities • New credit extensions • Overdrafts • Past due loans • Watch list loans • Insider loans • Anticipated charge-offs

  9. Internal Loan Review • Internal Loan review thoughts • Loan Review / Rating Objectives • Characteristics of Loan Review Program • Risk Rating / Credit Grading Systems • Personnel involved Risk Rating System • Risk Rating Elements

  10. Loan Review – Loan Rating Objectives • Consistent application • Are weak loans promptly identified? • What are the trends? • Are internal Credit policies followed? • Provide management with accurate information • Financial and regulatory reporting • Adequacy of loan loss reserve

  11. Characteristics of Loan Review • Responsibilities defined • Explicit description and definitions • Capacity for judgment • Freedom to communicate • Performed by skilled personnel

  12. Credit Grading Systems • Problem Loans – quarterly • Large exposures – quarterly • Sampling size • Performed by • Loan Officer • Independent credit review specialist

  13. Credit Grading Systems (continued) • Assessment independent of the lending function preferred • If loan officer used for grading, review by: • Peers, superiors, or loan committee • Independent department • External third party consultant

  14. Risk Rating Elements • Scope of reviews • Depth of reviews • Review of findings • Follow-up – correction action • Report Distribution

  15. Loans to Directors, Officers, Employees, and Shareholders • Can be the best loans • Can be the worst loans • Best Practices • No preferential treatment • Same terms as other borrowers • Annual reporting to the Board and Supervisor

  16. Fraud by Insiders • Also called White collar crime • Results from weak internal controls • Dominant insider misuses position • Fails to disclose interests • Diverts bank assets and income • Accepts bribes and gratuities

  17. Controlling Abuse • Regular internal/external audits • Review of all insider transactions • Follow-up on exceptions • Pre-screening of new officers and directors • Follow the money

  18. Examiner Conflict of Interests • Purpose – ensure integrity and objectivity • Restrictions • No gifts or gratuities from any bank • Reporting of indebtedness • For EIC, 18 month window for employment • May not participate in an examination where • A family member employed • A loan from • Previous employment held • Other

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