Regulatory 101 Elizabeth Hammond and Patrick Brennan NC Office of the Commissioner of Banks August 1, 2019

Objectives Understand the function of the dual banking system Understand the Office of the Commissioner of Banks’ supervision process

Dual Banking System In the U.S., banking is regulated by both the Federal and State governments New banks (De Novos) choose either a National or a State charter Nationally chartered banks are regulated by Office of the Comptroller of the Currency NC State charters are regulated by NC Commissioner of Banks Banks can also flip charters

Primary Federal Regulators All commercial banks must have a primary Federal regulator : For all national banks: the Office of the Comptroller of the Currency For State banks that are members of the Federal Reserve System: the Federal Reserve Bank For State “non-member” banks: Federal Deposit Insurance Corporation

Why are Banks so heavily regulated? Banks must have the public’s confidence in order for the financial system to operate efficiently Banks must be financially healthy to perform their role in the economy Banks are a conduit for the FRB’s monetary policy Banks accept FDIC-insured customer deposits

Federal Deposit Insurance Corporation Created in 1933 Since 1989, all commercial banks that accept deposits are required to have FDIC insurance Dodd-Frank Act permanently raised the insured amount to $250,000 per depositor, for each account and ownership category No depositor has ever lost a penny of FDIC-insured deposits In addition to ensuring all deposits for banks, the FDIC is the primary Federal regulator for State non-members

OCOB Supervisory Program 1. Continuous off-site analysis and monitoring 2. Risk-focused examinations and visitations Off-site On-site 3. Issuance of Report of Examination with ratings

Off-site Examination Tools Call Reports Uniform Bank Performance Report (UBPR) Reported quarterly N.C. Self-Evaluation Program (SEP) Early Warning Watch List Reported monthly SEC filings Pre-examination package Correspondence (Bank and Regulatory)

Types of Regulatory Exams Safety and Soundness (Commercial) Information Technology Trust Compliance/CRA

Risk-focused Examination Focuses examiner resources on validating and verifying bank management’s ability to: Identify risk Measure risk Aggregate risk Monitor risk Control risk

Frequency of Examinations Once every 12 months or May be extended to 18 months if: Total assets are less than $250 Million The institution is well-capitalized Composite rating of “1” or “2” on most recent examination Smaller banks examined alternately by the FDIC/FRB or State Larger banks have joint Federal and State exams

On-site Examination Team Examiner-in-Charge (EIC) Operations Manager (OM) Asset Manager (AM) Team Members

Basic Areas of Examination Review Credit Review Operations Review Bank Secrecy Act /Anti-Money Laundering (BSA/AML) Compliance Review Information Technology Review

Scope of the Credit Review Largest Commercial Credits Insider Debt (Reg O) Watch list, Past Dues, and Nonaccruals Previously criticized and adversely classified loans: Special Mention Substandard Doubtful Loss Random Sampling

Scope of Loan Review (cont.) Allowance for Loan and Lease Losses Appropriate Methodology Credit Administration Other Real Estate Owned Other Assets (repossessions)

Operations Analysis of Capital Earnings Liquidity Sensitivity to Market Risk Evaluation of Investment Portfolio Internal Routines and Controls Audit (Internal and External) Everything that is not credit portfolio quality

CAMELS Rating System A tool for regulators to use for evaluating the soundness of financial institutions on a uniform basis and identifying those institutions which require special attention. Also used in determining allocation of examiner resources.

CAMELS Rating System CAMELS represents 6 components of bank operations: Capital Adequacy Asset Quality Management Capability Earnings - Quality and Level Liquidity Sensitivity to Market Risk

CAMELS Rating System Evaluations and ratings consider many factors, including size and sophistication of bank, nature and complexity of activities, and risk profile. Composite rating based on an evaluation and rating of the six components. It usually bears a close relationship to the components, but is not a mathematical average of them.

1 - strong performance and lowest degree of supervisory concern CAMELS Rating System Ratings range from 1 to 5: 1 - strong performance and lowest degree of supervisory concern 5 - weakest performance, which indicates inadequate risk management practices and highest degree of supervisory concern

CAMELS Rating System Ratings, as well as the Report of Examination, are confidential and should not be shared with the public, business associates, or shareholders.

BSA/AML Procedures Risk Assessment System of Internal Controls SARs CTRs OFAC BSA Compliance Officer BSA/AML Compliance Program (includes CIP program) Independent Testing Training Program

Questions?