©2000 Bank for International Settlements 1 F I N A N C I A L S T A B I L I T Y I N S T I T U T E BANK FOR INTERNATIONAL SETTLEMENTS On-site Examination Process and Products FSI – CBSWCA Khartoum, Sudan 8 – 12 April 2002 Jason George – Financial Stability Institute

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 2 Supervisory Products Institutional Overview Risk Matrix Risk Assessment Supervisory Plan Examination Program Scope Memorandum Entry Letter Examination Report

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 3 Institutional Overview Should provide an executive summary of the institution’s present condition and its current and prospective risk profiles as well as key issues and past supervisory findings.

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 4 Institutional Overview Description of the organizational structure Summary of the bank’s business strategies, business lines, product mix, marketing emphasis, growth areas, and new products Key issues, such as competition or poor performance lines Overview of management

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 5 Institutional Overview Analysis of financial condition and trends Description of future prospects Description of internal and external audits Summary of supervisory activity performed since the last examination

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 6 Risk Matrix

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 7 Risk Matrix A risk matrix is used to identify significant activities, the type and level of inherent risks in these activities, and the adequacy of risk management over these activities, as well as to determine composite risk assessments for each of these activities and the bank.

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 8 Risk Assessment Should serve as a supervisory planning tool to be communicated with other supervisors. Format and content should be flexible and tailored to the individual bank.

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 9 Risk Assessment Risk Assessment should include: –Overall assessment of the bank –Description of the type and direction of risks –Identification of major business lines –Likelihood of an adverse event and the potential impact on the bank –Description of the bank’s risk management systems

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 10 Supervisory Plan

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 11 Supervisory Plan The supervisory plan represents a bridge between the institution’s risk assessment, which identifies significant risks and supervisory concerns, and the supervisory activities to be conducted.

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 12 Supervisory Plan The Supervisory plan should address: –Supervisory activities to be conducted, the scope of those activities, and specific concerns Prioritizing supervisory resources on areas of higher risk Staffing resources Reliance on internal or external audit

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 13 Examination Program

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 14 Examination Program The examination program should provide a comprehensive schedule of examination activities for the entire bank.

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 15 Examination Program The examination program incorporates: A schedule of activities Duration of time Resource estimates Planned product for communicating findings Need for special examiner skills

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 16 Scope Memorandum

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 17 Scope Memorandum The scope memorandum identifies the key objectives on the on-site examination. The focus is on the review of the bank’s internal risk management systems and an appropriate level of transaction testing.

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 18 Scope Memorandum Items to be included in the scope memorandum –Statement of the objectives –Overview of risks to be evaluated –Level of reliance on audit –Description of procedures to be performed

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 19 Entry Letter Letter to the institution requesting information. Completed subsequent to the scope memo. Considers the risk-focused supervision objectives and scope. Facilitates efficiency of the examination. Allows sufficient lead time for mgmt.

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 20 On-Site Examination

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 21 On-site Examination Examiners guided by previous steps. Focus on areas of highest risk. Emphasize review of systems, controls and internal audit procedures. Focus on high risk loans.

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 22 Traditional Process Point-in-time Surprise entry Same scope –look at everything Focus on financials

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 23 Evolution of Examination Process Continuous supervision Target examinations Review processes and internal controls

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 24 Risk-Focused Process Community Bank Supervision Large Complex Bank Supervision

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 25 Community Bank Supervision Generally smaller in asset size Involved in noncomplex operations Stable risk profile

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 26 Large Complex Banks Larger sized banks Involved in complex activities Rapidly changing risk profile Difficult to analyze at one point in time

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 27 Risk-Focused Supervision Framework Designation of a central point of contact Review of functional activities Focus on risk management processes Tailoring of supervisory activities Emphasis on ongoing supervision

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 28 Examination Timeline Off-Site PlanningRisk Assessment Scope On/Off-Site Review Analysis Validations Discussions Off-Site Follow up Monitor

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 29 Examination Timeline Off-Site PlanningRisk Assessment Scope On/Off-Site Review Analysis Validations Discussions Off-Site Follow up Monitor

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 30 Off-Site Planning Direct off-site and on-site work Review in-house information Request information from institution Discuss with management

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 31 Process Understand the bank and its associated risks

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 32 Agency Information Prior Examinations Correspondence Surveillance Data

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 33 Institution Provided Information Strategic Plans Budgets Annual Reports Auditors Reports and Management Letters Press Releases Management Reports/Board Packages

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 34 Communication with Management Internal Influences –Functional changes –Operational changes External Influences –Economy –Competition

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 35 Examination Timeline Off-Site PlanningRisk Assessment Scope On/Off-Site Review Analysis Validations Discussions Off-Site Follow up Monitor

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 36 Risk Management System Identify Quantify Monitor Control

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 37 Risk Management System Control Environment Risk Assessment Control Activities Information and Communication Monitoring

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 38 Risk Management System Control Environment - Senior management’s ability to establish a “tone from the top” regarding acceptable business practices.

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 39 Risk Management System Risk Assessment -- Consider external and internal factors that could impact achievement of the bank’s objectives and provide for managing changing conditions

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 40 Risk Management System Control Activities -- Encompasses a wide range of policies and implementation procedures that ensure that management’s directions are effected.

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 41 Risk Management System Information and Communication -- Includes identifying, capturing, processing, and reporting information by systems.

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 42 Risk Management System Monitoring -- Ensure appropriate procedures are in place to periodically evaluate the effectiveness of internal controls, to report deficiencies and modify procedures.

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 43 Reliance on Audit

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 44 Examination Timeline Off-Site PlanningRisk Assessment Scope On/Off-Site Review Analysis Validations Discussions Off-Site Follow up Monitor

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 45 Target Areas & Procedures Likely to Require Greater Depth Need for transaction testing

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 46 Examination Timeline Off-Site PlanningRisk Assessment Scope On/Off-Site Review Analysis Validations Discussions Off-Site Follow up Monitor

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 47 On-Site Review Review transactions/processes Evaluate models Observe Discuss Finalize financial analysis Finalize analysis of risk management

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 48 Examination Timeline Off-Site PlanningRisk Assessment Scope On/Off-Site Review Analysis Validations Discussions Off-Site Follow up Monitor

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 49 Questions

1 BANK FOR INTERNATIONAL SETTLEMENTS ©2001 Bank for International Settlements F I N A N C I A L S T A B I L I T Y I N S T I T U T E 50 Financial Stability Institute Jason George (41 61)