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

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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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)

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

10. 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

11. 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

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

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

14. 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

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

16. 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

17. 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.

18. 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

19. 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.

20. 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

21. 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.

22. 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

23. Questions?