New Fed Guidelines Rate Banks' Risk Management

Article excerpt

Edward W. Kelly Jr., a member of the board of governors of the Federal Reserve System, announced new Federal Reserve guidelines that instruct bank examiners to give a rating for risk management, including internal controls, that will weigh heavily in the overall evaluation of a bank's management. The risk management grades, which went into effect January 2, 1996, will be included in the management's portion of a bank's CAMEL rating, which measures capital, assets, management, earnings and liquidity.

Kelly told members attending the American Institute of CPAs national banking conference in Washington, D.C., that recent changes in the banking industry, such as increased competition, regulatory reforms and better computer and telecommunications technology, have increased risks significantly.

Kelly said these changes also have increased the tension between operating at maximum efficiency and enhancing the effectiveness of internal controls. "Estimating the cost of an internal control is easy," said Kelly. "Calculating its benefits--avoiding a financial loss or a blow to the corporation's reputation--is not." Kelly said he was particularly distressed that Barings and Daiwa collapsed recently because of breakdowns in the most basic principle of internal control, the segregation of incompatible duties.

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Accounting, auditing and disclosure play a crucial role in the financial marketplace, said Kelly. He said that since regulatory reports were based largely on generally accepted accounting principles, accounting and disclosure standards had an important impact on the information available for examination and other supervisory purposes. …