Academic journal article ABA Banking Journal

Washington's Favorite Four-Letter Word: Risk

Academic journal article ABA Banking Journal

Washington's Favorite Four-Letter Word: Risk

Article excerpt

Starting this month, Federal Reserve Bank safety-and-soundness examiners will be formally rating state-member banks, as well as bank holding companies, for their approach to risk management. In announcing this program last year, the Fed joined the Comptroller's Office, which previewed a somewhat different risk-management-evaluation program earlier in the year (Briefing, November 1995, p.7).

The Fed's risk-rating system will look at a bank's efforts in six areas of risk: credit, financial markets, liquidity, operational, legal, and bad publicity. Specifically, examiners will evaluate a bank's efforts in each of the six areas by four factors: board and senior management oversight; adequacy of policies, procedures, and limits; adequacy of risk measurement, monitoring, and management information systems; and quality of internal controls.

Examiners are instructed to temper their reviews to bank size and sophistication. "For smaller institutions," the memo states, "engaged solely in traditional banking activities and whose senior managers and directors are actively involved in the details of day-to-day operations, relatively basic risk-management systems may be adequate. In such institutions, these systems may consist only of written policies addressing material areas of operations . …

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