Magazine article American Banker

OCC Says 4 Areas Need Work in Managing Derivatives Risk

Magazine article American Banker

OCC Says 4 Areas Need Work in Managing Derivatives Risk

Article excerpt

After studying the way national banks manage risks stemming from derivatives transactions, the Comptroller's Office has found four areas that need improvement.

National banks involved in derivatives should expand their understanding of the instruments, enhance independent oversight, bolster computer systems tracking these transactions, and pinpoint risks cropping up in emerging markets, said an executive in the Office of the Comptroller of the Currency.

Michael Brosnan, the OCC's acting senior deputy comptroller for capital markets, prescribed those remedies in a recent interview.

"While we have substantive compliance ... there are certain issues that we and banks need to focus on," Mr. Brosnan said. "We need to point out to banks the areas that need work."

The agency surveyed examiners this summer to find out how faithfully national banks are observing Banking Circular 277 - the October 1993 policy statement laying out how risks involved in derivatives transactions should be managed.

The OCC's biggest concern, according to Mr. Brosnan, is that some national banks - especially smaller institutions - are getting involved without fully understanding the risks.

"We have found that certain end-user banks were using these things without understanding what they were doing," he said. "At smaller banks, you obviously have less people, so there is more struggling in terms of understanding derivatives."

Ann Grochala, director of bank operations at the Independent Bankers Association of America, agreed that small-bank officials do not always fully understand how the value of a derivative can fluctuate.

"Often, community bankers have the opportunity to purchase an investment with an initial rate that looks very good," Ms. Grochala said, "but they don't fully understand what indexes may cause the rate to change in the future. …

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