2017 Annual Report
I. Management’s Discussion and Analysis
The Year in Review
The goal of supervision policy is to provide clear, consistent, meaningful, and timely guidance to financial institutions.
Interest-Rate Risk, Credit Risk, and Liquidity Risk
As the post-crisis economic expansion has progressed, there has been a resumption of loan growth in the banking industry. Institutions with concentrated portfolios are experiencing more rapid loan growth than the rest of the industry. At some banks, loan growth has been accompanied by a reduction in holdings of liquid assets and increased reliance on funding sources other than stable core deposits. These trends have the potential to give rise to heightened credit risk and liquidity risk. In addition, an extended period of historically low interest rates and tightening net interest margins has created incentives for IDIs to reach for yield in their lending and investment portfolios by extending portfolio durations, potentially increasing their vulnerability to interest-rate risk.
Through regular on-site examinations and interim contacts with state nonmember institutions, FDIC staff regularly engages in dialogue with banks to ensure that their policies to manage credit risk, liquidity risk, and interest-rate risk are effective. Where appropriate, FDIC staff works with institutions that have significant exposure to these risks and encourages them to take appropriate risk-mitigating steps. The FDIC uses off-site monitoring to help identify institutions that are potentially more exposed to these risks and follows up with individual institutions to better understand their risk profiles.
Outreach and technical assistance efforts on these risk issues during 2017 included articles in the FDIC’s Supervisory Insights publication on credit risk trends and on the management of liquidity risk. The FDIC joined with the other federal banking agencies to host an interagency teleconference on November 6, 2017, with banks from around the country, regarding the management of liquidity risk. Additionally, FDIC examiners now devote additional attention during the examination process to assessing how well banks are managing the risks associated with concentrated credit exposures and concentrated funding sources. The findings of these assessments are shared with bank management in the report of examination.
Other Guidance Issued
Model Risk Management
In June 2017, the FDIC adopted the Supervisory Guidance on Model Risk Management (MRM) previously issued by the FRB and OCC. In recent years, many FDIC-supervised institutions have increased their reliance on models. The FDIC adopted the MRM guidance to facilitate consistent understanding of model risk management principles across the banking agencies and industry. The MRM guidance indicates that an effective model risk management framework may include: disciplined and knowledgeable model development that is well documented and conceptually sound; controls and processes to ensure proper implementation and appropriate use; effective validation processes; and strong governance, policies, and controls. The FDIC does not expect that the MRM guidance will pertain to FDIC-supervised institutions with total assets under $1 billion unless the institution’s model use is significant, complex, or poses elevated risk to the institution.
Responses to Major Hurricanes
The FDIC took a number of steps to address the aftermath of hurricanes Harvey, Irma, and Maria, and their effects on banking services by issuing a series of press releases and FILs, waiving certain regulatory requirements, and releasing interagency supervisory guidance.
- Federal and State Banking Agencies Issue Statement on Supervisory Practices Regarding Financial Institutions and Borrowers Affected by Hurricane Harvey (PR-64-2017);
- Meeting the Financial Needs of Customers Affected by Hurricane Harvey and its Aftermath (FIL-38-2017);
- Federal and State Banking Agencies Issue Statement on Supervisory Practices Regarding Financial Institutions and Borrowers Affected by Hurricane Irma (PR-69-2017);
- Meeting the Financial Needs of Customers Affected by Hurricane Irma and its Aftermath (FIL-43-2017); and
- Guidance to Help Financial Institutions and Facilitate Recovery in Areas Affected by Hurricane Maria (FIL-46-2017).
Temporary Exceptions to Appraisal Requirements
On October 24, 2017, the FDIC, together with the FRB, OCC and NCUA, published an order in the Federal Register pursuant to their authority under Section 1123 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) to make exceptions to FIRREA’s appraisal requirements for transactions involving real property located in a disaster area. The order exempts institutions from the appraisal requirements under FIRREA and its implementing regulations for any real estate-related financial transaction requiring the services of an appraiser, provided that: (1) the transaction involves real property located in an area of a state or territory that has been declared a major disaster by the President as a result of severe storms and flooding related to Hurricanes Harvey, Irma, or Maria; (2) there is a binding commitment to fund a transaction that was entered into on or after the date of each such declaration; and (3) the value of the real property supports the institution’s decision to enter into the transaction. A financial institution that relies on the order should maintain sufficient information in the loan file estimating the collateral’s value to support the institution’s credit decision.
The FDIC will monitor institutions that rely on the order to ensure real estate-related transactions are being originated in a manner consistent with safe and sound banking practices. The order expires three years after the date each state or territory was declared a major disaster.
Interagency Supervisory Examiner Guidance for Institutions Affected by a Major Disaster
The FDIC, in conjunction with the FRB, OCC, and NCUA, published supervisory examiner guidance for institutions affected by a disaster that results in a Presidential declaration of a major disaster, as defined by the Stafford Act. The guidance describes examination procedures for institutions directly affected by a major disaster, including institutions that may be located outside the area declared a major disaster, but have loans or investments to individuals or entities located in the area declared a major disaster.
The guidance describes expectations that examiners should have regarding how management at affected institutions conduct initial risk assessments and refine such assessments as more complete information becomes available and recovery efforts proceed. Examiners should consider the extent to which weaknesses in an institution’s financial condition are caused by external problems related to the major disaster and its aftermath.
During 2017, the FDIC also issued seven FILs providing guidance to help financial institutions, and to facilitate recovery in areas affected by tornadoes, flooding, straight-line winds, landslides, mudslides, and other disasters.
Risk Management Manual of Examination Policies
On July 26, 2017, the FDIC issued FIL-31-2017 to inform the industry that the FDIC Risk Management Manual of Examination Policies (Examination Manual) was updated to incorporate guidance from the FDIC Board to examiners regarding supervisory recommendations, including matters requiring board attention (MRBA). The updated Examination Manual is available on the FDIC’s website.