Highlights:
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A financial institution's relationship with a correspondent may result in credit (asset) and funding (liability) concentrations. On the asset side, a credit concentration represents a significant volume of credit exposure that a financial institution has advanced or committed to a correspondent. On the liability side, a funding concentration exists when an institution depends on one or a few correspondents for a disproportionate share of its total funding.
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While the agencies recognize some concentrations meet certain business needs or purposes, correspondent concentrations represent a lack of diversification, which adds a dimension of risk that management should consider when formulating strategic plans and internal risk limits.
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Institutions should implement procedures for identifying correspondent concentrations, which encompass their aggregate credit and funding concentrations to each correspondent on both a stand-alone basis and on an organization-wide basis.
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Institutions should specify prudent internal parameters relative to what information, ratios or trends will be monitored for each correspondent on an ongoing basis.
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Institutions should develop plans for managing concentration risks when internal limits, ranges or tolerances are met or exceeded, either individually or collectively.
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Institutions that maintain or contemplate entering into any credit or funding transactions with another financial institution should ensure the terms for these transactions are on an arm's-length basis; conform to sound investment, lending and funding practices; and avoid potential conflicts of interest.
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This guidance supplements existing guidance.
Distribution:
FDIC-Supervised Banks (Commercial and Savings)
Suggested Routing:
Chief Executive Officer
Chief Lending Officer
Chief Financial Officer
Related Topics:
Advisory on Interest Rate Risk Management, FIL-2-2010
Interagency Policy Statement on Funding and Liquidity Risk Management
Attachment:
Correspondent Concentration Risks - PDF (PDF Help)
Illustrations - Excel (Excel Help)
Contact:
Beverlea S. Gardner, Senior Examination Specialist, at BGardner@FDIC.gov or (202) 898 3640
Printable Format:
FIL-18-2010 - PDF (PDF Help)
Note:
FDIC financial institution letters (FILs) may be accessed from the FDIC's Web site at www.fdic.gov/news/news/financial/2010/index.html.
To receive FILs electronically, please visit http://www.fdic.gov/about/subscriptions/fil.html.
Paper copies of FDIC financial institution letters may be obtained through the FDIC's Public Information Center, 3501 Fairfax Drive, E-1002, Arlington, VA 22226 (1-877-275-3342 or 703-562-2200).
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