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Appeals of Material Supervisory Determinations: Guidelines & Decisions
SARC-2000-03 (December 15, 2000)
Your appeal of material supervisory determinations set forth in the May 8, 2000, joint safety and soundness examination was denied by the Supervision Appeals Review Committee (“Committee”) of the Federal Deposit Insurance Corporation (“FDIC”) on December 12, 2000.
The State of California Department of Financial Institutions (“State”) Commissioner Donald R. Myer was provided a copy of your letter of appeal; Assistant Deputy Commissioner Debie M. Abella has responded that the State concurs with the ratings and overall findings of the Report of Examination (“Report”).
The Committee has given careful consideration to the issues raised in your letter. After review, the Committee has concluded that the Management rating of “3,” the Liquidity rating of “3,” the Sensitivity to Market Risk rating of “3,” and the Composite rating of “3” are appropriate as reflected in the Report.
Although the Committee recognizes the generally satisfactory financial indicators and some improvement in management at [Bank] (“Bank”) since the previous examination, material deficiencies remain that the warrant the CAMELS component and composite ratings assigned. The Committee urges you to take steps to correct the deficiencies noted in the Report.
Several management weaknesses were noted in the Report, including the following (repeat criticisms from past examinations are in bold):
The Committee acknowledges some improvement in management, most notably the addition of outside directors to the board and its committees and the implementation of some recommendations from the prior examination. This improvement is reflected in the upgrade of the Bank’s management rating from a “4” at the last examination to a “3” at this examination. However, several risk management deficiencies persist and must be corrected. Board oversight is still considered less than satisfactory, and management has failed to establish a proper control environment. The Committee is concerned that similar criticisms were noted at previous examinations. This demonstrates a lack of regard for regulatory recommendations and prudent banking practices. Of particular concern at this examination are deficiencies in the management of liquidity and interest rate risk, inadequate internal routines and controls, and inadequate segregation of duties. These weaknesses warrant a component rating of “3” for Management and require your immediate attention.
Continued weaknesses in the Bank’s liquidity position are demonstrated by the continued non-core funding dependence and decreasing federal funds sold. However, perhaps more importantly, management’s liquidity and funds management practices need improvement. Management has failed to address issues from the prior examinations, such as short-term securities minimums, establishment of contingent liquidity lines, monitoring of volatility in large deposit accounts, and pre-purchase analysis/ongoing rate shocking monitoring for “non-standard or complex securities.” Policies and procedures for these items have been established by the board but not followed. Given these risk management weaknesses and deterioration in the Bank’s liquidity position, the Liquidity component warrants a “3” rating.
Sensitivity to Market Risk Rating
There are significant weaknesses in the Bank’s asset/liability and interest rate risk management practices, many of which are repeat criticisms. Although the Bank’s interest rate risk position is currently satisfactory, the Uniform Financial Institutions Rating System gives considerable weight to the overall quality, or lack thereof, of bank management’s practices in the sensitivity to market risk component rating. Management has failed to establish an appropriate risk management system to measure, monitor, and control interest rate risk. Several criticisms and recommendations in the Report remain unresolved from prior examinations, including the following:
The “3” rating definition for sensitivity to market risk focuses on two areas: the potential that a bank’s level of market risk may impact earnings or capital; or whether risk management practices need improvement. The Report documents significant risk management weaknesses that warrant a “3” rating for the Sensitivity to Market Risk component.
Deficiencies cited in the Report revolve around less than satisfactory risk management practices in investment, liquidity, asset/liability management, and IRR areas; internal loan grading; strategic planning; internal audit programs; internal routines and controls; staff retention and segregation of duties; expense reimbursement documentation; and adherence to applicable laws or regulations. Many of the criticisms contained in the Report are repeat criticisms from one or more examinations, indicating indifference for regulatory recommendations and prudent banking practices. Given the foregoing, the Report findings comport with the definition of a composite “3.”
This determination is considered the Federal Deposit Insurance Corporation’s final supervisory decision.
By direction of the Supervision Appeals Review Committee of the Federal Deposit Insurance Corporation.
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