- Hi, I'm Jim LaPierre,
Regional Director for the FDIC's
Kansas City Region.
We hope the preceding modules
provided helpful information
for evaluating
municipal securities.
In this final module,
we will recap important concepts
previously discussed,
including changes
to regulatory guidance,
items that should be addressed in the investment policy,
and supervisory expectations
related to pre-purchase
analysis and ongoing monitoring.
We'll conclude by providing
a list of key resources
that will assist
in the oversight
of municipal investment activities.
In the Overview & Industry
Trends module,
we mentioned the recent regulatory changes
that affect
risk management practices
of the
securities portfolio.
The Agencies issued guidance
that replaced external credit ratings with a non-ratings
based standard to determine creditworthiness.
In short, banks cannot rely
exclusively on credit ratings
when determining
creditworthiness.
We also discussed the diversity
of the municipal bond market
and challenges associated with
assessing municipal credit risk.
In the Investment Policies
& Procedures module,
we discussed the importance
of tailoring
the investment policies
and procedures to define
the bank's activities
and the board's risk tolerance.
We covered important elements that should be addressed
in the bank's investment policy.
These elements
include identifying
suitable investments,
setting reasonable risk limits,
and describing comprehensive pre-purchase analysis
and ongoing
monitoring procedures.
We also discussed the
independent review program,
which should evaluate
whether appropriate risk management practices
have been implemented.
In the Basic and Expanded
Analysis modules,
we described
the scope of analysis
needed to assess
a lower-risk versus
a higher-risk
municipal security.
These modules focused
on supervisory expectations
and guidelines
for pre-purchase analysis
and ongoing monitoring.
Whether the analysis
is basic or expanded,
some key credit factors
to consider
are the location
and economic conditions
where the obligor is located,
the type of issuance,
and the financial condition
and fiscal responsibility
of the issuer.
Bank management should also
assess the bond's interest rate
and liquidity risks
prior to purchase.
An important takeaway
from these modules
is that the depth of analysis
depends on the bond's
risk characteristics,
the nature and complexity of
municipal investment activities,
and the overall risk
of the municipal portfolio
as it relates to
the bank's financial condition.
Regardless of whether the
analysis is basic or expanded,
management must have
a sufficient understanding
of the credit,
interest rate,
and liquidity risks
in the municipal portfolio.
As mentioned throughout
this presentation,
management practices
should be consistent
with the risk presented
by an individual bond,
as well as
the overall portfolio.
Supervisory expectations
increase
when the bank has invested
in bonds with greater risk
or when the bank's
exposure increases.
We also described
the inherent credit risk
in the various
municipal bond types.
To conclude,
we would like to discuss
applicable regulatory guidance
and additional resources.
The 1998 Supervisory Policy
Statement on Investment
Securities and End-User
Derivatives Activities
establishes regulatory
expectations regarding
the overall investment portfolio
risk management framework.
It addresses board and
senior management oversight;
policies, procedures,
and limits;
risk measurement and reporting;
and internal controls.
The guidance states that
management should understand
the risks inherent
in its investment activities,
both prior to purchase
and on an ongoing basis.
The OCC Final Rule
applies to all banks
and eliminates
credit rating references
from the definition
of investment grade
for determining
eligibility for purchase.
The Final Guidance provides
a non-ratings based framework
for determining
creditworthiness,
and is an aid
for community banks
in their pre-purchase analysis and ongoing monitoring
of securities
with varying complexity.
It describes factors
banks should consider
as part of a robust credit risk
assessment framework.
Although the OCC Rule
is directed
to nationally chartered banks,
state-chartered banks
should also adhere
to the rule and guidance
because state banks
are generally prohibited
from engaging
in investment activities
not permissible
for a national bank.
The FDIC Final Rule
and Guidance is specific
to FDIC-insured savings
associations and is consistent
with the OCC Final
Rule and Guidance.
The Uniform Agreement on
the Classification and Appraisal
of Securities Held
by Depository Institutions
provides bankers and examiners
with guidance
for assigning classifications
and assessing individual
bond credit risks.
In addition to
the regulatory guidance,
an article in the Summer 2013 Supervisory Insights entitled
"Credit Risk Assessment
of Bank Investment Portfolios"
discusses
many of the same topics
we have covered
in this presentation.
Bankers can find the
Financial Institution Letters
discussed previously and
the Supervisory Insights article
on the FDIC's website
at fdic.gov.
Regional Senior Capital Markets
and Securities Specialists
are also available
as additional resources.
If you have any questions
about this presentation,
please send them
to supervision@fdic.gov.
The FDIC's capital
markets specialists
will be happy to assist.
On behalf of the FDIC,
we appreciate you
taking the time to watch
this presentation
and we hope you found
the information helpful.
Please be sure to check
our website for other videos
on various risk management
and consumer protection topics
that may be of interest.
Thank you.
