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Supervision and Regulation Letters
SR 10-10
Interagency Guidance on Correspondent Concentration Risk
April 30, 2010
Attachment(s):
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
DIVISION OF BANKING
SUPERVISION AND REGULATION
SUPERVISION AND REGULATION
SR 10-10
April 30, 2010
TO THE OFFICER IN CHARGE OF SUPERVISION AND APPROPRIATE SUPERVISORY AND EXAMINATION STAFF AT EACH FEDERAL RESERVE BANK AND EACH DOMESTIC AND FOREIGN BANKING
ORGANIZATION SUPERVISED BY THE FEDERAL RESERVE
| SUBJECT: | Interagency Guidance on Correspondent Concentration Risk |
Attached is interagency guidance issued by the Board of Governors of the Federal Reserve System and the other federal banking agencies.1 This guidance reminds institutions of supervisory expectations on sound practices for managing risks associated with funding and credit concentrations arising from correspondent relationships (correspondent concentration risk).2 The guidance highlights the need for institutions to identify, monitor, and manage correspondent concentration risk on a standalone and organization-wide basis. The guidance also reinforces the supervisory view that financial institutions should perform appropriate due diligence on all credit exposures to and funding transactions with other financial institutions.
Reserve Banks are asked to distribute this letter to financial institutions supervised by the Federal Reserve, as well as to supervisory and examination staff. Questions regarding this letter may be directed to Barbara J. Bouchard, Associate Director, at (202) 452-3072; or Craig A. Luke, Supervisory Financial Analyst, Supervisory Guidance and Procedures section, at (202) 452-6409. In addition, questions may be sent via the Board’s public website.3
signed by
Patrick M. Parkinson
Director
Patrick M. Parkinson
Director
- The other federal banking agencies include the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision.
- See, for example, SR letter 93-36, “Preliminary Examiner Guidelines for Regulation F – Interbank Liabilities.”
- See http://www.federalreserve.gov/feedback.cfm.
Appendix A
Calculating Respondent Credit Exposures on an Organization-Wide Basis
| 50000000 | Due from DDA with correspondent |
| 1,000,000 | Due from DDA with correspondent’s two affiliated insured depository institutions (IDIs) |
| 1,000,000 | CDs issued by correspondent bank |
| 500,000 | CDs issued by one of correspondent's two affiliated IDIs |
| 51,500,000 | Federal funds sold to correspondent on a principal basis |
| 2,500,000 | Federal funds sold to correspondent's affiliated IDIs on a principal basis |
| 3,750,000 | Reverse Repurchase agreements |
| 250,000 | Net current credit exposure on derivatives1 |
| 4,500,000 | Direct and indirect loans to or for benefit of a correspondent, its holding company, or affiliates |
| 2,500,000 | Investments in the correspondent, its holding company, or affiliates |
| 117,500,000 | Gross Credit Exposure |
| 100,000,000 | Total Capital |
| 118% | Gross Credit Concentration |
| 17,850,000 | Due from DDA (less checks/cash not available for withdrawal & federal deposit insurance (FDI))2 |
| 500,000 | Due from DDA with correspondent's two affiliated IDIs (less FDI)2 |
| 750,000 | CDs issued by correspondent bank (less FDI) |
| 250,000 | CDs issued by one of correspondent's two affiliated IDIs (less FDI) |
| 51,500,000 | Federal funds sold on a principal basis |
| 2,500,000 | Federal funds sold to correspondent's affiliated IDIs on a principal basis |
| 100,000 | Under-collateralized amount on reverse repurchase agreements (less the current market value of government securities or readily marketable collateral pledged)3 |
| 50,000 | Uncollateralized net current derivative position1 |
| 4,500,000 | Direct and indirect loans to or for benefit of a correspondent, its holding company, or affiliates |
| 2,500,000 | Investments in the correspondent, its holding company, or affiliates |
| 80,500,000 | Net Credit Exposure |
| 100,000,000 | Total Capital |
| 81% | Net Credit Concentration |
NOTE: Respondent Bank has $1 billion in Total Assets, 10% Total
Capital, and 90% Total Liabilities and Correspondent Bank has $1.5 billion in Total Assets,
10% Total Capital, and 90% Total Liabilities
Calculating Correspondent Funding Exposures on an Organization-Wide Basis
| 50,000,000 | Due to DDA with respondent |
| 1,000,000 | Correspondent's two affiliated IDIs' Due to DDA with respondent |
| 1,000,000 | CDs sold to respondent bank |
| 500,000 | CDs sold to respondent from one of correspondent's two affiliated IDIs |
| 51,500,000 | Federal funds purchased from respondent on a principal basis |
| 2,500,000 | Federal funds sold to correspondent's affiliated IDIs on a principal basis |
| 1,000,000 | Repurchase Agreements |
| 107,500,000 | Gross Funding Exposure |
| 1,350,000,000 | Total Liabilities |
| 7.96% | Gross Funding Concentration |
| 17,850,000 | Due to DDA with respondent (less checks and cash not available for withdrawal and FDI)2 |
| 500,000 | Correspondent’s two affiliated IDIs' Due to DDA with respondent (less FDI)2 |
| 750,000 | CDs sold to correspondent (less FDI) |
| 250,000 | One of correspondent’s two affiliated IDIs' CDs sold to respondent (less FDI)2 |
| 51,500,000 | Federal funds purchased from respondent on a principal basis |
| 2,500,000 | Federal funds sold to correspondent's affiliated IDIs on a principal basis |
| 150,000 | Under-collateralized amount of repurchase agreements relative to the current market value of government securities or readily marketable collateral pledged3 |
| 73,500,000 | Net Funding Exposure |
| 1,350,000,000 | Total Liabilities |
| 5.44% | Net Funding Concentration |
- There are 5 derivative contracts with a mark-to-market fair value position as follows: Contract 1 (100), Contract 2 +400, Contract 3 (50), Contract 4 +150, and Contract 5 (150). Collateral is 200, resulting in an uncollateralized position of 50.
- While temporary deposit insurance programs may provide certain transaction accounts higher levels of federal deposit insurance coverage, institutions should not rely on such programs for mitigating concentration risk.
- Government securities means obligations of, or obligations fully guaranteed as to principal and interest by, the U.S. government or any department, agency, bureau, board, commission, or establishment of the United States, or any corporation wholly owned, directly or indirectly, by the United States.
Appendix B
Calculating Respondent Credit Exposures on a Correspondent Only Basis
| 50,000,000 | Due from DDA with correspondent |
| 0 | Due from DDA with correspondent’s two affiliated insured depository institutions (IDIs) |
| 1,000,000 | CDs issued by correspondent bank |
| 0 | CDs issued by one of correspondent's two affiliated IDIs |
| 51,500,000 | Federal funds sold to correspondent on a principal basis |
| 0 | Federal funds sold to correspondent's affiliated IDIs on a principal basis |
| 3,750,000 | Reverse Repurchase agreements |
| 250,000 | Net current credit exposure on derivatives1 |
| 4,500,000 | Direct and indirect loans to or for benefit of a correspondent, its holding company, or affiliates |
| 2,500,000 | Investments in the correspondent, its holding company, or affiliates |
| 113,500,000 | Gross Credit Exposure |
| 100,000,000 | Total Capital |
| 114% | Gross Credit Concentration |
| 17,850,000 | Due from DDA (less checks/cash not available for withdrawal & federal deposit insurance (FDI))2 |
| 0 | Due from DDA with correspondent's two affiliated IDIs (less FDI)2 |
| 750,000 | CDs issued by correspondent bank (less FDI) |
| 0 | CDs issued by one of correspondent's two affiliated IDIs (less FDI) |
| 51,500,000 | Federal funds sold on a principal basis |
| 0 | Federal funds sold to correspondent's affiliated IDIs on a principal basis |
| 100,000 | Under-collateralized amount on reverse repurchase agreements (less the current market value of government securities or readily marketable collateral pledged)3 |
| 50,000 | Uncollateralized net current derivative position1 |
| 4,500,000 | Direct and indirect loans to or for benefit of a correspondent, its holding company,or affiliates |
| 2,500,000 | Investments in the correspondent, its holding company, or affiliates |
| 77,250,000 | Net Credit Exposure |
| 100,000,000 | Total Capital |
| 77% | Net Credit Concentration |
NOTE: Respondent Bank has $1 billion in Total Assets, 10% Total
Capital, and 90% Total Liabilities and Correspondent Bank has $1.5 billion in Total Assets,
10% Total Capital, and 90% Total Liabilities
Calculating Correspondent Funding Exposures on a Correspondent Only Basis
| 50,000,000 | Due to DDA with respondent |
| 0 | Correspondent's two affiliated IDIs' Due to DDA with respondent |
| 1,000,000 | CDs sold to respondent bank |
| 0 | CDs sold to respondent from one of correspondent's two affiliated IDIs |
| 51,500,000 | Federal funds purchased from respondent on a principal basis |
| 0 | Federal funds sold to correspondent's affiliated IDIs on a principal basis |
| 1,000,000 | Repurchase agreements |
| 103,500,000 | Gross Funding Exposure |
| 1,350,000,000 | Total Liabilities |
| 7.67% | Gross Funding Concentration |
| 17,850,000 | Due to DDA with respondent (less checks and cash not available for withdrawal and FDI)2 |
| 0 | Correspondent’s two affiliated IDIs' Due to DDA with respondent (less FDI)2 |
| 750,000 | CDs sold to correspondent (less FDI) |
| 0 | One of correspondent’s two affiliated IDIs' CDs sold to respondent (less FDI)2 |
| 51,500,000 | Federal funds purchased from respondent on a principal basis |
| 0 | Federal funds sold to correspondent's affiliated IDIs on a principal basis |
| 100,000 | Under-collateralized amount on repurchase agreements (less the current market value of government securities or readily marketable collateral pledged)3 |
| 70,200,000 | Net Funding Exposure |
| 1,350,000,000 | Total Liabilities |
| 5.20% | Net Funding Concentration |
- There are 5 derivative contracts with a mark-to-market fair value position as follows: Contract 1 (100), Contract 2 +400, Contract 3 (50), Contract 4 +150, and Contract 5 (150). Collateral is 200, resulting in an uncollateralized position of 50.
- While temporary deposit insurance programs may provide certain transaction accounts higher levels of federal deposit insurance coverage, institutions should not rely on such programs for mitigating concentration risk.
- Government securities means obligations of, or obligations fully guaranteed as to principal and interest by, the U.S. government or any department, agency, bureau, board, commission, or establishment of the United States, or any corporation wholly owned, directly or indirectly, by the United States.
Last update: February 1, 2011
