Forward-Looking Bank Supervision 2010 Kansas City Region Regulatory Conference Call August 24, 2010

2 Agenda Introduction Components of an Effective Risk Management Program The Impact When Risk Management Practices Are Weak, and the Components of Forward- Looking Risk Assessments Regulatory Policies, Procedures, and Strategies Banker Recommendations Question and Answer

3 Risk Management Program Emphasis on changing Risk Management (RM) programs to address the current economic cycle Applies to all banks Business strategies/activities must have effective RM programs, contingency plans, appropriate Capital allocations, and a strong Compliance Management System (CMS)

4 The 5 P’s of Risk Management There are five essential elements of a strong RM program: 1) Proactive planning 2) Policies/practices 3) Parameters 4) Protection 5) Prospects

5 Proactive Planning Items to consider when assessing the adequacy of your strategic planning process are: – How formal is the process? – Who is involved? – Are the plans realistic? – Are plans periodically back-tested against actual performance? – Is the planning process dynamic?

6 Proactive Planning What are the basics of a sound strategic planning process? - Be realistic. - Assess external factors. - Plan to control “controllable” factors. -Assess adequacy of current staffing.

7 Policies and Practices Consider relevance in current economic conditions. Update policies and procedures if the strategic plan has changed. Avoid gaps in duties/responsibilities as the strategies and goals of the bank change. Adjust Compliance Management System (CMS) as warranted. Ensure policies are being followed.

8 Parameters Review existing policy parameters to ensure continued relevance. Assess risk tolerances for all types of concentrations, including the funding side of the balance sheet. Consider all relevant factors when establishing policy limitations.

9 Protection Some business activities may require higher levels of capital protection than others. Internal controls and independent reviews also provide protection for a bank’s business risks. Exit strategies (and how and when to implement them) are very important.

10 Prospects Assess all potential outcomes of a particular business strategy. Remember, as a bank’s condition deteriorates, so will prospects for raising capital or establishing new borrowing lines. Regularly review the bank’s customer base to determine if prospects have deteriorated in light of changing economic conditions.

11 Impact of Weak Risk Management Common themes of recently failed banks: - Concentration risk - Inadequate credit administration and underwriting - Volatile funding - Deviations from business plan - Underfunded ALLL/poor methodology - Management deficiencies

12 Forward-Looking Risk Assessments Risk is inherent in banking, but must be properly identified, managed, monitored, and controlled Regulatory guidance addresses emerging issues/risks There will be a regulatory response to weak risk management programs, including related to consumer compliance programs

13 Regulatory Strategies and Policies Focus on strategic plan, business model and associated risk Increased supervision for high-risk plan, model, and/or profile institutions Supervision process may include accelerated exams or interim visitations Expect a strong supervisory response if the risks are not being appropriately managed

14 Regulatory Strategies and Policies (continued) Enhanced Supervisory Procedures for Newly Insured FDIC-Supervised Banks CAMELS and Consumer Compliance ratings consider assessment of risk management Regulatory emphasis on risk tolerances, planning, and the risk management process Management practices impact all of the ratings components

15 Recommendations for Bank Management Implement an effective risk management program addressing all risks Closely review prior examinations, audits, loan reviews, etc. for further guidance Address changes in the business cycle and how it impacts your bank Attend regulatory and industry events Communicate with regulators

16 Questions?