TO THE OFFICER IN CHARGE OF SUPERVISION
AT EACH FEDERAL RESERVE BANK
On October 1, 1997, the Federal Reserve will begin implementing a risk-
focused framework for the supervision of community banks. This letter outlines this
framework and accompanies a handbook that provides more detail.1 Reserve Banks should provide copies of this handbook to appropriate staff and to senior officials of the state banking
departments in their districts. Guidance on the risk-focused supervision framework for large
complex institutions will be issued in a separate SR-letter.
The risk-focused supervision framework for community banks, as outlined in
the handbook, reflects the results of a joint effort by the Federal Reserve and FDIC to develop
a common examination process. The process targets activities with the highest levels of risk at
each institution, provides a tiered approach to examination procedures, and enhances
examiners' abilities to diagnose emerging problems. Implementation of this process will
provide greater consistency in examinations conducted by the Federal Reserve and the FDIC
and is expected to result in examinations that are more efficient and effective and less
burdensome on institutions.
The risk-focused supervision framework relies heavily on the exercise of
examiner judgment in determining the scope of the examination during the planning process.
This allows examiners to tailor the procedures that are performed on-site to the bank's risk
profile. A scope memorandum is to be prepared that contains an assessment of the bank's
risks and a description of the examination activities to be performed. In preparing the scope
memorandum, examiners are encouraged to contact the bank in order to learn about any
changes in management, policies, or strategic direction. New products or markets the bank
has entered should also be identified. A sample scope memorandum is included in the attached
The joint Federal Reserve and FDIC risk-focused supervision framework
includes examination procedure modules covering most areas reviewed at community banks.
These have been developed to assist examiners in their analyses and their decision-making
process. The procedure modules are organized according to the bank's business activities and
risk management processes and reflect best practice guidance and a broader process-oriented
review of the bank's risks.
Examination procedures are to be tailored to the characteristics of each bank,
keeping in mind size, complexity, and risk profile. The procedures examiners select to
perform from each module should be focused on developing appropriate documentation to
assess adequately management's ability to identify, measure, monitor, and control risks. The
examination procedure modules, set forth below, have been designated as primary and
supplemental. Normally, the primary modules would be used at each examination, while the
supplemental modules would be used when warranted by the bank's activity. Loan references
also have been developed for use at banks that engage in specialized lending activities.
The examination procedure modules have been automated for use on virtually
all laptop computers currently in field use through a standalone software program called
"Elvis." Elvis provides a documentation vehicle for work performed on an examination, as
well as electronic access to the Federal Reserve's and FDIC's bank examination manuals and
an automated Report of Examination. Both the FDIC and Federal Reserve will be using the
examination procedure modules in their automated format. These modules replace the Federal
Reserve's existing Work Documentation Program.
The Elvis software and the documentation for the automated examination
modules have been provided, under separate cover, to staff at each Reserve Bank previously
designated as contact for handling the implementation of Elvis.
The implementation of this common examination process by the Federal
Reserve and the FDIC represents a significant advancement toward achieving a more
consistent, risk-focused approach to examining state-chartered banks. The examination
procedure modules were presented to the Conference of State Bank Supervisors at their annual
meeting in May of this year. Since that time, examiners from each of the fifty states have
been trained in the use of these modules, and a number of state banking departments will begin
using them at examinations this year. As you know, extensive training has been provided to
Federal Reserve examiners, and the program has been field-tested by a number of Reserve
Banks over the last nine months. The Federal Reserve and the FDIC intend to issue joint
updates to the examination procedure modules on a quarterly basis.
1 A draft of this handbook was distributed to attendees at the June 1997 examiner conference in Dallas. The current version of the handbook will be put on the FEDWEB.
2 Includes Loan References for ten specialized lending areas.
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