[Federal Register Volume 62, Number 3 (Monday, January 6, 1997)]
[Notices]
[Pages 752-757]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-155]
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FEDERAL DEPOSIT INSURANCE CORPORATION
Uniform Financial Institutions Rating System
AGENCY: Federal Deposit Insurance Corporation.
ACTION: Notice of adoption of policy statement.
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SUMMARY: The Board of Directors of the Federal Deposit Insurance
Corporation (FDIC) (Board) has considered the proposed revisions to the
Uniform Financial Institutions Rating System (UFIRS) as approved by the
Federal Financial Institutions Examination Council (FFIEC) on December
9, 1996. On December 20, 1996, the Board adopted the updated UFIRS as a
policy statement of the FDIC and rescinded the 1979 statement of policy
published in the FDIC's regulatory service (FDIC Law, Regulations and
Related Acts) at page 5079.
EFFECTIVE DATE: January 1, 1997.
FOR FURTHER INFORMATION CONTACT: Daniel M. Gautsch, Examination
Specialist, (202) 898-6912, Office of Policy, Division of Supervision.
For legal issues, Linda L. Stamp, Counsel, (202) 898-7310, Supervision
and Legislation Branch, Federal Deposit Insurance Corporation, 550 17th
Street NW, Washington, D.C. 20429.
SUPPLEMENTARY INFORMATION: The FDIC is a Federal financial institutions
regulatory agency under the Federal Financial Institutions Examination
Council Act of 1978. The FFIEC adopted an updated UFIRS after a notice
and request for comment was published in the Federal Register on July
18, 1996 at 61 FR 37472. On December 9, 1996, the Task Force on
Supervision of the FFIEC approved under delegated authority the updated
UFIRS to update the rating system to address changes in the financial
services industry and in supervisory policies and procedures occurring
since the rating system was adopted in 1979.
Section 303(a)(2) of the Riegle Community Development and
Regulatory Improvement Act of 1994 (12 U.S.C. 4803(a)) (Riegle Act)
provides that the FDIC shall, consistent with the principles of safety
and soundness, statutory law and policy, and the public interest, work
jointly to make uniform all regulations and guidelines implementing
common statutory or supervisory policies. Section 303(a)(1) of the
Riegle Act requires the FDIC to review its own regulations and written
policies and to streamline those regulations and policies where
possible. To fulfill the section 303 mandate, the FDIC has been
reviewing on an interagency basis and internally, its regulations and
written policies to identify those areas where streamlining or updating
is appropriate. As a result of those reviews, the FDIC is adopting the
updated UFIRS effective for examination commenced on or after January
1, 1997.
The text of the policy statement follows:
Uniform Financial Institutions Rating System
Introduction
The Uniform Financial Institutions Rating System (UFIRS) was
adopted by the Federal Financial Institutions Examination Council
(FFIEC) on November 13, 1979. Over the years, the UFIRS has proven to
be an effective internal supervisory tool for evaluating the soundness
of financial institutions on a uniform basis and for identifying those
institutions requiring special attention or concern. A number of
changes, however, have occurred in the banking industry and in the
Federal supervisory agencies' policies and procedures which have
prompted a review and revision of the 1979 rating system. The revisions
to UFIRS include the addition of a sixth component addressing
sensitivity to market risks, the explicit reference to the quality of
risk management processes in the management component, and the
identification of risk elements within the composite and component
rating descriptions.
The revisions to UFIRS are not intended to add to the regulatory
burden of institutions or require additional policies or processes. The
revisions are intended to promote and complement efficient examination
processes. The revisions have been made to update the rating system,
while retaining the basic framework of the original rating system.
The UFIRS takes into consideration certain financial, managerial,
and compliance factors that are common to all institutions. Under this
system, the supervisory agencies endeavor to ensure that all financial
institutions are evaluated in a comprehensive and uniform manner, and
that supervisory attention is appropriately focused on the financial
institutions exhibiting financial and operational weaknesses or adverse
trends.
The UFIRS also serves as a useful vehicle for identifying problem
or deteriorating financial institutions, as well as for categorizing
institutions with deficiencies in particular component areas. Further,
the rating system assists Congress in following safety and soundness
trends and in assessing the aggregate strength and soundness of the
financial industry. As such, the UFIRS assists the agencies in
fulfilling their collective mission of maintaining stability and public
confidence in the nation's financial system.
Overview
Under the UFIRS, each financial institution is assigned a composite
rating based on an evaluation and rating of six essential components of
an institution's financial condition and operations. These component
factors address the adequacy of capital, the quality of assets, the
capability of management, the quality and level of earnings, the
adequacy of liquidity, and the sensitivity to market risk. Evaluations
of the components take into consideration the institution's size and
sophistication, the nature and complexity of its activities, and its
risk profile.
Composite and component ratings are assigned based on a 1 to 5
numerical scale. A 1 indicates the highest rating, strongest
performance and risk management practices, and least degree of
supervisory concern, while a 5 indicates the lowest rating, weakest
performance, inadequate risk management practices and, therefore, the
highest degree of supervisory concern.
The composite rating generally bears a close relationship to the
component ratings assigned. However, the composite rating is not
derived by computing an arithmetic average of the component ratings.
Each component rating is based on a qualitative analysis of the factors
comprising that component and its interrelationship with the other
components. When assigning a composite rating, some components may be
given more weight than others depending on the situation at the
institution. In general, assignment of a composite rating may
incorporate any factor that bears significantly on the overall
condition and soundness of the financial institution. Assigned
composite and component ratings are disclosed to the institution's
board of directors and senior management.
The ability of management to respond to changing circumstances and
to address the risks that may arise from
[[Page 753]]
changing business conditions, or the initiation of new activities or
products, is an important factor in evaluating a financial
institution's overall risk profile and the level of supervisory
attention warranted. For this reason, the management component is given
special consideration when assigning a composite rating.
The ability of management to identify, measure, monitor, and
control the risks of its operations is also taken into account when
assigning each component rating. It is recognized, however, that
appropriate management practices vary considerably among financial
institutions, depending on their size, complexity, and risk profile.
For less complex institutions engaged solely in traditional banking
activities and whose directors and senior managers, in their respective
roles, are actively involved in the oversight and management of day-to-
day operations, relatively basic management systems and controls may be
adequate. At more complex institutions, on the other hand, detailed and
formal management systems and controls are needed to address their
broader range of financial activities and to provide senior managers
and directors, in their respective roles, with the information they
need to monitor and direct day-to-day activities. All institutions are
expected to properly manage their risks. For less complex institutions
engaging in less sophisticated risk taking activities, detailed or
highly formalized management systems and controls are not required to
receive strong or satisfactory component or composite ratings.
Foreign Branch and specialty examination findings and the ratings
assigned to those areas are taken into consideration, as appropriate,
when assigning component and composite ratings under UFIRS. The
specialty examination areas include: Compliance, Community
Reinvestment, Government Security Dealers, Information Systems,
Municipal Security Dealers, Transfer Agent, and Trust.
The following two sections contain the composite rating
definitions, and the descriptions and definitions for the six component
ratings.
Composite Ratings
Composite ratings are based on a careful evaluation of an
institution's managerial, operational, financial, and compliance
performance. The six key components used to assess an institution's
financial condition and operations are: capital adequacy, asset
quality, management capability, earnings quantity and quality, the
adequacy of liquidity, and sensitivity to market risk. The rating scale
ranges from 1 to 5, with a rating of 1 indicating: the strongest
performance and risk management practices relative to the institution's
size, complexity, and risk profile; and the level of least supervisory
concern. A 5 rating indicates: the most critically deficient level of
performance; inadequate risk management practices relative to the
institution's size, complexity, and risk profile; and the greatest
supervisory concern. The composite ratings are defined as follows:
Composite 1
Financial institutions in this group are sound in every respect and
generally have components rated 1 or 2. Any weaknesses are minor and
can be handled in a routine manner by the board of directors and
management. These financial institutions are the most capable of
withstanding the vagaries of business conditions and are resistant to
outside influences such as economic instability in their trade area.
These financial institutions are in substantial compliance with laws
and regulations. As a result, these financial institutions exhibit the
strongest performance and risk management practices relative to the
institution's size, complexity, and risk profile, and give no cause for
supervisory concern.
Composite 2
Financial institutions in this group are fundamentally sound. For a
financial institution to receive this rating, generally no component
rating should be more severe than 3. Only moderate weaknesses are
present and are well within the board of directors' and management's
capabilities and willingness to correct. These financial institutions
are stable and are capable of withstanding business fluctuations. These
financial institutions are in substantial compliance with laws and
regulations. Overall risk management practices are satisfactory
relative to the institution's size, complexity, and risk profile. There
are no material supervisory concerns and, as a result, the supervisory
response is informal and limited.
Composite 3
Financial institutions in this group exhibit some degree of
supervisory concern in one or more of the component areas. These
financial institutions exhibit a combination of weaknesses that may
range from moderate to severe; however, the magnitude of the
deficiencies generally will not cause a component to be rated more
severely than 4. Management may lack the ability or willingness to
effectively address weaknesses within appropriate time frames.
Financial institutions in this group generally are less capable of
withstanding business fluctuations and are more vulnerable to outside
influences than those institutions rated a composite 1 or 2.
Additionally, these financial institutions may be in significant
noncompliance with laws and regulations. Risk management practices may
be less than satisfactory relative to the institution's size,
complexity, and risk profile. These financial institutions require more
than normal supervision, which may include formal or informal
enforcement actions. Failure appears unlikely, however, given the
overall strength and financial capacity of these institutions.
Composite 4
Financial institutions in this group generally exhibit unsafe and
unsound practices or conditions. There are serious financial or
managerial deficiencies that result in unsatisfactory performance. The
problems range from severe to critically deficient. The weaknesses and
problems are not being satisfactorily addressed or resolved by the
board of directors and management. Financial institutions in this group
generally are not capable of withstanding business fluctuations. There
may be significant noncompliance with laws and regulations. Risk
management practices are generally unacceptable relative to the
institution's size, complexity, and risk profile. Close supervisory
attention is required, which means, in most cases, formal enforcement
action is necessary to address the problems. Institutions in this group
pose a risk to the deposit insurance fund. Failure is a distinct
possibility if the problems and weaknesses are not satisfactorily
addressed and resolved.
Composite 5
Financial institutions in this group exhibit extremely unsafe and
unsound practices or conditions; exhibit a critically deficient
performance; often contain inadequate risk management practices
relative to the institution's size, complexity, and risk profile; and
are of the greatest supervisory concern. The volume and severity of
problems are beyond management's ability or willingness to control or
correct. Immediate outside financial or other assistance is needed in
order for the financial institution to be viable. Ongoing supervisory
attention is necessary. Institutions in this group
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pose a significant risk to the deposit insurance fund and failure is
highly probable.
Component Ratings
Each of the component rating descriptions is divided into three
sections: an introductory paragraph; a list of the principal evaluation
factors that relate to that component; and a brief description of each
numerical rating for that component. Some of the evaluation factors are
reiterated under one or more of the other components to reinforce the
interrelationship between components. The listing of evaluation factors
for each component rating is in no particular order of importance.
Capital Adequacy
A financial institution is expected to maintain capital
commensurate with the nature and extent of risks to the institution and
the ability of management to identify, measure, monitor, and control
these risks. The effect of credit, market, and other risks on the
institution's financial condition should be considered when evaluating
the adequacy of capital. The types and quantity of risk inherent in an
institution's activities will determine the extent to which it may be
necessary to maintain capital at levels above required regulatory
minimums to properly reflect the potentially adverse consequences that
these risks may have on the institution's capital.
The capital adequacy of an institution is rated based upon, but not
limited to, an assessment of the following evaluation factors:
The level and quality of capital and the overall financial
condition of the institution.
The ability of management to address emerging needs for
additional capital.
The nature, trend, and volume of problem assets, and the
adequacy of allowances for loan and lease losses and other valuation
reserves.
Balance sheet composition, including the nature and amount
of intangible assets, market risk, concentration risk, and risks
associated with nontraditional activities.
Risk exposure represented by off-balance sheet activities.
The quality and strength of earnings, and the
reasonableness of dividends.
Prospects and plans for growth, as well as past experience
in managing growth.
Access to capital markets and other sources of capital,
including support provided by a parent holding company.
Ratings
1 A rating of 1 indicates a strong capital level relative to the
institution's risk profile.
2 A rating of 2 indicates a satisfactory capital level relative to
the financial institution's risk profile.
3 A rating of 3 indicates a less than satisfactory level of
capital that does not fully support the institution's risk profile. The
rating indicates a need for improvement, even if the institution's
capital level exceeds minimum regulatory and statutory requirements.
4 A rating of 4 indicates a deficient level of capital. In light
of the institution's risk profile, viability of the institution may be
threatened. Assistance from shareholders or other external sources of
financial support may be required.
5 A rating of 5 indicates a critically deficient level of capital
such that the institution's viability is threatened. Immediate
assistance from shareholders or other external sources of financial
support is required.
Asset Quality
The asset quality rating reflects the quantity of existing and
potential credit risk associated with the loan and investment
portfolios, other real estate owned, and other assets, as well as off-
balance sheet transactions. The ability of management to identify,
measure, monitor, and control credit risk is also reflected here. The
evaluation of asset quality should consider the adequacy of the
allowance for loan and lease losses and weigh the exposure to
counterparty, issuer, or borrower default under actual or implied
contractual agreements. All other risks that may affect the value or
marketability of an institution's assets, including, but not limited
to, operating, market, reputation, strategic, or compliance risks,
should also be considered.
The asset quality of a financial institution is rated based upon,
but not limited to, an assessment of the following evaluation factors:
The adequacy of underwriting standards, soundness of
credit administration practices, and appropriateness of risk
identification practices.
The level, distribution, severity, and trend of problem,
classified, nonaccrual, restructured, delinquent, and nonperforming
assets for both on- and off-balance sheet transactions.
The adequacy of the allowance for loan and lease losses
and other asset valuation reserves.
The credit risk arising from or reduced by off-balance
sheet transactions, such as unfunded commitments, credit derivatives,
commercial and standby letters of credit, and lines of credit.
The diversification and quality of the loan and investment
portfolios.
The extent of securities underwriting activities and
exposure to counterparties in trading activities.
The existence of asset concentrations.
The adequacy of loan and investment policies, procedures,
and practices.
The ability of management to properly administer its
assets, including the timely identification and collection of problem
assets.
The adequacy of internal controls and management
information systems.
The volume and nature of credit documentation exceptions.
Ratings
1 A rating of 1 indicates strong asset quality and credit
administration practices. Identified weaknesses are minor in nature and
risk exposure is modest in relation to capital protection and
management's abilities. Asset quality in such institutions is of
minimal supervisory concern.
2 A rating of 2 indicates satisfactory asset quality and credit
administration practices. The level and severity of classifications and
other weaknesses warrant a limited level of supervisory attention. Risk
exposure is commensurate with capital protection and management's
abilities.
3 A rating of 3 is assigned when asset quality or credit
administration practices are less than satisfactory. Trends may be
stable or indicate deterioration in asset quality or an increase in
risk exposure. The level and severity of classified assets, other
weaknesses, and risks require an elevated level of supervisory concern.
There is generally a need to improve credit administration and risk
management practices.
4 A rating of 4 is assigned to financial institutions with
deficient asset quality or credit administration practices. The levels
of risk and problem assets are significant, inadequately controlled,
and subject the financial institution to potential losses that, if left
unchecked, may threaten its viability.
5 A rating of 5 represents critically deficient asset quality or
credit administration practices that present an imminent threat to the
institution's viability.
Management
The capability of the board of directors and management, in their
[[Page 755]]
respective roles, to identify, measure, monitor, and control the risks
of an institution's activities and to ensure a financial institution's
safe, sound, and efficient operation in compliance with applicable laws
and regulations is reflected in this rating. Generally, directors need
not be actively involved in day-to-day operations; however, they must
provide clear guidance regarding acceptable risk exposure levels and
ensure that appropriate policies, procedures, and practices have been
established. Senior management is responsible for developing and
implementing policies, procedures, and practices that translate the
board's goals, objectives, and risk limits into prudent operating
standards.
Depending on the nature and scope of an institution's activities,
management practices may need to address some or all of the following
risks: credit, market, operating or transaction, reputation, strategic,
compliance, legal, liquidity, and other risks. Sound management
practices are demonstrated by: active oversight by the board of
directors and management; competent personnel; adequate policies,
processes, and controls taking into consideration the size and
sophistication of the institution; maintenance of an appropriate audit
program and internal control environment; and effective risk monitoring
and management information systems. This rating should reflect the
board's and management's ability as it applies to all aspects of
banking operations as well as other financial service activities in
which the institution is involved.
The capability and performance of management and the board of
directors is rated based upon, but not limited to, an assessment of the
following evaluation factors:
The level and quality of oversight and support of all
institution activities by the board of directors and management.
The ability of the board of directors and management, in
their respective roles, to plan for, and respond to, risks that may
arise from changing business conditions or the initiation of new
activities or products.
The adequacy of, and conformance with, appropriate
internal policies and controls addressing the operations and risks of
significant activities.
The accuracy, timeliness, and effectiveness of management
information and risk monitoring systems appropriate for the
institution's size, complexity, and risk profile.
The adequacy of audits and internal controls to: promote
effective operations and reliable financial and regulatory reporting;
safeguard assets; and ensure compliance with laws, regulations, and
internal policies.
Compliance with laws and regulations.
Responsiveness to recommendations from auditors and
supervisory authorities.
Management depth and succession.
The extent that the board of directors and management is
affected by, or susceptible to, dominant influence or concentration of
authority.
Reasonableness of compensation policies and avoidance of
self-dealing.
Demonstrated willingness to serve the legitimate banking
needs of the community.
The overall performance of the institution and its risk
profile.
Ratings
1 A rating of 1 indicates strong performance by management and the
board of directors and strong risk management practices relative to the
institution's size, complexity, and risk profile. All significant risks
are consistently and effectively identified, measured, monitored, and
controlled. Management and the board have demonstrated the ability to
promptly and successfully address existing and potential problems and
risks.
2 A rating of 2 indicates satisfactory management and board
performance and risk management practices relative to the institution's
size, complexity, and risk profile. Minor weaknesses may exist, but are
not material to the safety and soundness of the institution and are
being addressed. In general, significant risks and problems are
effectively identified, measured, monitored, and controlled.
3 A rating of 3 indicates management and board performance that
need improvement or risk management practices that are less than
satisfactory given the nature of the institution's activities. The
capabilities of management or the board of directors may be
insufficient for the type, size, or condition of the institution.
Problems and significant risks may be inadequately identified,
measured, monitored, or controlled.
4 A rating of 4 indicates deficient management and board
performance or risk management practices that are inadequate
considering the nature of an institution's activities. The level of
problems and risk exposure is excessive. Problems and significant risks
are inadequately identified, measured, monitored, or controlled and
require immediate action by the board and management to preserve the
soundness of the institution. Replacing or strengthening management or
the board may be necessary.
5 A rating of 5 indicates critically deficient management and
board performance or risk management practices. Management and the
board of directors have not demonstrated the ability to correct
problems and implement appropriate risk management practices. Problems
and significant risks are inadequately identified, measured, monitored,
or controlled and now threaten the continued viability of the
institution. Replacing or strengthening management or the board of
directors is necessary.
Earnings
This rating reflects not only the quantity and trend of earnings,
but also factors that may affect the sustainability or quality of
earnings. The quantity as well as the quality of earnings can be
affected by excessive or inadequately managed credit risk that may
result in loan losses and require additions to the allowance for loan
and lease losses, or by high levels of market risk that may unduly
expose an institution's earnings to volatility in interest rates. The
quality of earnings may also be diminished by undue reliance on
extraordinary gains, nonrecurring events, or favorable tax effects.
Future earnings may be adversely affected by an inability to forecast
or control funding and operating expenses, improperly executed or ill-
advised business strategies, or poorly managed or uncontrolled exposure
to other risks.
The rating of an institution's earnings is based upon, but not
limited to, an assessment of the following evaluation factors:
The level of earnings, including trends and stability.
The ability to provide for adequate capital through
retained earnings.
The quality and sources of earnings.
The level of expenses in relation to operations.
The adequacy of the budgeting systems, forecasting
processes, and management information systems in general.
The adequacy of provisions to maintain the allowance for
loan and lease losses and other valuation allowance accounts.
The earnings exposure to market risk such as interest
rate, foreign exchange, and price risks.
Ratings
1 A rating of 1 indicates earnings that are strong. Earnings are
more than sufficient to support operations and maintain adequate
capital and allowance levels after consideration is
[[Page 756]]
given to asset quality, growth, and other factors affecting the
quality, quantity, and trend of earnings.
2 A rating of 2 indicates earnings that are satisfactory. Earnings
are sufficient to support operations and maintain adequate capital and
allowance levels after consideration is given to asset quality, growth,
and other factors affecting the quality, quantity, and trend of
earnings. Earnings that are relatively static, or even experiencing a
slight decline, may receive a 2 rating provided the institution's level
of earnings is adequate in view of the assessment factors listed above.
3 A rating of 3 indicates earnings that need to be improved.
Earnings may not fully support operations and provide for the accretion
of capital and allowance levels in relation to the institution's
overall condition, growth, and other factors affecting the quality,
quantity, and trend of earnings.
4 A rating of 4 indicates earnings that are deficient. Earnings
are insufficient to support operations and maintain appropriate capital
and allowance levels. Institutions so rated may be characterized by
erratic fluctuations in net income or net interest margin, the
development of significant negative trends, nominal or unsustainable
earnings, intermittent losses, or a substantive drop in earnings from
the previous years.
5 A rating of 5 indicates earnings that are critically deficient.
A financial institution with earnings rated 5 is experiencing losses
that represent a distinct threat to its viability through the erosion
of capital.
Liquidity
In evaluating the adequacy of a financial institution's liquidity
position, consideration should be given to the current level and
prospective sources of liquidity compared to funding needs, as well as
to the adequacy of funds management practices relative to the
institution's size, complexity, and risk profile. In general, funds
management practices should ensure that an institution is able to
maintain a level of liquidity sufficient to meet its financial
obligations in a timely manner and to fulfill the legitimate banking
needs of its community. Practices should reflect the ability of the
institution to manage unplanned changes in funding sources, as well as
react to changes in market conditions that affect the ability to
quickly liquidate assets with minimal loss. In addition, funds
management practices should ensure that liquidity is not maintained at
a high cost, or through undue reliance on funding sources that may not
be available in times of financial stress or adverse changes in market
conditions.
Liquidity is rated based upon, but not limited to, an assessment of
the following evaluation factors:
The adequacy of liquidity sources compared to present and
future needs and the ability of the institution to meet liquidity needs
without adversely affecting its operations or condition.
The availability of assets readily convertible to cash
without undue loss.
Access to money markets and other sources of funding.
The level of diversification of funding sources, both on-
and off-balance sheet.
The degree of reliance on short-term, volatile sources of
funds, including borrowings and brokered deposits, to fund longer term
assets.
The trend and stability of deposits.
The ability to securitize and sell certain pools of
assets.
The capability of management to properly identify,
measure, monitor, and control the institution's liquidity position,
including the effectiveness of funds management strategies, liquidity
policies, management information systems, and contingency funding
plans.
Ratings
1 A rating of 1 indicates strong liquidity levels and well-
developed funds management practices. The institution has reliable
access to sufficient sources of funds on favorable terms to meet
present and anticipated liquidity needs.
2 A rating of 2 indicates satisfactory liquidity levels and funds
management practices. The institution has access to sufficient sources
of funds on acceptable terms to meet present and anticipated liquidity
needs. Modest weaknesses may be evident in funds management practices.
3 A rating of 3 indicates liquidity levels or funds management
practices in need of improvement. Institutions rated 3 may lack ready
access to funds on reasonable terms or may evidence significant
weaknesses in funds management practices.
4 A rating of 4 indicates deficient liquidity levels or inadequate
funds management practices. Institutions rated 4 may not have or be
able to obtain a sufficient volume of funds on reasonable terms to meet
liquidity needs.
5 A rating of 5 indicates liquidity levels or funds management
practices so critically deficient that the continued viability of the
institution is threatened. Institutions rated 5 require immediate
external financial assistance to meet maturing obligations or other
liquidity needs.
Sensitivity to Market Risk
The sensitivity to market risk component reflects the degree to
which changes in interest rates, foreign exchange rates, commodity
prices, or equity prices can adversely affect a financial institution's
earnings or economic capital. When evaluating this component,
consideration should be given to: management's ability to identify,
measure, monitor, and control market risk; the institution's size; the
nature and complexity of its activities; and the adequacy of its
capital and earnings in relation to its level of market risk exposure.
For many institutions, the primary source of market risk arises
from nontrading positions and their sensitivity to changes in interest
rates. In some larger institutions, foreign operations can be a
significant source of market risk. For some institutions, trading
activities are a major source of market risk.
Market risk is rated based upon, but not limited to, an assessment
of the following evaluation factors:
The sensitivity of the financial institution's earnings or
the economic value of its capital to adverse changes in interest rates,
foreign exchange rates, commodity prices, or equity prices.
The ability of management to identify, measure, monitor,
and control exposure to market risk given the institution's size,
complexity, and risk profile.
The nature and complexity of interest rate risk exposure
arising from nontrading positions.
Where appropriate, the nature and complexity of market
risk exposure arising from trading and foreign operations.
Ratings
1 A rating of 1 indicates that market risk sensitivity is well
controlled and that there is minimal potential that the earnings
performance or capital position will be adversely affected. Risk
management practices are strong for the size, sophistication, and
market risk accepted by the institution. The level of earnings and
capital provide substantial support for the degree of market risk taken
by the institution.
2 A rating of 2 indicates that market risk sensitivity is
adequately controlled and that there is only moderate potential that
the earnings performance or capital position will be adversely
affected. Risk management practices are satisfactory for the size,
sophistication, and market risk accepted by the
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institution. The level of earnings and capital provide adequate support
for the degree of market risk taken by the institution.
3 A rating of 3 indicates that control of market risk sensitivity
needs improvement or that there is significant potential that the
earnings performance or capital position will be adversely affected.
Risk management practices need to be improved given the size,
sophistication, and level of market risk accepted by the institution.
The level of earnings and capital may not adequately support the degree
of market risk taken by the institution.
4 A rating of 4 indicates that control of market risk sensitivity
is unacceptable or that there is high potential that the earnings
performance or capital position will be adversely affected. Risk
management practices are deficient for the size, sophistication, and
level of market risk accepted by the institution. The level of earnings
and capital provide inadequate support for the degree of market risk
taken by the institution.
5 A rating of 5 indicates that control of market risk sensitivity
is unacceptable or that the level of market risk taken by the
institution is an imminent threat to its viability. Risk management
practices are wholly inadequate for the size, sophistication, and level
of market risk accepted by the institution.
By Order of the Board of Directors dated at Washington, D.C.,
this 20th day of December, 1996.
Federal Deposit Insurance Corporation.
Jerry L. Langley,
Executive Secretary.
[FR Doc. 97-155 Filed 1-3-97; 8:45 am]
BILLING CODE 6714-01-P