Are You Confident in Your Correspondents?

Written By: Thomas Karlsson

In today's volatile business environment how confident are you that your correspondents are not encountering financial difficulties? Regulation F "Limitations on Interbank Liabilities" requires a bank to establish and maintain written polices and procedures to prevent excessive exposure to any individual correspondent in relation to the condition of the correspondent. The policies and procedures shall require periodic review of the financial condition of the correspondent and take into account any deterioration in the correspondent's financial condition.

In most banks the policies and procedures require an annual review of the correspondents. Due to the current credit crisis we recommend these reviews be performed quarterly. The benefit of quarterly reviews is to limit the exposure risk derived from less than adequately capitalized correspondents.

Also in most reviews only financial data is obtained. We recommend the review of qualitative data also. Some of the factors to consider in the review of correspondents should include; changes in international, national, regional, and local economic and business

conditions and development that affect the correspondent financial condition, including the condition of various market segments; changes in the nature and volume of the portfolio; changes in experience, ability, and depth of lending management and other relevant staff; changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans; changes in the value of underlying collateral for collateral-dependant loans; the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated losses in the institution's existing portfolio.

Performing quarterly reviews on both quantitative and qualitative factors of the correspondents will limit your financial institution's risk of exposure.

Contact Nichols, Cauley & Associates by Email, phone, or online form with your questions.

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