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Informational Memorandum
Subject:National Oversight and Examination Program for FY 2009
Date of Memorandum:11/13/2008
Expiration Date:
Signed By:McKenzie, Thomas
FCA Contact Person:Paulsen, Roger
Contact Phone:703-883-4265
List of Attachments:

Printer Friendly ======>IM on FY 09 NOP  Final 11-14-08.pdf

Other FY 2009 Oversight and Examination Activities

Investments and Liquidity: The recent turmoil in financial markets is having a direct impact on investments held by System banks for liquidity purposes. Credit ratings have been downgraded on some investments, rendering them ineligible under existing regulatory authorities. These downgrades have prompted the banks to submit plans to FCA for approval to hold these investments until maturity or until market conditions improve. Also, banks have experienced unrealized losses on their investments and have recognized a small amount of other than temporary impairment. The objectives of this activity are to closely monitor developments in the System banks' investment portfolios and implement supervisory strategies to ensure banks deal with risks related to the changing financial landscape. You may expect OE’s Capital Markets Specialists to maintain frequent contact with each bank to monitor changing investment conditions, liquidity levels, and market access.

Counterparty Risk: System institutions are increasingly engaging in financial and credit transactions and operational services with both System and Non-System counterparties. As such, it is important to accurately measure and effectively manage exposure to counterparties. It is equally important that the System, as a whole, be able to assess its combined exposure to material counterparties. We will continue discussing with System representatives and individual institutions the importance of information systems and control processes to manage counterparty risks. We expect all institutions to conduct sensitivity analysis on earnings and/or capital impact should those counterparties be unable to perform as agreed.

General Financing Agreements (GFAs): In the face of potentially rising risks to banks from direct loans to their affiliated associations, it is critical that GFAs provide the framework and authority to respond to this risk in a timely, adequate, and proactive manner. This review will provide insight into whether banks are effectively using underwriting standards and GFAs to manage their direct loan exposures. It will take into account the results of a planned joint review of these key funding documents by System bank credit management during FY 2009.

Information Technology: Our operations specialist examiners will evaluate System governance and control practices over an institution’s technology service providers (TSPs). This activity, which will be conducted at selected institutions, will include evaluating the risk assessment, due diligence, contracting, and monitoring processes for TSPs.

Young, Beginning, and Small (YBS) Farmers: We continue to evaluate the effectiveness of the System’s YBS lending programs. On August 10, 2007, FCA revised FCA Bookletter BL-040 (Bookletter) to provide additional guidance that clarifies available authorities in serving YBS farmers and ranchers. In October 2006 we issued Examination Bulletin 2006-2, which clarified the “Other Credit Needs” of part-time farmers, including YBS farmers. FCA will continue to work with boards and management as they consider the opportunity discussed in those documents, as well as other opportunities to better serve YBS farmers and ranchers. In select institutions, examiners will evaluate implementation of FCA regulations governing YBS lending.

Compliance with Consumer and Borrower Rights Regulations: We will continue to use the National Examination Activity (NEA) approach for examining compliance with consumer, borrower rights, and other similar regulations to assess System compliance with applicable laws and regulations. The NEA will involve a sample of institutions and will evaluate and test internal controls used to manage compliance risk. Regulatory compliance will be evaluated at other institutions as appropriate.