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FCA Examination Manual
ModulePlanning and Monitoring
SectionMonitoring
NumberEM-210
Date Published06/1994

Introduction


Monitoring consists of the activities associated with ongoing surveillance of Farm Credit System (FCS) institutions to keep abreast of significant changes in risk. Monitoring activities should be tailored to the condition of the institution and its operating environment. Follow-up that may result from monitoring should be appropriate and timely. Monitoring activities typically consist of reviewing financial information and various other information and documents obtained from a myriad of sources. The depth of review can and oftentimes will cross over into the realm of examination analysis. This usually occurs when the information submitted is sufficient enough to allow for a thorough examination from which conclusions can be reached. Since examiners have the latitude to perform most examination activities off site, monitoring and off-site examination are complementary activities that facilitate the efficient and effective use of resources while providing regulatory oversight of FCS institutions. Insights gained through monitoring and off-site examination activities are also incorporated into ongoing institutional examination planning, thereby enhancing that portion of the examination process.

Objectives

The objectives of monitoring are to provide timely recognition of changing risk in an institution and gain efficiencies by facilitating off-site examination activities. These objectives are commonly accomplished through:


Responsibilities

Each Associate Regional Director (ARD) is responsible for establishing a monitoring program that identifies specific responsibilities, reporting, and controls. The Annual Operating Plan (AOP) provides general monitoring strategies and guidelines after considering risks such as macro- and micro-economic conditions and the institution's size, condition, and management effectiveness. Monitoring of each institution is assigned to a specific examiner(s) who is accountable for ensuring these activities are carried out. Individual institutional assignments for monitoring are documented by each field office either as a part of its AOP or a supplement thereto. Monitoring examiners should be cognizant of prior Reports of Examination, off-site activity reports, monitoring strategies documented in the field office's AOP, external conditions, and the most recent resource recommendations made on form FCA 1000.

Information Sources

The use of information from various sources is necessary for an effective and efficient monitoring process. Information is available to examiners in three primary forms: FCA-generated, FCS-reported, and external sources.

FCA-Generated--A wide range of information is available through various resources within FCA. Some of these sources are:

FCS-Reported--FCS institutions routinely supply various documents and reports to FCA. These items represent important sources of information for the monitoring process. Examples of FCS-reported information include:

- Monthly board and related committee meeting minutes;

- Monthly report of operations (board report);

- Credit reviews and financial evaluations;

- Policy or procedural changes (manual updates);

- Organizational or personnel changes;

- Districtwide correspondence and guidance letters; and

- Newsletters and correspondence to stockholders.

External Sources--In addition to FCA-generated and FCS-reported data, external sources can provide useful information to assist examiners in the oversight of an institution. Significant external sources include:

Analysis

Information obtained should be reviewed and analyzed on a timely, periodic basis and in accordance with the institution's risk. From the various sources of information available, examiners conduct periodic analyses to organize and present the information in a factual and logical format for subsequent use. The financial condition of the institution, prior Reports of Examination, overall economic condition, and the effectiveness of institution management generally determine the scope and frequency of examination analysis to be performed. To facilitate efficient resource usage, examination activities should be performed in the field office when the available information is sufficient to conduct analysis work and/or form conclusions.

Listed below are several activities to consider in developing a schematic approach to monitoring. A number of the following activities are analytical in nature and, as such, typically go beyond monitoring and into an examination activity:

Review correspondence and hold discussions with enforcement examiners regarding any applicable enforcement actions;

While this list is not all inclusive, it illustrates that monitoring can encompass a wide range of activities in a dynamic environment. It also depicts items which could be examined while off site, allowing examiners to concentrate on-site examination efforts in areas most needed.

Documentation and Reporting

Documentation and prompt reporting of monitoring activities are necessary to ensure identified concerns are addressed. A well-documented file is important for an effective monitoring program. However, emphasis is placed on identifying and concisely reporting deteriorating trends, with a focus on the underlying factors and conditions causing those trends, rather than producing a grandiose document with inconsequential historical data.

The nature and extent of documentation required for monitoring activities are determined by the ARD. Reporting can be as simple as retrieving documents from the various sources listed above and making notations thereon where no significant findings are evident. Typically, however, a brief memorandum to the file or specific workpapers are required by field office or region directives to properly organize and document the examiner's analysis of the information received. In all cases, internal correspondence or documentation is generated when monitoring requires a follow-up contact or activity.

Off-site activity reports are used to summarize the results of monitoring efforts and/or off-site examination work. Activity reports are generally provided to the ARD with copies forwarded to the respective regional office and enforcement examiner for institutions under enforcement action. In addition, copies of off-site activity reports on institutions with a CAMEL rating of "3," "4," or "5" are forwarded to the Farm Credit System Insurance Corporation. The ARD determines if further distribution is required. The ARD is also responsible for informing the Regional Director and Chief Examiner of issues that have a potential for districtwide or Systemwide impact. Additional guidance on reporting is detailed in the Reports and Conferences module of this manual.

Follow-up

Monitoring results determine whether or not additional contacts or correspondence with the institution are required. Although contacts may be oral, they should be documented to ensure FCA's file integrity. Each field office establishes delegated authorities and responsibilities for contacting and requesting information from institutions. If an examiner detects noncompliance with a formal enforcement requirement, or if an enforcement action is imminent, the EIC coordinates with the enforcement examiner.

Reports of Examination often require a response from the institution to the appropriate field office. Upon receipt, responses are analyzed and a determination is made as to their appropriateness. The institution is notified of their receipt and FCA's conclusions, particularly any exceptions found.

Material weaknesses or adverse trends identified through monitoring or off-site examination activities should be addressed when discovered. The cause of these weaknesses or trends should be determined and the institution contacted, if necessary. Any significant problems or deterioration should be a matter of record and additional follow-up action, if needed, should be taken in a timely manner.

Summary

Monitoring is designed to contribute to the agency's oversight and examination effectiveness while allowing efficiencies to be gained where inherent institutional risk allows. Monitoring activities are, therefore, an integral part of the agency's examination process and regulatory oversight. ARDs are responsible for establishing an appropriate monitoring program for institutions under their responsibility. Frequent coordination and communication between Office of Examination examiners and enforcement examiners are expected for institutions operating under agency enforcement documents. Substantial information is available from a multitude of sources so that periodic monitoring activity or actual off-site examination of certain functions can be performed on individual institutions. Specific monitoring assignments are made to examiners for accountability purposes. Follow-up necessitated by monitoring activities should occur as appropriate. The type, frequency, and documentation required from the monitoring activities should be tailored to the degree of risk present in the institution and the type of activity performed.

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