(a) General. A bank shall establish and maintain written policies
and procedures to prevent excessive exposure to any individual correspondent
in relation to the condition of the correspondent.
(b) Standards for selecting correspondents.
(1) A bank shall establish
policies and procedures that take into account credit and liquidity
risks, including operational risks, in selecting correspondents and
terminating those relationships.
(2) Where exposure to a correspondent is
significant, the policies and procedures shall require periodic reviews
of the financial condition of the correspondent and shall take into
account any deterioration in the correspondent’s financial condition.
Factors bearing on the financial condition of the correspondent include
the capital level of the correspondent, level of nonaccrual and past-due
loans and leases, level of earnings, and other factors affecting the
financial condition of the correspondent. Where public information
on the financial condition of the correspondent is available, a bank
may base its review of the financial condition of a correspondent
on such information, and is not required to obtain nonpublic information
for its review.
1(3) A bank may
rely on another party, such as a bank rating agency or the bank’s
holding company, to assess the financial condition of or select a
correspondent, provided that the bank’s board of directors has reviewed
and approved the general assessment or selection criteria used by
that party.
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(c) Internal
limits on exposure.
(1) Where the financial condition of the
correspondent and the form or maturity of the exposure create a significant
risk that payments will not be made in full or in a timely manner,
a bank’s policies and procedures shall limit the bank’s exposure to
the correspondent, either by the establishment of internal limits
or by other means. Limits shall be consistent with the risk undertaken,
considering the financial condition and the form and maturity of exposure
to the correspondent. Limits may be fixed as to amount or flexible,
based on such factors as the monitoring of exposure and the financial
condition of the correspondent. Different limits may be set for different
forms of exposure, different products, and different maturities.
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(2) A bank shall structure
transactions with a correspondent or monitor exposure to a correspondent,
directly or through another party, to ensure that its exposure ordinarily
does not exceed the bank’s internal limits, including limits established
for credit exposure, except for occasional excesses resulting from
unusual market disturbances, market movements favorable to the bank,
increases in activity, operational problems, or other unusual circumstances.
Generally, monitoring may be done on a retrospective basis. The level
of monitoring required depends on—
(i) the extent to which
exposure approaches the bank’s internal limits;
(ii) the volatility of the exposure;
and
(iii) the financial
condition of the correspondent.
(3) A bank shall establish appropriate
procedures to address excesses over its internal limits.
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(d) Review by board of directors. The policies and procedures established under this section shall
be reviewed and approved by the bank’s board of directors at least
annually.
