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Board of Governors of the Federal Reserve System

Supervision and Regulation Letters

SR 10-10

Interagency Guidance on Correspondent Concentration Risk

April 30, 2010
Print version (38 KB PDF) | HTML
Attachment(s):
Correspondent Concentration Risks (319 KB PDF)
Appendix A (32 KB PDF) | HTML
Appendix B (35 KB PDF) | HTML
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Seal of the Board of Governors of the Federal Reserve System
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C.  20551
DIVISION OF BANKING
SUPERVISION AND REGULATION
SR 10-10
April 30, 2010
TO THE OFFICER IN CHARGE OF SUPERVISION AND APPROPRIATE SUPERVISORY AND EXAMINATION STAFF AT EACH FEDERAL RESERVE BANK AND EACH DOMESTIC AND FOREIGN BANKING ORGANIZATION SUPERVISED BY THE FEDERAL RESERVE
SUBJECT:   Interagency Guidance on Correspondent Concentration Risk

Attached is interagency guidance issued by the Board of Governors of the Federal Reserve System and the other federal banking agencies.1 This guidance reminds institutions of supervisory expectations on sound practices for managing risks associated with funding and credit concentrations arising from correspondent relationships (correspondent concentration risk).2 The guidance highlights the need for institutions to identify, monitor, and manage correspondent concentration risk on a standalone and organization-wide basis. The guidance also reinforces the supervisory view that financial institutions should perform appropriate due diligence on all credit exposures to and funding transactions with other financial institutions.

Reserve Banks are asked to distribute this letter to financial institutions supervised by the Federal Reserve, as well as to supervisory and examination staff. Questions regarding this letter may be directed to Barbara J. Bouchard, Associate Director, at (202) 452-3072; or Craig A. Luke, Supervisory Financial Analyst, Supervisory Guidance and Procedures section, at (202) 452-6409. In addition, questions may be sent via the Board’s public website.3

signed by
Patrick M. Parkinson
Director
Attachments:
 
Notes:
  1. The other federal banking agencies include the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision.  Return to text
  2. See, for example, SR letter 93-36, “Preliminary Examiner Guidelines for Regulation F – Interbank Liabilities.”  Return to text
  3. See http://www.federalreserve.gov/feedback.cfm.  Return to text
Appendix A
Calculating Respondent Credit Exposures on an Organization-Wide Basis
Respondent Bank's Gross Credit Exposure to a Correspondent, its Holding Company and Affiliates
50000000 Due from DDA with correspondent
1,000,000 Due from DDA with correspondent’s two affiliated insured depository institutions (IDIs)
1,000,000 CDs issued by correspondent bank
500,000 CDs issued by one of correspondent's two affiliated IDIs
51,500,000 Federal funds sold to correspondent on a principal basis
2,500,000 Federal funds sold to correspondent's affiliated IDIs on a principal basis
3,750,000 Reverse Repurchase agreements
250,000 Net current credit exposure on derivatives1
4,500,000 Direct and indirect loans to or for benefit of a correspondent, its holding company, or affiliates
2,500,000 Investments in the correspondent, its holding company, or affiliates
117,500,000 Gross Credit Exposure
100,000,000 Total Capital
118% Gross Credit Concentration


Respondent Bank's Net Credit Exposure to a Correspondent, its Holding Company and Affiliates
17,850,000 Due from DDA (less checks/cash not available for withdrawal & federal deposit insurance (FDI))2
500,000 Due from DDA with correspondent's two affiliated IDIs (less FDI)2
750,000 CDs issued by correspondent bank (less FDI)
250,000 CDs issued by one of correspondent's two affiliated IDIs (less FDI)
51,500,000 Federal funds sold on a principal basis
2,500,000 Federal funds sold to correspondent's affiliated IDIs on a principal basis
100,000 Under-collateralized amount on reverse repurchase agreements (less the current market value of government securities or readily marketable collateral pledged)3
50,000 Uncollateralized net current derivative position1
4,500,000 Direct and indirect loans to or for benefit of a correspondent, its holding company, or affiliates
2,500,000 Investments in the correspondent, its holding company, or affiliates
80,500,000 Net Credit Exposure
100,000,000 Total Capital
81% Net Credit Concentration
NOTE:  Respondent Bank has $1 billion in Total Assets, 10% Total Capital, and 90% Total Liabilities and Correspondent Bank has $1.5 billion in Total Assets, 10% Total Capital, and 90% Total Liabilities


Calculating Correspondent Funding Exposures on an Organization-Wide Basis
Correspondent Bank's Gross Funding Exposure to a Respondent Bank
50,000,000 Due to DDA with respondent
1,000,000 Correspondent's two affiliated IDIs' Due to DDA with respondent
1,000,000 CDs sold to respondent bank
500,000 CDs sold to respondent from one of correspondent's two affiliated IDIs
51,500,000 Federal funds purchased from respondent on a principal basis
2,500,000 Federal funds sold to correspondent's affiliated IDIs on a principal basis
1,000,000 Repurchase Agreements
107,500,000 Gross Funding Exposure
1,350,000,000 Total Liabilities
7.96% Gross Funding Concentration


Correspondent Bank's Net Funding Exposure to a Respondent, its Holding Company and Affiliates
17,850,000 Due to DDA with respondent (less checks and cash not available for withdrawal and FDI)2
500,000 Correspondent’s two affiliated IDIs' Due to DDA with respondent (less FDI)2
750,000 CDs sold to correspondent (less FDI)
250,000 One of correspondent’s two affiliated IDIs' CDs sold to respondent (less FDI)2
51,500,000 Federal funds purchased from respondent on a principal basis
2,500,000 Federal funds sold to correspondent's affiliated IDIs on a principal basis
150,000 Under-collateralized amount of repurchase agreements relative to the current market value of government securities or readily marketable collateral pledged3
73,500,000 Net Funding Exposure
1,350,000,000 Total Liabilities
5.44% Net Funding Concentration
 
Appendix A Footnotes:
  1. There are 5 derivative contracts with a mark-to-market fair value position as follows:  Contract 1 (100), Contract 2 +400, Contract 3 (50), Contract 4 +150, and Contract 5 (150). Collateral is 200, resulting in an uncollateralized position of 50.  Return to text
  2. While temporary deposit insurance programs may provide certain transaction accounts higher levels of federal deposit insurance coverage, institutions should not rely on such programs for mitigating concentration risk.  Return to text
  3. Government securities means obligations of, or obligations fully guaranteed as to principal and interest by, the U.S. government or any department, agency, bureau, board, commission, or establishment of the United States, or any corporation wholly owned, directly or indirectly, by the United States.  Return to text
Appendix B
Calculating Respondent Credit Exposures on a Correspondent Only Basis
Respondent Bank's Gross Credit Exposure to a Correspondent
50,000,000 Due from DDA with correspondent
0 Due from DDA with correspondent’s two affiliated insured depository institutions (IDIs)
1,000,000 CDs issued by correspondent bank
0 CDs issued by one of correspondent's two affiliated IDIs
51,500,000 Federal funds sold to correspondent on a principal basis
0 Federal funds sold to correspondent's affiliated IDIs on a principal basis
3,750,000 Reverse Repurchase agreements
250,000 Net current credit exposure on derivatives1
4,500,000 Direct and indirect loans to or for benefit of a correspondent, its holding company, or affiliates
2,500,000 Investments in the correspondent, its holding company, or affiliates
113,500,000 Gross Credit Exposure
100,000,000 Total Capital
114% Gross Credit Concentration


Respondent Bank's Net Credit Exposure to a Correspondent
17,850,000 Due from DDA (less checks/cash not available for withdrawal & federal deposit insurance (FDI))2
0 Due from DDA with correspondent's two affiliated IDIs (less FDI)2
750,000 CDs issued by correspondent bank (less FDI)
0 CDs issued by one of correspondent's two affiliated IDIs (less FDI)
51,500,000 Federal funds sold on a principal basis
0 Federal funds sold to correspondent's affiliated IDIs on a principal basis
100,000 Under-collateralized amount on reverse repurchase agreements (less the current market value of government securities or readily marketable collateral pledged)3
50,000 Uncollateralized net current derivative position1
4,500,000 Direct and indirect loans to or for benefit of a correspondent, its holding company,or affiliates
2,500,000 Investments in the correspondent, its holding company, or affiliates
77,250,000 Net Credit Exposure
100,000,000 Total Capital
77% Net Credit Concentration
NOTE:  Respondent Bank has $1 billion in Total Assets, 10% Total Capital, and 90% Total Liabilities and Correspondent Bank has $1.5 billion in Total Assets, 10% Total Capital, and 90% Total Liabilities


Calculating Correspondent Funding Exposures on a Correspondent Only Basis
Correspondent Bank's Gross Funding Exposure to a Respondent
50,000,000 Due to DDA with respondent
0 Correspondent's two affiliated IDIs' Due to DDA with respondent
1,000,000 CDs sold to respondent bank
0 CDs sold to respondent from one of correspondent's two affiliated IDIs
51,500,000 Federal funds purchased from respondent on a principal basis
0 Federal funds sold to correspondent's affiliated IDIs on a principal basis
1,000,000 Repurchase agreements
103,500,000 Gross Funding Exposure
1,350,000,000 Total Liabilities
7.67% Gross Funding Concentration


Correspondent Bank's Net Funding Exposure to a Respondent
17,850,000 Due to DDA with respondent (less checks and cash not available for withdrawal and FDI)2
0 Correspondent’s two affiliated IDIs' Due to DDA with respondent (less FDI)2
750,000 CDs sold to correspondent (less FDI)
0 One of correspondent’s two affiliated IDIs' CDs sold to respondent (less FDI)2
51,500,000 Federal funds purchased from respondent on a principal basis
0 Federal funds sold to correspondent's affiliated IDIs on a principal basis
100,000 Under-collateralized amount on repurchase agreements (less the current market value of government securities or readily marketable collateral pledged)3
70,200,000 Net Funding Exposure
1,350,000,000 Total Liabilities
5.20% Net Funding Concentration


 
Appendix B Footnotes:
  1. There are 5 derivative contracts with a mark-to-market fair value position as follows:  Contract 1 (100), Contract 2 +400, Contract 3 (50), Contract 4 +150, and Contract 5 (150). Collateral is 200, resulting in an uncollateralized position of 50.  Return to text
  2. While temporary deposit insurance programs may provide certain transaction accounts higher levels of federal deposit insurance coverage, institutions should not rely on such programs for mitigating concentration risk.  Return to text
  3. Government securities means obligations of, or obligations fully guaranteed as to principal and interest by, the U.S. government or any department, agency, bureau, board, commission, or establishment of the United States, or any corporation wholly owned, directly or indirectly, by the United States.  Return to text
Last update: February 1, 2011