Federal Reserve Implements System To Grade Banks on Managing Risk

banks on how well they manage risk. The risk management grades, ranging from 1 for "strong" to 5 for "unsatisfactory," will be included in the management portion of banks' Camel ratings. The grading system, sent to the 12 Federal Reserve banks Tuesday and released publicly Thursday, will go into effect on Jan. 2. This new way of rating risk is needed, Fed Governor Edward J. Kelley said Thursday, because "banks' portfolios are so dynamic that you can't be comfortable just going in and checking specific line items." Answering questions after a speech to the American Institute of Certified Public Accountants here, Mr. Kelley said the guidelines amounted to "a formal way to include and fold in the notion of looking at processes and systems and not just looking at specific asset categories." But Mr. Kelley also said bankers shouldn't expect to see regulations anytime soon on one specific area of risk management -interest rate risk. "It's probably unlikely to be ready for prime time in '96," he said of the rate risk proposal that bank regulators floated in August. The stumbling block, according to Mr. Kelley, is agreeing on a way to quantify the risks posed by sharp interest rate moves. "I think I see us migrating back to a more subjective approach," he said. While all the bank regulatory agencies have been emphasizing risk management lately, the Fed guidelines released Thursday are the first to formally incorporate a risk management score into the Camel ratings. These ratings, which measure capital, assets, management, earnings, and liquidity, have played a growing role in bank regulation in recent years. To get the top score in risk management, a Fed-regulated bank or bank holding company must have managers and directors who "are active participants in managing risk and ensure that appropriate policies and limits exist," according to the guidelines. These policies must be "supported by risk monitoring procedures, reports, and management information systems." The lowest rating, on the other hand, "indicates a critical absence of effective risk management practices to identify, monitor, or control significant risk exposures." The guidelines say the risk management score should be reported and explained on the "Ratings and General Information" page of the bank exam report, and be an "important factor when determining the overall management rating of the Camel rating system."