WASHINGTON - The Office of the Comptroller of the Currency is changing the way it examines national banks, by categorizing risk nine ways.
The new "supervision by risk" program, the latest step in the evolution of OCC exams, was explained by Comptroller Eugene A. Ludwig in a speech prepared for delivery Tuesday night.
"Our supervision will be more efficient and of more value, because we will focus on what matters - reduction of risk - and an elimination of makework, ministerial - often seen as nitpicking - tasks," Mr. Ludwig said in the speech, which was scheduled for presentation at Georgetown University's Center for Business-Government Relations.
The list of nine risks starts with credit risk and includes interest rate risk, liquidity risk, price risk, foreign exchange risk, transaction risk, compliance risk, strategic risk, and reputation risk.
The new approach, aimed primarily at larger banks exposed to a wider variety of risks than smaller institutions, represents an evolution in OCC policy. The agency has always focused on credit risk.
In the past, Mr. Ludwig said in the speech, the OCC's supervision was more a retrospective look at how risks had been mishandled by institutions.
"We were focusing on the results of these poor practices - treating the disease - rather than administering preventive medicine," he said.
Since different banks often are exposed to different risks, examiners will customize and streamline their exams to fit each bank's risk profile, Mr. Ludwig said.
"Supervision by risk focuses our efforts on evaluating the quantity of risk exposure in an institution and determining the quality of the risk management systems in place to control that risk," he added.
After pinning down a bank's ability to manage its risks, examiners will put together an "examination strategy" for the institution, the comptroller said.
The OCC will then "focus future supervision on what we deem to be the higher risk areas within the banks, while limiting our examination of lower-risk areas that bank management is addressing effectively," Mr. Ludwig said.
Industry representatives greeted the comptroller's announcement with measured applause.
"While this is a significant development, it's more evolutionary than revolutionary," said James McLaughlin, director of agency relations for the American Bankers Association. He said many of the concepts were already elements of the Camel rating, which measures a bank's capital, assets, management, earnings, and liquidity.
"It's a refinement of Camel," he said.