Financial institution executives will be heavily scrutinized by bank examiners who suspect that they are relying too much on their brokerage houses for investment portfolio management strategies, said sources at the Office of the Comptroller of the Currency.
During a private meeting of OCC personnel, instructions were given to examiners to thoroughly question bank management about its investment strategies and the use of certain derivative instruments in its portfolios.
The agency reportedly has come across cases where bank management has leaned too heavily on the support services of its traders and could not explain the instruments or strategies being used in its institutions when asked.
Examiners have been told informally that certain investment houses servicing the smaller banking market may serve as flags, and to question bank personnel who are counting on the support services these firms provide.
Two Memphis, Tenn.-based operations provide investment services to the majority of smaller institutions: First Tennessee and Morgan Keegan Inc. Both broker deals for banks with assets of less than $500 million.
"It's the banks' responsibility to know what they are doing with their investments," said Frank Gusmus, a CFO of First Tennessee's bond division.
It is investment advice that the banking regulators are concerned about.
"I think you do see some cases where bankers are parroting back to the examiner what the broker has said," said Bill Gooch, managing director of fixed-income research for Morgan Keegan Inc.