WASHINGTON - The Office of the Comptroller of the Currency is reminding its examiners to evaluate the risks that private banking services may pose to a national bank's reputation.
"Competition for personal clients is very strong, and negative publicity, whether deserved or not, can damage a bank's ability to compete," the OCC says in a new handbook on managing the broad range of fiduciary services that banks offer. "Litigation, regulatory action, criminal activity, inadequate products and services, below-average investment performance, poor service quality, and weak strategic initiatives and planning can lead to a diminished reputation and, consequently, to an inability to compete and be successful."
Concern about commercial banks' reputations has risen to new levels this year as a result of high-profile congressional, judicial, and regulatory investigations into the role some companies played in the downfall of Enron Corp., WorldCom Inc., and other scandal-ridden corporations.
Karen Shaw Petrou, the managing partner with Federal Financial Analytics, said the emphasis on corporate fraud is calling attention to something the banking agencies have long warned about. "Reputational risk has been in the supervision-by-risk framework for years, but its meaning and the real risk are now clear," she said. "You can see it with a few institutions - a bad headline and their stock drops 30%."
Less than one page of the 36-page handbook, which the OCC issued last week, is devoted to reputation risk. The rest of it covers a broad range of fiduciary services banks offer, such as investment accounts and trust agreements, and the risks that banks and their regulators must monitor.
"It shows the evolution of our way of supervision from pure compliance to a more risk-based approach," said Lisa Lintecum, the director of asset management at the Comptroller's Office. "This handbook has been in the works for many months. It's not tied to any of the investigations or anything else going on" in Congress, she said.
Though the reference to reputation risk in the handbook barely registers on the Richter scale of regulatory action, analysts see it as an opening salvo in the battle against the hazard that all bank regulators are expected to begin waging.
The handbook "is a small indication of the much bigger reputation-risk issues regulators are wrestling with," Ms. Petrou said. "I expect we'll see this in a lot of forthcoming regulations."
Defining reputation risk is not easy.
"It's not quantifiable, and it's impossible to measure, but it's very real," Ms. Petrou said. "Coming up with an appropriate supervisory framework for it is challenging but necessary."
In addition to addressing reputation risk, the handbook, "Personal Fiduciary Services," outlines the transaction, compliance, and strategic risks, and it details how they should be managed.
For example, the OCC emphasizes that personal fiduciary services must be managed by - or under the direction of - the bank's board of directors. If a bank uses an outside vendor to run its private banking services, the bank's board and senior management must oversee those operations.
The handbook says there is no one-size-fits-all approach to managing the risks associated with personal banking.
"Each bank should establish a risk management system suited to its own needs and circumstances," it states. "In general, the more complex the fiduciary services offered, the greater the need for formalized and detailed policies and procedures."
Specifically, it says, banks should have policies on broker placement practices, the use of insider information in securities transactions, the selection and retention of legal counsel, and conflicts of interests.
"A conflict of interest normally arises when the bank's ability to act exclusively in the best interest of the client is impaired," the handbook says. "If such a conflict exists, the bank should take appropriate action to resolve the conflict before accepting the account."
The manual also tells banks not to accept new business without assessing their ability to handle it: "The bank must determine whether it has the expertise and systems to properly manage the account and whether the account meets the bank's risk and profitability standards."
It further reminds banks that they are required to conduct annual reviews of the assets in each fiduciary account for which they make investment decisions.
