Consigned Items and Other Customer Services

Background

Banks historically have offered a variety of customer services that do not result in the recording of an asset or liability on the general ledger of the bank. These services include the issuance of consigned items, such as

U.S. savings bonds and commemorative coins; customer safekeeping activities, such as the rental of safe deposit box facilities and the safekeeping of collateral; and collection department services.

Although these customer services do not affect a bank’s general ledger, they do result in the assumption of a contingent liability. Accordingly, banks must have in place proper internal controls, strong operating procedures and safeguards, and sound audit coverage if they are to offer these services prudently. Although not always profitable, these services enable banks to offer customers a full range of banking services and provide an additional source of noninterest income.

Risks Associated with Consigned Items and Other Customer Services

For purposes of the Office of the Comptroller of the Currency’s (OCC) discussion of risk, the OCC assesses banking risk relative to its impact on capital and earnings. From a supervisory perspective, risk is the potential that events, expected or unanticipated, may have an adverse impact on the bank’s capital or earnings. The OCC has defined nine categories of risk for bank supervision purposes. These risks are: credit, interest rate, liquidity, price, foreign exchange, transaction, compliance, strategic, and reputation. These categories are not mutually exclusive; any product or service may expose the bank to multiple risks. For analysis and discussion purposes, however, the OCC identifies and assesses the risks separately.

The applicable risk associated with consigned items and other customer services is transaction risk. Transaction risk is the risk to earnings or capital arising from problems with service or product delivery. This risk is a function of internal controls, information systems, employee integrity, and operating processes. Transaction risk exists in all products and services.

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