Determine the existence of any concentration of due from bank deposit with other banks, as follows:

• Combine all due from foreign banks—demand (nostro) and time deposits, federal funds sold, and any call money for each entity.

• For any concentration that exceeds 25 percent of the bank’s capital structure, forward information to examiners assigned “Loan Portfolio Management” and “Concentrations of Credits” for possible inclusion in the Report of Examination.

Review the maximum deposit balance established for each due from bank account and determine if the maximum balance:

• Is established after consideration of compensating balance requirements resulting from commitments or credit lines made available to the other bank or its holding company. Coordinate this effort with the examiner assigned “Related Organizations.”

• Appears to be related to loans of executive officers or directors, or to loans that have been used to acquire stock control of the bank under examination.

  • If such due from accounts are detected, provide full details of the account to the examiner assigned to “Loan Portfolio Management.”

If verification procedures will not be performed, scan the most recent bank-prepared reconcilements for any unusual items and determine that closing balances listed on reconcilements agree with the general ledger and with the balances shown on the cut-off statement.

For any significant due from accounts, review the most recent reconcilements and for any outstanding items which are large, unusual, or outstanding for more than two months. Review any related correspondence, and determine if charge-off of outstanding items is appropriate. Consider:

• If the bank’s policy for charge-off of old open items provides for exceptions in extenuating circumstances, review exception items and determine if charge-off is appropriate.

• If the bank has no charge-off policy for old open items, review outstanding items and charge off any in accordance with the OCC’s policy guidance.

Review any information (in coordination with the “Loan Portfolio Management” examiner) relating to Miscellaneous loan debit and credit suspense accounts and discuss with management any large or old items.

Review the bank’s calculation of its Federal Reserve requirement and determine that reports are accurate and complete.

Determine whether the most recent compliance examination uncovered any weaknesses or violations of law or regulations dealing with due from banks or with insider relationships with correspondent banks. If violations were noted:

• Determine whether corrective action was taken.

• Test subsequent compliance with any law or regulation so noted.

Review any information received relating to Interagency Country Exposure Review Committee credits by doing the following:

• Compare the schedule to the sample selection to determine which due from bank—time deposits are portions of Interagency Country Exposure Review Committee credits.

• For each due from bank—time deposit identified, transcribe appropriate information from the schedule to individual line sheets.

• Maintain in working papers for future reference. No further examination procedures are necessary.

Review any information received relating to loans criticized during the previous examination (due from banks—time portion) and determine:

• Disposition of due from banks—time criticized by transcribing appropriate information from the schedule to individual line sheets.

• Current balance and payment status, or date the deposit was paid and the source of repayment.

Review information received relating to due from foreign banks—demand and determine the disposition of any accounts previously criticized by transcribing the following relevant information:

• Current balance and payment status, or

• Date the deposit was paid and the source of repayment.

Review any information received relating to rebooked charge-offs of due from bank—time deposits and determine:

• That any rebooked due from bank—time deposit(s) meets the criteria and terms of the bank’s policy for placing new bank time deposits.

• That such due from bank—time deposit(s) are not subject to classification. If so, list the balance(s) for charge-off.

Testing

This section is designed to evaluate the credit quality of banks with which time accounts are maintained and the credit quality of foreign banks, if any, with which demand accounts are maintained. Discuss which of the following procedures should be performed with the EIC prior to testing. The determination of which procedures are needed depends on the overall risk profile of the bank’s due from bank activities.

Using an appropriate sampling technique, select deposit customers (due from banks—time and due from foreign banks—demand) for detailed examination.

Determine if any sample accounts are affiliates of the bank or other banks. If so, notify the examiner assigned “Related Organizations.”

Determine whether any sample accounts are finance companies or commercial borrowers and not banks. If any finance companies or commercial borrowers are identified, forward this information to the “Loan Portfolio Management” examiner.

Prepare credit line sheets for each sample loan and transcribe information from source documents as follows:

Due From Foreign Banks—Demand:

• The customer’s aggregate due from foreign banks—demand liability (for nostro accounts, include this amount in foreign currency and the local currency equivalent).

• The amount of a customer’s line designated by the bank.

• • Frequency of recent overdrawn nostro accounts.

• – (Overdrawn nostro accounts as they relate to foreign exchange activities are discussed in the “Foreign Exchange” section. Also, the examiner assigned “Borrowed Funds” must obtain, or prepare, a listing of overdrawn nostro accounts for inclusion in the borrowing section of the report of examination).

• Past compliance with a customer’s line limitation as determined from a review of the liability ledger records.

Due From Banks—Time:

• A customer’s aggregate due from bank—time liability.

• Due from bank—time record copies aggregating customer’s total outstanding liability, including:

  • Name of bank.

  • Amount.

  • Currency.

  • Inception date.

  • Value date.

  • Maturity.

  • Interest rate.

Transcribe or compare information from requested schedules to credit line sheets, where appropriate, and indicate any bank lines that have been canceled.

Transcribe significant liability and other information on officers, principals, and affiliations of appropriate banks contained in the sample. Cross-reference line sheets to banks (borrowers), where appropriate.

Obtain liability and other information on common borrowers from examiners assigned to cash items, overdrafts, and loan areas, and, together, decide who will review the borrowing relationship. Pass or retain completed credit line sheets.

Obtain credit files for all borrowers for whom credit line sheets were prepared and complete credit line sheets, where appropriate.

For each due from bank—time deposit selected in the sample, check the bank’s central liability file and perform the following:

• Compare the interest rate charged to the interest rate schedule(s), and determine that the terms are within established guidelines.

• Compare the amount of the time deposits with:

  • The lending officer’s authority.

  • The depositor’s limit established by the bank.

  • Detail the major owners of the bank and, if a foreign account, whether there is any support by the government.

  • Ascertain compliance with established bank policy.

Evaluate the credit quality of banks with which time accounts are maintained and the credit quality of foreign banks with which due from bank—demand accounts are maintained by doing the following:

• Analyze balance sheet and profit and loss items as reflected in current and preceding financial statements, and determine the existence of any favorable or adverse trends.

• Relate items or groups of items in the current financial statements to other items or groups of items set forth in the statements, and determine the existence of any favorable or adverse ratios.

• Review components of the balance sheet as reflected in the current financial statements, and determine the reasonableness of each item as it relates to the total financial structure.

• Review supporting information for the major balance sheet items and the techniques used in consolidation, and determine the primary sources of repayment and evaluate their adequacy.

• Compare each bank’s balance sheet, profit and loss items, and ratios with those of comparable banks in the same country (if evaluating the credit quality of foreign due from banks—demand accounts) to help identify banks which may be overextended.

• Review compliance with provisions of due from bank—time deposit agreements.

• Review digest of officers’ memoranda, mercantile reports, credit checks, and correspondence to determine the existence of any problems that might deter the contractual liquidation program.

After completing the above procedures, evaluate whether you have fully met your original examination objectives. If not, or if significant levels of undue risk, misstated bank records, or other matters justify the need for further investigation, complete the following verification procedures to determine the level of risk associated with due from accounts.

Verification Procedures

1. Determine the number of the last unissued draft of each due from bank and due from foreign bank—demand accounts and record the number for comparison when performing reconcilements.

Prepare, or request that bank personnel generate a listing of all due from bank accounts together with their balances from the bank’s daily statement as of examination date. Listing should include:

• Separate totals for Federal Reserve bank, due from domestic banks, and due from foreign banks.

• For due from foreign banks, totals for due from central banks, overdrawn nostro accounts and due from affiliated banks—demand should be separately listed.

Compare each total to the appropriate subtotal in the general ledger as of examination date to verify balances are properly recorded.

Select a sample of due from bank accounts to be tested.

Request the bank to arrange for cut-off statements for each sample account, as of the examination date and a subsequent cut-off statement, not less than 5 days later, for sample account. Instructions to the bank should include the following:

• The statements should be addressed to the Examiner-In-Charge and be delivered unopened.

• For foreign banks, they should be performed in the name of the bank, on its letterhead, and returned to its auditing department with a code designating that the statements be submitted to the examiners unopened.

(Note: The request for subsequent cutoff statements does not apply to foreign banks.)

Through senior management, arrange to have the Federal Reserve bank statement, and any other cut-off statements, delivered unopened to the examiner daily for several days subsequent to the examination date.

Send a “Request for Detailed Statement of Account” form requesting verification of balances and information on potential and existing liabilities. (This step does not apply to foreign banks.)

Prepare or review reconcilements for each sample account, as follows:

• Review reconciling items carefully to determine that the time period between debit and credit entries by the bank under examination and the offsetting credit or debit by the correspondent bank is comparable for similar types of items. If any differences in timing occur, ascertain the reason.

• Determine that wire transfers appear on the correspondent statement the same day as entered on the bank’s books. Determine the reason for any exceptions.

• Test all drafts included in the cut-off statement for authorized signature, proper endorsement, dates of drafts, payee, and amounts, and determine that:

  • The date drawn is not subsequent to the date paid by the correspondent bank.

  • Drafts issued to transfer funds from the bank’s account to the correspondent’s account are not outstanding more than the normal transit time.

  • All drafts are numbered.

  • Drafts are issued sequentially.

For the due from bank accounts sampled in number one above, reconcile the account (on a reconcilement form) using the following steps:

(Note: Unless controls and audit procedures are extremely lax or suspect, the Examiner-In-Charge should waive the actual reconcilement of the account and direct that such procedures are performed on all due from accounts by bank personnel under the supervision of an examiner. Before turning the cut-off statements over to bank personnel for reconcilement, the examiner should copy them to prevent alteration. The examiner should obtain a copy of the reconcilement when completed and, for the accounts selected in the sample, should determine accuracy and test the reconcilement for correctness.)

• Insert “our balance to their debit” and the date as shown on the general ledger.

  • If balance is overdrawn, record on line “our balance to their credit.”

• Insert “their balance to our credit” and the date as shown on the correspondent bank’s cut-off statement.

  • If balance is overdrawn, record on line “their balance to our debit.”

• Ensure the mathematical accuracy of the prior reconcilement by an adding machine run of the figures.

• Determine that “our balance to their debit” agrees to the general ledger as of the prior reconcilement date.

• Determine that “their balance to our credit” agrees to the correspondent bank’s statement as of the prior reconcilement date.

• Determine that the closing balance and date listed on the statement used in the bank’s last reconcilement agrees to the opening balance and date listed on the cut-off statement as of the examination date.

  • If any intervening cut-off statements were received, determine that new opening balances and dates always agree with the previous statements’ closing balances and dates.

  • Check any outstanding “we debit—they do not credit” items from the previous reconcilement to determine if credit has been given on a later cut-off statement from the correspondent bank.

  • Do the same for any “we credit—they do not debit” item to determine that the debit has been made on a later cut-off statement from the correspondent bank.

  • Check any open “they debit—we do not credit” item from the previous reconcilement to determine if a credit as been made to the bank’s general ledger.

  • Do the same for any “they credit—we do not debit” item to determine if a debit has been made to the bank’s general ledger.

  • If any item on a previous reconcilement does not clear, list it on the reconcilement form being prepared.

• Determine that each debit and credit entry shown on the bank’s general ledger since the date of last reconcilement is offset by a corresponding credit or debit on a correspondent bank’s cut-off statement.

• If a debit or credit is posted in error, the item may “clear” by an offsetting credit or debit on the general ledger, if made by the bank under examination, or on the cut-off statement, if made by the correspondent bank.

• Any items on the general ledger, except outstanding drafts, that are not offset by an appropriate debit or credit on the correspondent bank’s cut-off statement are considered “open” and should be transferred to the reconcilement form under the appropriate “we debit” or “we credit” caption along with the date and a brief description.

• Any items on the correspondent bank’s cutoff statement that are not offset by an appropriate debit or credit on the bank’s general ledger are considered “open” and should be transferred to the reconcilement form under the appropriate “they debit” or “they credit” caption along with the date and a brief description.

• “We credit” items that represent outstanding drafts should not be listed on the “we credit” section of the reconcilement form. Each outstanding draft should be listed by number on the reverse side of the reconcilement form and the total should be carried forward opposite the caption “drafts outstanding.” Included in the listing should be any drafts still outstanding from the previous reconcilement.

• Prove the reconcilement by totaling the right-hand and left-hand columns on the reconcilement form. Proof is established when the two balances agree.

Determine clearance of “we debit” and “we credit” items using later cut-off statements, when available, as follows:

• Carefully determine that all debits on or about the date of the examination are satisfactorily accounted for and are not an attempt to conceal a shortage.

• Enter dates cleared on the reconcilement form under heading “date since credited” or “date since debited.”

• Indicate that the entry was proper and that transit time was normal by circling the clearance date on the reconcilement form.

• If an item is cleared by reversing the entry, that is, by a subsequent offsetting debit or credit entry on the ledger of bank under examination, check the entry through to its source.

• If the entry involves excess transit time, confirm to the correspondent bank.

• Investigate all large items to determine that they are legitimate.

• All material “we debit” and “we credit” items that do not clear on later cut-off statements should be confirmed, with a copy of the confirmation tracer retained for comparison with the original after it is returned. If time does not permit the return of the confirmation tracer during the examination, the return envelope should be directed to the local OCC office and the copy of the confirmation tracer should be sent to the office for comparison. For foreign banks, confirmation forms and return envelopes should be prepared:

  • By bank staff under examiner supervision.

  • On bank letterhead and signed by the auditor.

  • By using the bank’s return address with a code designed to direct such routing to the examiner.

  • A record of “we debit” and “we credit” items that are not considered material should be retained for review at the next examination to determine the propriety of their deposition.

Using the general ledger or appropriate subsidiary ledger, determine clearance of “they debit” and “they credit” items, such that:

• All items should clear during the examination either by offsetting credit or debit to the bank’s ledger or by the correspondent bank reversing the entry.

• Enter dates cleared on the reconcilement form under the heading “date since credited” or “date since debited.”

• The reason for nonclearance should be determined for all “they debit” and “they credit” items that do not clear in a reasonable amount of time. The validity of the reason for nonclearance should be established and documented on the reconcilement form. Any material items that are not satisfactorily resolved should be brought to the attention of the EIC.

Indicate, on the master listing of all due from bank accounts, next to each bank balance, that the account has been reconciled and that open items have been cleared or confirmed. When open items have been subsequently verified, indicate that fact.

Due From Foreign Banks—Demand (Nostro Accounts)

Using an appropriate sampling technique, select due from foreign bank— demand accounts and perform the following:

• Trace profit or loss entries resulting from the revaluation of net open spot positions that were passed to the respective nostro accounts.

• Check that at the maturity of a forward exchange contract, proper entries are made to the respective nostro accounts and forward revaluation adjustment accounts.

• Test to be sure that when “swap” forward contracts are delivered, the correct entries are passed to the applicable nostro accounts and swap adjustment account.

• Investigate any one-sided entries, that is, an entry only to the foreign currency ledgers but not to the dollar (or local currency) book value ledgers, which might indicate kiting or fraud.

Test the additions of the trial balances and the reconciliation of the trial balances to the general ledger.

Due From Banks—Time

Using an appropriate sampling techniques, select due from bank—time deposits, and perform the following:

• Prepare and mail confirmations to selected bank customers. (Confirmation forms should be done in the name of the bank, on its letterhead, and returned to its auditing department with a code designed to direct such confirmations to the examiners. Confirmation forms should include the name of the bank, amount, currency, inception and value dates, maturity, and interest rate.)

• After a reasonable time, mail second requests.

• Follow-up on any no-replies or exceptions, and resolve differences.

• Examine due from bank—time contracts for completeness and agree dates, amount, and interest rate to the trial balance.

• Check to see that the required authorized signature of an approving officer is on the contract.

• Check to see that the contract appears to be genuine.

• List all documentation discrepancies, and investigate.

• Review customer ledgers and authorizations, and determine if authorizations are signed in accordance with terms of the due from bank—time agreements.

Other

Review a sample of accrued interest accounts by:

• Evaluating and testing procedures for accounting for accrued interest and for handling adjustments.

• Scanning accrued interest for any unusual entries and following up on any unusual items by tracing them to initial and supporting records.

Obtain or prepare a schedule showing the accrued interest balances and the deposit balances for selected time periods since last examination, and do the following:

• Calculate ratios.

• Investigate significant fluctuations and/or trends.