Related Organizations

Other Related Organizations

Examiners also will assess the risks posed by significant related organizations in which the bank has no direct investment. Such companies, often nonbanking subsidiaries of a bank holding company, may conduct activities as varied as lending, consumer leasing, data processing, broker-dealer operations, asset management, real estate appraisal, and property management for other real estate owned and bank premises. Affiliates often offer the bank an opportunity to engage in businesses otherwise prohibited for the bank. Yet because of the commonality of ownership or management, a bank’s transactions with affiliates may not be subject to the same sort of objective analysis that transactions with independent parties receive. Even if the bank does not have a financial stake in the affiliate, any business setbacks of the affiliate may affect the condition of the bank. Therefore, assessing risks will require examiners to be knowledgeable about the businesses of all affiliates, the nature of affiliates’ relationship with the bank, and all transactions between affiliates and the bank.

Like the risks posed by subsidiaries, the risks posed by affiliates depend on the nature of the affiliate’s activities and its relationship to the bank. Even if a national bank does not transact business with an affiliate, the affiliate’s business nevertheless may pose many indirect risks to the bank. For example, a full-scale mortgage affiliate may be subject to credit risk (obligor’s repayment ability), interest rate risk (balance sheet repricing opportunities), transaction risk (the volume and complexity of transactions), liquidity risk (the volume, composition, and cost of funds), price risk (changes in value of position-taking instruments), compliance risk (adherence to consumer protection laws and other prescribed practices), reputation risk (the public’s perception of the affiliate, particularly when the affiliate has the same trade name or brand as the bank), strategic risk (decisions affecting corporate mission and culture), and, conceivably, foreign currency translation risk (if the entity conducts transactions denominated in a foreign currency). A broker-dealer affiliate that sells nondeposit investment products to the bank’s retail customers likely may be subject to transaction, compliance, strategic, and reputation risk. While these risks may not be unmitigated risks of the bank, the examiner should be aware of the types of risk associated with the affiliated entity in determining the level of risk posed to the bank.

For these related organizations, including related interests of insiders, examiners should focus on intercompany transactions. Intercompany transactions may pose other risks than simply compliance risk. Credit transactions with, or purchases of loans or other assets from, an affiliate also would directly subject the bank to credit risk, although the restrictions of sections 23A and 23B and Regulation W limit that risk. Intercompany transactions in the aggregate also may pose direct liquidity risk and interest rate risk. If there are few or no transactions between the bank and the affiliate, risk may be limited to reputation or strategic risk.

While affiliated enterprises often provide valuable support and expertise to a bank in areas such as information processing and property management, examiners should thoroughly review the fees paid to such affiliates to ensure that they are reasonable reimbursement for goods and services received and that they comply with section 23B.

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