Objective: Determine the level of risk arising from relationships between the bank and its related organizations and whether those relationships pose undue risks upon the condition and reputation of the bank.

1. Review the list of related organizations and determine the type of related organization (for example: nonbank affiliate, operating subsidiary, financial subsidiary, statutory subsidiary, bank holding company, chain banking organization, parallel banking group, community development investment, foreign branch).

2. Identify the lines of business in which each related organization engages.

3. Through review of bank-prepared information and discussions with bank personnel, identify the nature of the relationship or manner of affiliation between the bank and its related organizations. Determine which related organizations are affiliates for purposes of applying the legal restrictions on transactions with affiliates.

4. Assess whether the bank maintains sufficient independence in its relationships with its parent company and other related organizations to ensure that the interests of the bank are adequately protected and not subordinate to those of the related organization. ^[23]

5. Consider:

   • Does the bank have an appropriate conflicts of interest policy and is compliance with the policy monitored?

   • If the board and management of the bank are the same or predominantly the same as that of the parent company or other material related organization, is there guidance for resolving any conflicts of interest presented by these dual roles?

   • Does bank policy provide for transparency of reporting of affiliate transactions and require that those transactions be subject to internal and external audit?

   • Are dealings with related organizations subject to appropriate oversight by the bank’s board and management, including risk management systems and management information systems (MIS)?

   • Do related organizations provide significant services to the bank or perform significant functions for the bank and, if so, is payment for those services reasonable and well-documented?

   • Is the formation of or investment in new related organizations, or the introduction of new or complex activities within existing related organizations, subject to adequate due diligence by the bank?

   • Do board or committee meeting minutes reflect discussions of material related organizations and reflect approval of significant dealings or transactions?

6. Assess the financial condition and quality of operations of the related organization, as appropriate.

7. Identify and determine the significance of any material changes in the bank’s relationship with, investment in, or transactions with a related organization.

8. Determine the significance of any changes in the type or volume of the products that related organizations offer, or the significance of any changes in the vehicle through which related organizations offer those products.

9. Determine whether transactions between the bank and its related organizations are appropriate. Consider the following:

   • When the transaction represents fees paid or received for services rendered,

     • The necessity of the service.

     • The quality of the service received.

     • The method used to compute the charge for the service.

     • The reasonableness of the costs incurred.

     • How the fee schedule compares with that in effect 12 months ago.

     • The bank’s ability to afford such cost.

   • Cash transfers to or from a related organization in connection with a consolidated income tax obligation (amounts paid should be based on the amount that would be due if a separate return were filed and should be paid only at such time to reasonably permit required estimated payments or final settlements to be made to the IRS).

   • The quality and nature of loans, investments, or future commitments.

10. Review transactions between the bank and its affiliates. Consider:

    • The business function of each affiliate.

    • The nature of the relationship with the bank.

    • Risks applicable to each affiliate.

    • Risks that may translate directly to the bank.

    • Compliance with sections 23A and 23B and Regulation W.

11. Consider the following when determining the type and level of risk presented to the bank by

    operating subsidiaries, financial subsidiaries,

    and

    statutory subsidiaries:

    • Review information on the activities of each subsidiary and determine the materiality of the bank’s investment in the subsidiary. Consider the following:

      • The percent of ownership and the dollar amount invested in the subsidiary.

      • The nature of risk and the level of risk inherent in the subsidiary’s business.

      • The adequacy of the bank’s policies and procedures governing the subsidiary’s line of business.

      • The extent to which the parent bank participates in the subsidiary’s line of business outside the subsidiary.

      • The size of the subsidiary relative to the bank’s total assets and capitalization.

      • The types of services the subsidiary performs for the bank or other related organizations.

      • The subsidiary’s contribution to the bank’s earnings.

      • The types and amounts of intercompany transactions.

    • Determine which, if any, additional procedures from applicable booklets of the Comptroller’s Handbook should be incorporated into the review.

12. Consider the following when determining the type and level of risk presented to the bank by a

    bank holding company:

    • Review the management structure and programs of the holding company and its subsidiaries and consider the following:

      • The level of centralized control over the subsidiary bank.

      • Management expertise available to the subsidiary bank.