FDIC newsletter on risk management of investments in structured credit products

01 May 2009

The letter reiterates and clarifies existing supervisory guidance on the purchase and holding of complex structured credit products. It focuses on the various supervisory concerns related to these securities.

The Financial Institution Letter reiterates and clarifies existing supervisory guidance on the purchase and holding of complex structured credit products. It focuses on the various supervisory concerns related to these securities: pre-purchase analysis, suitability determination, risk limits, credit ratings, valuation, ongoing due diligence, adverse classification, and capital treatment.

 

Highlights:

Ø       Risk management of investments in structured credit products should include adequate due diligence, reasonable exposure limits, accurate risk measurement, an understanding of the tranched structure, knowledge of the collateral performance, and a determination of investment suitability.

Ø       Institutions should consider credit ratings as a factor in the risk management process; however, credit ratings should not be the sole factor considered when evaluating the risk present in structured credit products.

Ø       Institutions should have a reasonable, documented, and consistently applied approach to pricing high risk, illiquid, complex structured credit products.

Ø       Examiners' classification of structured credit products is governed by the guidance in the "Uniform Agreement on the Classification of Assets and Appraisal of Securities." This guidance permits examiners to adversely classify a security when supported by current credit information despite an investment grade credit rating.

 

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