Banking in the Ninth

Use of Payments Data to Enhance Supervision

Safety and Soundess Update - June 2016

Published June 22, 2016  | June 2016 issue

A September 26, 2012, letter informed depository institutions (DIs) using Federal Reserve System (System)-priced services that the System had authorized sharing of payments-related information with bank and credit union supervisory agencies. Examiners from the System and the other federal prudential supervisors1 have been using this information to assist with identifying risk in supervised institutions since that time. This article reminds DIs of the type of data that the System’s payments operations share and describes how examiners use it. It also provides insight into how use of the data by supervisors can benefit DIs.

What type of payments information do bank supervisors receive?

The System extracts DI payments data from account information maintained at each Federal Reserve Bank. The data is compiled by an automated system, the Payment Analysis and Screening System (PASS), developed and maintained by staff at the Federal Reserve Bank of Minneapolis. PASS calculates the daily aggregate value of each DI’s FedCash, check, FedACH and FedWire Funds Service activities. It presents DIs’ daily aggregate value data graphically over time and permits peer group comparisons. Separately, the System also provides ACH origination and returns data. The System has placed important limitations on the data it shares with supervisors. Specifically, the System does not share any individual transaction information, and each supervisor receives data related to entities only for which it is the primary regulator.

How does the Federal Reserve use this data in supervision?

Supervisors use the payments data to assist with identifying emerging Operational/Transaction Risk and Legal/Compliance Risk, and for examination scoping and monitoring activities. Specifically, supervisory staff analyze a DI’s payments data during examination scoping to help identify spikes or changes in activity levels based on historical trends in the data for the DI and relative to peer institutions. These reports assist Bank Secrecy Act and Anti-Money Laundering (BSA/AML) or Operations Risk examiners in identifying potential areas of further review. Supervisory staff can also create customized peer groups to compare payments activity against DIs with similar or specific financial, operational and/or locational characteristics. By doing this, supervisory staff can identify whether activity is typical for a geographical area, for example, rather than focusing solely on nationwide peer groups. This type of analysis can show anomalous activity that could potentially be helpful in identifying fraud, risks from relationships with third-party payments providers and risk associated with BSA/AML compliance.

In addition, monitoring of payments activity between supervisory events can identify potential changes in an institution’s risk profile early. For example, an increase in ACH transaction volume between examination cycles may suggest a new customer relationship or a new product offering. This could prompt a call from supervisory staff to identify the cause of the change and, if necessary, discuss appropriate risk management practices with DI management.

How does the use of this data benefit DIs?

The use of payments data for examination scoping results in a more focused examination and more targeted information request from examiners. Knowing on which day(s) and how payments activity varied from historical patterns allows examiners to target their review on the areas of highest potential risk. For example, while scoping the examination, an examiner may identify a day when the bank experienced outgoing wire transfer activity well above the normal level of activity. The examiner would then focus her or his on-site investigation on that day’s transactions rather than asking management to provide outgoing wire information on several random days, which may or may not include the day the activity spiked.

Supervisory monitoring of payments activity between examinations can assist in identifying potential changes in an institution’s payments risk profile and taking appropriate responsive action. Specifically, early identification of changes in activities or risk allows supervisors to work with institutions on ensuring that appropriate controls are in place and the DI is appropriately monitoring activity before adverse consequences arise.

If you have questions regarding the payment data shared with supervisors, contact Ryan Bahr at 612-204-5106 or Ryan.Bahr@mpls.frb.org.


Endnote

1 Supervision staff from the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the National Credit Union Administration have access to the data.

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