FCSIC has developed an Allowance for Insurance Fund Loss Procedure to evaluate the level of risk an insured bank poses to the Insurance Fund. FCSIC employs a risk matrix that contains general measures, financial ratios, and thresholds for assessing insurance risk. The risk matrix is divided into low-risk, medium-risk, and high-risk categories. Any System bank that breaches a medium- or high-risk threshold is closely scrutinized to determine whether a loss to the Insurance Fund is probable and can be reasonably estimated.

System bank losses could originate from investments, individual borrower loans and/or association direct notes. The probability of bank default related to any of these asset classes is generally very low. However, some associations are very large and a large association failure may cause its funding bank to default on its insured debt, exposing the Insurance Fund to losses.

The following tasks will be required:

Task 1:

• Review FCSIC’s Allowance for Insurance Fund Loss Procedure,
• Evaluate and opine on the appropriateness of the insurance risk matrix thresholds, and
• Develop enhancements to the current methodology for determining when a loss to the Insurance Fund is probable.

Task 2:

• Develop a high-level project plan for creating a model that computes a probability of default for each System bank and association, and
• Develop a high-level project plan for building out a loss given default rating system for the banks and associations in the System.

Additional advice and analytical support related to FCSIC’s risk management process may be requested.

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