Risk Management in the Private Banking Sector: Federal Reserve Bank of New York Issues New Guidelines
| Published date | 01 February 1998 |
| Pages | 384-388 |
| DOI | https://doi.org/10.1108/eb025851 |
| Date | 01 February 1998 |
| Author | Anita Ramasastry |
| Subject Matter | Accounting & finance |
Journal of Financial Crime — Vol. 5 No. 4 — Risk Management
RISK MANAGEMENT
Risk Management in the Private Banking Sector:
Federal Reserve Bank of New York Issues New
Guidelines
Anita Ramasastry
In July 1997, the Federal Reserve Bank of New
York (FRBNY) issued a paper on 'Guidance on
Sound Risk Management Practices Governing Pri-
vate Banking Activities' (the 'Guidelines'). The
paper is the culmination of the work of FRBNY
bank examiners who recently concluded a year
long study of 40 financial institutions in New York
City with private banking departments. Private
banking refers to the provision of financial services
to high net worth individuals. FRBNY examiners
evaluated the private banking policies and proce-
dures of commercial banks, Edge Act corporations,
trust companies and the US branches of foreign
banks in an attempt to gauge the level of risk
management at these institutions. The examiners
found 'varying degrees of sophistication and depth
in private banking activities'.1
The Guidelines do not constitute regulations
and thus are not legally binding. They are, how-
ever, a positive attempt to provide financial institu-
tions with practical guidance concerning their
private banking activities. The FRBNYs focus on
private banking is a result of increasing market
growth in this sector. As the market has increased,
so have demands and competition between banks.
Consequently, as the Guidelines note 'there are
increased pressures on relationship managers and
marketing officers ... to obtain new clients,
increase their assets under management, and
contribute a greater percentage to the net income
of their organizations'.2
The main goal of the Guidelines is to minimise
reputational and legal risk as well as to deter
money laundering. Recently, bank regulators have
become concerned with the risk management pro-
cedures in private banking. Of great concern is the
ability of financial institutions to determine the
identity of account holders in order to prevent the
use of private banking as a vehicle for money laun-
dering. Very often private banking customers open
accounts using intermediaries such as attorneys or
financial advisers as named account holders.
Alternatively, individuals form personal investment
companies and the companies become the account
holders. The identity of the true or 'beneficial'
owner of the funds cannot be ascertained under
these circumstances. The Guidelines are a further
extension of the FRBNYs emphasis on Know
Your Customer (KYC) policies with respect to
these situations.
The Guidelines identify the reputational and
legal risks associated with 'inadequate knowledge
of the client's personal and business background,
source of wealth and use of their private banking
accounts'.3 Additionally, the Guidelines outline the
essential elements of a control framework for pre-
venting and managing such risks. According to the
Guidelines, the key to preventing risk is for an
institution to understand the
complete
nature of a
Page 384
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