Nyc B6 Gao Fdr- Occ Interview Re 911

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Prepared by: Tom Conahan Date: 12/13/01 Job Code: 250045

DOC Library: Goal 1 DOC Number: 333942

Interview With OCC Re: 9/11 Reviewed by: Toni Gillich Review Date: _January 4. 2001

Record of Interview Purpose

To determine the immediate impact of the September 11 attacks on National Banks and to learn of OCC's longer term plans to respond.

Contact Method

Interview

Contact Place

Office of the Comptroller of the Currency 250 E Street, N.W. Washington, D.C.

Contact Date

November 29, 2001

Participants

Office of the Comptroller of the Currency (OCC): Mike Brosnan, Deputy Comptroller for Risk Evaluation, (202) 874-4660 Ralph Sharpe, Deputy Comptroller, Technology, (202) 8744-572 Vernon Stafford, Director, Large Bank Supervision, (202) 874-5190 Kevin Bailey, Core Policy, Laura McAuliffe, Senior Advisor OIG/GAO Liaison, (202) 874-4603

GAO Mr. James McDermott, Assistant Director, FMCI Ms. Toni Gillich, Analyst, FMCI

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Record of Interview

r Prepared by: Tom Conahan Date: 12/13/01 Job Code: 250045

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Mr. Tom Conahan, Senior Analyst, FMCI a

Comments/Remarks

Unless otherwise noted, the OCC officials said the following:

National Banks Experience No Major Disruptions

There were no significant disruptions to National Banks from the September 11 attacks. There were some minor disruptions, like ATM machines that did not work and branches that had to be closed in the lower Manhattan area, but these were generally minor, localized problems. Because the commercial paper market was not functioning for a couple of days, some firms drew down their credit lines with banks, resulting in greater credit risk. The Federal Reserve made funds available to enhance banks' liquidity, but no national banks needed them. However, the Federal Reserve's offer of funds served as a psychological boost. National banks did take advantage of the lower discount rate however. While banks' credit exposures increased significantly in the first 4 or 5 business days, it was done thoughtfully and the OCC monitored the situation throughout. Counter party credit exposures went in some cases from about $lbillion a day to about $5 billion. Banks were thoughtful in making their business decisions, but they also wanted to be good citizens. The OCC officials stressed that they were monitoring the situation continually. The officials note that among the companies that were drawing down their credit lines were the airlines, which were losing larg<"~ amounts of money. The officials said that the airline industry's problem, were not enough to truly affect the banking industry, but they did represent a "body blow." The OCC tried to act with common sense in the days following the attacks. There were a number of smaller issues that emerged such as granting specific banks the authority to close branches. Such requests came from banks in the lower Manhattan area, but also other areas, such as in the Sears Tower in Chicago, which seemed vulnerable after the attacks. Banks had the authority to close branches on the 11th. Other issues involved some banks wanting to move funds in ways that might violate certain rules, such as 23 A. While these communications were often informal, they were handled on a case-by-case basis and were handled responsibly. Both the banks and the OCC wanted to act as "good citizens" in the period following the attacks. The emphasis was on maintaining confidence in the system. On the 14th, U.S. regulators issued a memo on how balance sheets may balloon (attached). The officials said that they were willing to exercise some forbearance on specific issues, but this simply meant that they were willing to talk. Prompt Corrective Action would not kick in for technical violations. However, there were no blanket approvals of any particular activities. In the days following the attacks the OCC participated in a number of conference calls with other agencies to share information. They noted that the President's Working Group operated well during this period. The-

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Record of Interview

Prepared by: Tom Conahan Date: 12/13/01 Job Code: 250045

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other agencies that participated in these calls included other bank regulators, insurance regulators, and securities regulators. The OCC officials said that these calls worked well. The key to all of the regulators' efforts in the days following the attacks, was to maintain overall confidence and return to normalcy. Comptroller Hawke was grounded because of the prohibition on flying, but he and other senior OCC officials were in contact with examiners on site at the banks to determine what was going on. The officials noted that the Y2K planning done by banks was helpful in surviving this crisis.

Lessons Learned

The officials said that the attacks caused OCC officials to think a lot about contingency planning for possible future attacks or other highly disruptive events. For example, while senior OCC officials were spread throughout the country at the time of the attacks, they were reasonably successful in communicating with the rest of the agency because the OCC offices in Washington were unaffected by the attacks. The attacks prompted OCC officials to consider how they would proceed if their main offices were damaged or somehow affected. They would need back up communication facilities. They are developing updated phoned lists, etc. On October 31 there was an interagency meeting to discuss the implications of the September 11 attacks. While the consensus was that contingency plans worked pretty well in the affected areas, they need to be revisited. One of the challenges is developing a framework to deal with a wide variety of different contingencies. No one contemplated attacks of the sort that occurred on September 11, which required that banks move their entire operations. The officials noted that the framework should include consideration of the staffs' psychological as well as physical needs. On October 25, BITS, which is the technology group of the Financial Services Roundtable, had a forum to consider the implications of the attack, which included representatives from the regulatory agencies. Their deliberations were similar to those that occurred at the interagency meetings. They noted that prior to the attacks, most of the planning for disaster recovery was data-centered. These attacks showed that the needs of people, both psychological and physical, must be considered. Most guidance on contingency planning, including OCC's Comptroller's Handbook for Information Technology, is based on 1996 guidance from the FFIEC. The regulators are now considering what changes need to be made to this guidance based on lessons learned from the attacks. OCC has prepared a document for Treasury that summarizes where things stand at this point, (attached) identifying current gaps in preparedness. The banking industry is working primarily through BITS to improve the industry's preparedness. The OCC is hoping to leverage off of this work in updating their guidance.

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Prepared by: Tom Conahan Date: 12/13/01 Job Code: 250045

The OCC officials noted that certain issues in this regard have been brought into sharp focus. For example, as has been publicized, some institutions, with one particularly noteworthy example, thought they haa separate data lines from their facilities only to learn that they were routed through the same switching station. Another issue that emerged in this case is the need to locate facilities and their back-ups further apart from one another. The officials noted that some banks are rethinking their consolidation plans. For example, Fleet was in the process of consolidating three data centers located along the East Coast into a single center. The have now reconsidered their plan. The officials note that many national banks have diverse locations. For example, Bank of America has a number of diverse locations and withstood 9/11 quite well. A recent trend among large national banks toward consolidation of facilities is likely to reverse itself in the future as the benefits of dispersion become clear. Banks are going to have to consider a number of issues as they engage in their contingency planning. Currently only a few firms provide these services; the market may grow. As mentioned earlier, one issue that banks must consider is the impact of events like 9/11 on people. In the past, the focus has been on machines and where they are located and how they interact. However, the psychological and physical impact on the key people required to run those machines must also be considered. Banks have to think about how many people should possess certain skills, in case some are lost. The officials noted that the fundamentals of contingency planning really have not changed, but the contingencies for which banks have to prepare have. The OCC officials also commented on the concentration of certain market functions in small numbers of firms, such as was the case with BONY and Cantor Fitzgerald. They noted that they cannot, as regulators, dictate some changes to the market, like what lines of business banks may or should pursue. The market will determine such things. The officials said that preparations for possible disruptions associated with Y2K helped in preparing for this crisis. They mentioned that programs to enhance telecommunications access for key individuals, such as the GETS and TSP programs helped where they were accessible but, in some cases, OCC staff began to turn in their access cards containing the codes they would need to access the systems. This was unfortunate. OCC is looking at the idea of having its staff hold on to these cards.

The Importance of Bank Capital

The OCC officials said that another issue that has gained some attention in light of the attacks is that of the importance of bank capital. September 11 showed that even the best capitalized bank can suffer serious damage to its operations if its data systems, or telecommunications lines are disrupted or destroyed. Banks' back office operations are the keys. A group of banks including Mellon Bank and State Street Bank have been vocal on the issue of the importance of capital versus back office

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Prepared by: Tom Conahan Date: 12/13/01 Job Code: 250045

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operations and internal controls, stating that the latter are the matters of most importance. The OCC officials suggested we review a piece written by Karen Shaw Petrou discussing the events of September 11, that notes that capital was not the key, but liquidity and capital (attached). There is currently discussion in the industry about revising the Basle Accord, in terms of operational risk. Some industry analysts believe that 9/11 confirmed that capital is not the issue for operational risk; rather, it is back-office processing and internal controls. There is an industry group consisting of Mellon, States Street, and others who are looking at asset management issues and the Pillar II assessment process that supplements specific capital allocations. The effects of the attacks on financial institutions and markets have fueled this debate domestically and abroad, as many believe that the problems were more related to liquidity and confidence. The key question being discussed is how much capital should banks hold against a certain contingency.

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Record of Interview