Financial Examination System
A. The legal basis for Financial Examinations
According to Paragraph 1 of Article 2, Article 4 and Article 5 of the “Organic Act of the Financial Supervisory Commission (FSC)” and other applicable financial regulations, the Financial Examination Bureau (FEB) conducts financial examinations on financial institutions within the FSC’s jurisdiction.
According to Paragraph 1 of Article 7 of the “Agricultural Finance Act”, the FEB conducts financial examinations on Agricultural Bank and credit departments of farmers’ and fishermen’s associations empowered by the Council of Agriculture, Executive Yuan.
B. Objectives of financial examinations
The objectives to conduct financial examinations on financial institutions are as follows:
1. Evaluate business activities, risk management, regulatory compliance, consumer protection and compliance with government policies on financial institutions.
2. Evaluate finance and business (ex. capital adequacy, asset quality, management, earnings, liquidity, etc.) of financial institutions.
3. Foster financial institutions to improve examination findings and follow up their improvements, and revise financial regulations and address sound supervisory measures from reviewing business activities of financial institutions.
C. Types of on-site financial examinations
According to the examination scope and objectives, the types of FEB financial examinations are as follows:
1. Full-scope examinations: The FEB conducts risk-based examinations on finance, business and overall operations of financial institutions.
2. Targeted examinations: In response to financial market conditions or supervisory concerns, the FEB conducts examinations on certain financial institutions or specific business.
3. Commissioned examinations: According to Paragraph 1 of Article 7 of the “Agricultural Finance Act”, the FEB conducts examinations on Agricultural Bank and credit departments of farmers’ and fishermen’s associations empowered by the Council of Agriculture, Executive Yuan.
D. The frequency of full-scope examinations
The FEB determines examination types and frequencies on financial institutions not only in response to the FSC supervisory concerns, but also according to institutions’ business scale, nature of business activities, risk profile, impact on financial markets, and external audit work. The FEB conducts full-scope examinations on those institutions, in principle, once during each 2-year period, but may adjust the examination frequency referred to industry characteristics and institutions’ finance and business.
E. Changes of financial examination system
1. The Differential examination mechanism
a. To encourage financial institutions to improve their ability to exercise self-oversight, the FEB has implemented the differential examination mechanism for domestic banks since 2009. By applying the financial examination rating system and the review and analysis system on call reports submitted by financial institutions and considering any exception managements (ex. significant findings on regulatory compliance), the FEB has established the composite ratings to assign different risk grades for financial institutions. Therefore, the FEB determines different examination frequencies and depths on those institutions based on their risk grades and internal audit works.
b. The FEB has implemented the differential examination mechanism for financial holding companies, domestic banks, foreign bank branches in Taiwan, credit cooperatives, securities companies, securities investment trust companies, bills finance companies, insurance companies (including re-insurance companies) and credit departments of farmers' and fishermen's associations.
2. The Examination rating system for domestic banks
a.To implement risk-based examination mechanism, the FEB has established “the financial examination rating system for domestic banks,” which was modeled in part after similar rating systems implemented by financial regulators in the USA and Japan and modified in light of Taiwan’s financial supervisory concerns and examination focuses. The rating system has been implemented since 2011.
b.Through the examination rating system, the FEB evaluates financial soundness, regulatory compliance, consumer protection and risk management of domestic banks and then assigns 5 rating grades (A to E scale: A is the best rating and E is the worst rating) for those banks to reflect their overall business soundness and the degree of their compliance with supervisory concerns. The rating system helps examiners evaluate banks’ overall business management to achieve risk-based examination effectiveness.
F. Standardized examination operating procedures
1. To promote effectiveness and transparency of financial examinations in response to the trend of financial groups and structural complexity of financial markets, the FEB not only adjusted examination focuses in compliance with supervisory regulations and market environments, but also established “the FEB Operating Procedures for On-Site Examinations”, which set up consistent examination operating procedures for pre-examination process, reporting and following up significant examination findings, the exit meeting, etc.
2. For efficient implementation of financial examinations, the FEB set up examination manuals for financial holding companies, domestic banks, foreign bank branches in Taiwan, credit cooperatives, bills finance companies, securities investment trust companies, life insurance companies, non-life insurance companies, securities companies and credit departments of farmers’ and fishermen’s associations. According to current financial regulations and natures and procedures of financial institutions’ business, the examination manuals summarize specific areas needed to be reviewed and indicate related regulations to provide examiners with a set of standardized examination operating procedures.
3. To implement paper reduction and energy conservation and to protect global resources, the FEB posted examination checklists and related attachments, which financial institutions are required to fill out before on-site examinations, on FEB’s website. Furthermore, the FEB has set up the “One-Stop Window for Reporting of Financial Supervisory Information” for financial institutions to submit their call reports.
G. Improvement of examination findings
1. The purpose of financial examinations is to help financial institutions improve their business shortcomings. The FEB summarizes primary examination findings and annually discloses significant findings for each financial industry. In addition, the FEB also requires institutions to report their improvements on examination findings within specified time limit. Through reviewing those improvements, the FEB hopes institutions to improve their business problems.
2. The FEB has established the “Operating Procedures for Monitoring and Evaluation of Efforts by Financial Institutions to Make Improvements Where Examinations Reveals Shortcomings”. After evaluating institutions’ internal control functions and internal audit work, the FEB fosters those institutions to improve examination findings and enhance their internal control and internal audit functions, and also requires their internal audit departments to make an improvement plan on the findings according to their significance. The FEB hopes institutions’ board of directors and business management to take their responsibilities in monitoring related improvements and internal audit work.
H. Examination communication and training mechanism
1.To enhance communication or contact with financial institutions, the FEB has taken the following measures:
a. Individual case: The FEB communicates and discusses primary examination findings with examined institutions during on-site examinations and in the exit meeting. If necessary, the FEB may invite auditor general of institutions to specify what sort of improvements needed to be made.
b. General case: The FEB may hold seminars to communicate and discuss primary examination findings, important measures, and matters requiring attention during examinations and in cases where improvements needed to be made, with internal audit departments of financial institutions.
c. If finding any doubt about or inappropriateness in the application of existing regulations, examined institutions may submit the feedback form to examination personnel during on-site examination period and the feedback form will be transferred to related bureaus for their references.
2.The competent training institutions recognized by the FSC should bring new operating procedures for internal auditing, frequently asked questions (FAQ) on the application of regulations, primary financial examination findings and supervisory concerns on financial institutions’ business activities, into subjects of their internal audit training programs to help financial institutions’ auditors comply with and implement related regulations.