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downgrade the risk class ratings. Externally, the OCC’s bank
examiners would review certain of the risk class ratings assigned
by FNBC, particularly those assigned to major credits. The OCC
did not review all risk class ratings assigned, and the OCC did
not always agree with the risk class rating assigned by FNBC.
3. CRESCO Loss Reserve Factors
a. Loss Reserves
Banks were required to establish loss reserves for expected
credit losses. These reserves were ascertained for each
transaction by applying the following three factors: (1) The
expected credit exposure, (2) the probability of default by the
counterparty, and (3) the percentage of loss in the event of
default by a counterparty.
b. CRESCO
CRESCO was FNBC’s overseer with respect to credit risk
appetite, its credit risk policies and procedures, and the
portfolios of credit risk that resulted from its activities. For
each risk classification, FNBC established a CRESCO loss reserve
factor to estimate its rate of credit losses for financial
accounting and everyday business purposes. This factor was
reviewed periodically by CRESCO.
The determination of the CRESCO loss reserve factor involved
many subjective estimates and business judgments. The loss
reserve factor was based on historical commercial loan loss
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