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TE > 1.1 Basic Concepts > Flashcards

1.1 Basic Concepts Flashcards

1
Q

What does the FDIC do?

A

conducts exams to ensure public confidence and protect the DIF. Public confidence is important because customer deposits are a primary funding source for banks. The DIF is necessary to protect customers’ deposits and resolve failed institutions.

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2
Q

What do on-site exams do? (3 points)

A

1) ensure stability of banks by identifying undue risks and weak risk mgmt practices.
2) review CAMELS components/compliance with laws and regs
3) identify the cause and severity go problems in individual banks and emerging risk in the industry

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3
Q

What empowers examiners to make a thorough examination of bank affairs?

A

FDI Act Sections 10(b) and (c)

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4
Q

Examiners should avoid what?

A

Any form of political communication

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5
Q

UFIRS is what? (3 points)

A

Uniform Financial Institution Rating System

1) effective supervisory tool for evaluating financial institutions on a uniform basis and for identifying institutions requiring special attention.
2) take into consideration certain financial, managerial, and compliance factors common to all institutions
3) assists congress in assessing the aggregate strength of the financial industry and following risk management trends.

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6
Q

what is everything assessed in relation to?

A

consideration is given to an institution’s size and sophistication, the nature and complexity of activities, and its general risk profile.

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7
Q

Part 309 prohibits what?

A

Part 309 - Confidentiality standards
banks cannot, except in very limited circumstances, disclose the ratings or any part of an ROE without the prior written consent of the primary federal regulator.

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8
Q

An Exit Meeting addresses what? (5 points)

A

1) EIC communicates recommended component and composite ratings with senior management and the BOD, if appropriate.
2) indicate ratings are subject to RO/RD review
3) discuss key factors considered in ratings
4) indicate that the composite rating is not an average of component ratings, but rather a qualitative evaluation of overall managerial, financial, and operational performance.
5) reminder of Part 309 Confidentiality

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9
Q

What is an examination letter and when should it be given? (3 points)

A

1) outlines FDIC’s expectations for troubled institutions between the close of an exam and the issuance of an enforcement action.
2) delivered by Field Supervisors during exam exit meeting
3) for any bank newly assigned a composite rating of 3 or worse

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10
Q

What does an examination letter convey? (4 points)

A

1) tentative composite rating downgrade
2) the expectation that management stabilize the institution’s risk profile and strengthen the financial condition
3) that any actions taken to materially expand the balance sheet or risk profile and inconsistent with supervisory expectations
4) management is required to obtain non-objection from the RD before engaging in any transactions that would materially change the balance sheet composition (I.e. asset growth, volatile funding sources, etc.)

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11
Q

When is a temporary order appropriate?

A

when immediate corrective measures are needed due to a higher-risk situation

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12
Q

what is the first priority of RMS?

A

effective oversight of banks requiring special attention.

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13
Q

Examination Frequency Requirements

A

full scope, on-site examination at least once every:
- 12-months
- can be extended to 18-months, if:
TA of $1 billion or less
Bank is well capitalized
Management rating of 1 or 2 at most recent exam
Composite rating or 1 or 2 at most recent exam
(composite FRB ROCA rating of 1-2 for foreign)
Not formal enforcement action
No change in control in the preceding 12-months

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14
Q

What are alternate exams and when are they acceptable?

A

Exams may be conducted in alternate 12 or 18 month periods if the full scope, on-site exam completed by state authority during the interim period is acceptable
o Only acceptable for:
1 or 2 rated banks
stable and improving 3 rated banks if:
composite rating is confirmed by offsite review
no adverse trends are noted

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15
Q

When is an exam deemed to have ended?

A

the earlier of the date the EIC submits the report for review, or 60 calendar days from the examination start date as defined in ROE instructions

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16
Q

Specialty Exams - what governs the exam interval?

A

internal RMS policy

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17
Q

Specialty Exams - how often should exams be conducted?

A

generally concurrently with RM exams - except when impractical or inefficient to do so.

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18
Q

Specialty Exams - who has authority to adjust specialty exam cycles and when/why would they be adjusted? (4 points)

A

1) regional director may make reasonable adjustments
to accomodate concurrent exams for 1 and 2 rated specialty areas.
2) Internal policy also allows adjustments to 3 rated speciality areas.
3) should not extend 4 or 5 rated areas beyond 12 month cycle.
4) Municipal securities dealers must meet the 2 year cycle requirement

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19
Q

Speciality Exams - what speciality exam is required to be conducted by the FDIC if the state does not complete it?

A

BSA exam

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20
Q

Insured Branches of Foreign Banks - must be examined every ___?

A

1) 12 months
2) may be extended to 18 months if:
a) TA of less than $1 billion
b) ROCA composite 1 or 2
c) No formal enforcement action
d) No change in control in past 12 months
e) Have T1C ratio equal or greater than 6% and Total Capital ratio equal or greater than 10% - when reported on consolidated basis
f) Liquidity - Have maintained on a daily basis (over the previous 3 Qtrs) eligible assets in an amount not less than 108% of the preceding quarter average third-party liabilities, and have sufficient liquidity to meet obligations to third parties

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21
Q

what is the objective of risk focused supervision?

A

to efficiently evaluate the S&S of a bank

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22
Q

what does the most effective exam approach do?

A

focuses examiner resources on assessing management’s ability to identify and control risks.

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23
Q

what does risk focused supervision consider in determining a bank’s risk profile?

A

Considers the adequacy of audit and internal control practices in determining a bank’s risk profile and tries to reduce regulatory burdens by testing rather than duplicating the work of banks audit and control functions

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24
Q

what is a full scope exam? (3 points)

A

the procedures necessary to complete the mandatory pages of the uniform ROE and evaluate all components of the UFIRS rating system

all exam activities are considered in the overall assessment of the institution

RM (CAMELS), IT, BSA/AML/OFAC, Trust, Registered Transfer Agent, Municipal Securities Dealers, Government Securities Dealers

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25
Q

what is a limited scope exam/visitation?

what is it used for?

A

an exam that does not satisfy full scope requirements

Used to:

1) assess changes in an institutions risk profile and monitor compliance with corrective actions
2) investigate adverse or unusual situations
3) determine progress in correcting deficiencies, or
4) assess compliance with supervisory requirements established through an order

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26
Q

can examiners assign ratings as a result of a limited scope exam?

A

 Depending on the scope, purpose, and sufficiency of the reviews, examiners can assign composite ratings and component ratings. Component ratings for areas that were not reviewed should be brought forward from the previous examination

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27
Q

how should the results of a limited scope exam be conveyed?

A

in a memorandum from the EIC to the RD

If shared with bank - results can be in any appropriate format

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28
Q

how are limited scope reviews used for institutions subject to corrective action? (3 points)

A

1) Supervisory strategies for institutions operating under an enforcement action, particularly formal, should generally include limited scope reviews
2) Limited scope reviews should be scheduled within six months after an enforcement action is issued to evaluate an institutions progress in implementing the corrective program
3) If forgo, document reasons in RO files

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29
Q

De Novo - why is it important to monitor De Novos?

A

Adverse economic conditions and other factors often negatively affect newly chartered institutions more than established institutions

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30
Q

what are some commons risk elements observed at troubled or failed de novo?

A
  • Rapid growth
  • Over reliance on volatile funding sources
  • Concentrations without compensating controls
  • Significant deviations from approved business plans
  • Non-compliance with the order approving deposit insurance
  • Weak risk management practices
  • Unseasoned loan portfolios
  • Significant consumer protection problems
  • Problematic third-party relationships
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31
Q

what are the exam frequencies for de novo? (4 points)

A
  • If a newly chartered insured bank is a sub of a multi-bank holding company that is in satisfactory condition, normal exam cycle should be followed
  • Otherwise, a limited scope exam within first 6 months and a full-scope exam within first 12 months.
  • Annual exams through 3rd year of operation
  • After initial full-scope exam, exams may be alternated with state
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32
Q

what is de novo period?

A

3 years

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33
Q

who has responsibility to monitor de novo?

A

RO for 3 year period

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34
Q

what is considered a material or significant change for asset growth in de novo?

A

+/- 25% deviation from asset growth projections

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35
Q

what does a de novo need to do if they have a material or significant change from their business plan?

A

apply for RO approval

36
Q

what are examples of significant changes?

A

o Geographic markets
o Loan products and services
o Investment strategies and levels
o Deposit products and services
o Other services, such as private banking or trust services
o Liquidity strategies and funding sources
o Delivery channels, particularly through third-party relationships
o Fixed assets
o Other activities
o Customer categories
o Relationship with parent an affiliates

37
Q

When is an exam required when converting to an insured state. non-member institution? (2 points)

A

full scope exam w/in 12 months of the LX prior to conversion for national, SM, thrift, and non-insured institutions.

If the prior exam was a state exam, the RD has authority to accept – should only be done for 1 or 2 rated banks

38
Q

when there is a change in ownership what should be done?

A

Full scope exam within twelve months after a change in control

39
Q

what does coordination of exam cycles help to achieve? (3 points)

A

helps to

1) effectively use resources,
2) minimize duplication of efforts, and
3) reduce business interruptions to the bank

40
Q

for what exams should coordination efforts be made?

which should receive particular emphasis?

A

1) examinations of institutions, holding company inspections, subsidiary institution exams, interstate banks, and chain banks

2)
a) HC/Subsidiary - banking organizations with over $10B in consolidated assets and those banking organizations (assets in excess of $1B) that exhibit financial weaknesses

b) Interstate/Chain – should be combination of traditional and top-down approach supervisory strategies.
- Chain - should consider the financial impact of the consolidated chain on the individual banks within that chain

41
Q

On-site exams are…

A

critical to the supervisory process

42
Q

what necessitates emphasis on more frequent and less-structured supervision? (2 points)

A

1) Diversified risks in the industry and

2) the volatile performance and financial condition of individual institutions

43
Q

what is the purpose of more frequent & less structured supervision?

A

to identify and obtain corrections in an institution’s policies and procedures before serious financial problems develop

44
Q

During pre-planning, or ASAP on-site, what should be done?

A

Assess activities and condition of non-bank subsidiaries in pre-planning or ASAP onsite to determine need for subsidiary exam

45
Q

what are some pre-planning resources?

A 
offsite tools, 
financials, 
correspondence, 
past ROEs, 
information from other regulators, 
media/public information/articles, 
rumors/observations/other
46
Q

what does anticipatory supervision aim to accomplish?

A

To effectively prevent or mitigate serious problems in an institution, such problems or conditions that are likely to cause problems must be identified and corrected early

47
Q

how should written and oral commentary be framed (basis of anticipatory supervision)?

A

discussions and written commentary should clearly convey the issue that is cause for concern and explain the risks to the institution’s operations or financial performance if not addressed in a timely manner

48
Q

When are alternating exams allowed?

A

when the state examination conducted during the intervening period is “adequate”

49
Q

what are some considerations for determining if a state exam is adequate? (4 points)

A

Completeness of state ROE

Adequacy of supporting documentation

Ability of state banking department to achieve exam objectives over time (budgets, training, reports, reviews, etc.)

Adequacy of formal of informal arrangement between state and FDIC

50
Q

what does effective pre-planning do? (3 points)

A

helps :
support risk-scoping decisions (work performed and targeted areas)

determine staffing needs (# and expertise)

enhance examination efficiencies and reduce disruptions at institutions.

51
Q

when are branch exams conducted and who decides if they are necessary?

A

1) as-needed basis only

2) RD decides if necessary to conduct

52
Q

request lists should be ______ and ______ if possible

A

combined

tailored

53
Q

how much advanced notice should be provided for an upcoming exam?

A

2 weeks

54
Q

what should examiners do to minimize disruptions for institutions?

A

conduct as many exam procedures offsite as possible

55
Q

what does a review of external audit workpapers provide examiners with?

A

Provides info on internal control environment and financial reporting practices

56
Q

when should external audit workpapers be reviewed? (4)

A

when:

1) Significant concerns exist regarding matters that would fall within the scope of the work performed by the banks external auditor, OR
2) The bank has been, or is expected to be, assigned a UFIRS composite rating of 4 or 5

AND
the examiner believes the exam will benefit from the workpaper review

Note: if review is not conducted – document reasons and maintain in exam workpapers

57
Q

what is a Shared Loss Agreement (SLA)? (3)

A

a contract between FDIC and institutions that acquired failed bank assets

where the FDIC agrees to absorb a portion of the losses, if incurred, on specific assets (usually loans)

over specific timeframes

58
Q

what is the typical structure of an SLA? (6)

A

FDIC absorbs a predetermined percentage (i.e. 80% or 95%) of the incurred losses (up to pre-determined $ threshold) and receives a pro-rata share of recoveries (i.e. 80% or 95%) of recoveries

Loss coverage only maintained when institution adheres to SLA terms and makes good faith collection efforts

FDIC’s reimbursement for losses on assets covered by SLA is measured in relation to an asset’s book value on the records of the failed bank on the date of its failure
- NOT in relation to the acquisition-date FV at which covered assets must be booked by the acquiring institution

Commercial: losses for 5 yrs, recoveries for 8 yrs

Res: losses and recoveries for 10 yrs

59
Q

what does an institution record for the life of the SLA?

A

an indemnification asset to reflect the expected FDIC loss reimbursement under the life of the SLA

60
Q

what does an SLA do?

A

keep assets in the private sector with local acquirers and reduce resolution costs

61
Q

what are the seven exam considerations for SLAs?

A
  • Communicate with DRR during pre-planning
  • Review SLA & consider its implication on asset review, accounting, classifications, and ratings
  • Include SLA-covered loans in sample
  • In most cases, the portion of an asset covered by an SLA should not be subject to adverse classifications because loss sharing represents a conditional guarantee from the FDIC.
  • Generally, amount that would otherwise by adversely classified should be reduced by the applicable coverage rate (i.e. 80%)
  • Make sure indemnification asset has a zero balance when SLA expires
  • DRR evaluates compliance with SLAs
62
Q

what are exam requirements for institutions that received FDIC assistance, or were involved in purchase and assumption or deposit transfer transactions?

what banks are exempt?

A
  • Visitation/limited scope exam within 30 days of the transaction date to determine how funds from the FDIC are being used and whether the bank is in compliance with any applicable assistance agreement.
  • Second visitation within 6 months of transaction
  • Full scope exam within 12 months of transaction

Acquiring institutions with total assets in excess of 10x the deposits required AND have composite 1 or 2 are exempt from these requirements

63
Q

open communication with bank management helps ensure what?

A

1) exam requests are met and

2) disruptions minimized

64
Q

what should examiners encourage throughout the exam (hint BOD)?

A

voluntary BOD attendance/involvement in exam

65
Q

when should meeting with management occur (at a minimum)?

A
  • Pre-planning, meetings throughout exam, and exit mtg.

* Ensure open, two-way communication

66
Q

when are meeting with the BOD required and who should attend?

when is a BOD Committee allowed?

A

1) Composite 4 or 5 - EIC and RD or designee should meet with the BOD (with required quorum) during or after exam
2) Composite of 3 - EIC should meet with BOD (quorum) during or after the exam. RO representation is AT THE DISCRETION of the RD

3) Composite 1 or 2
EIC meets with BOD or committee during or after exam. RO representation AT THE DISCRETION of RD

o once every 36 months
o Management rated 3, 4, 5
o Any other CAMELS rated 4 or 5
o Any two CAMELS are 3 or worse

For 1 or 2 rated:
BOD Committee allowed only when committee:
o Influential to policy
o Meets regularly
o Contains reasonable outside director representation
o Reports regularly to BOD

67
Q

what is the primary objective of a Trust exam?

A

to determine whether its operations or the administration of its accounts have given rise to
- possible or contingent liabilities, or
- direct liabilities (estimated losses),
which could reduce the bank’s capital accounts

68
Q

what are the five areas of trust?

A

MO - E - CA

  • Management
  • Operation, Audit, Internal Controls
  • Earnings
  • Compliance
  • Asset Management
69
Q

If IT is outsourced management and the BOD maintain what?

A

oversight responsibilities

70
Q

what are the four review areas of IT?

A

MADS

  • Management
  • Audit
  • Development and Acquisition
  • Support and Delivery
71
Q

what is the primary objective of an IT exam?

A

to determine the confidentiality, integrity, and availability of records produced by automated systems

72
Q

what is the IT rating system?

A

URSIT

73
Q

what is the purpose of the BSA?

A

to ensure U.S. financial institutions maintain appropriate records and file certain reports involving currency transactions and customer relationships

74
Q

what ratings do BSA exam findings affect?

A

Mgmt and Composite

75
Q

what is the purpose of consumer protection exams?

A

to determine a bank’s compliance with various consumer and civil rights laws and regulations

76
Q

key components of a consumer protection review?

A

Truth in Lending, Truth in Savings, CRA, and Fair Housing regulations

77
Q

what can violations fo consumer laws result in?

A

civil or criminal liabilities, and consequently, financial penalties

78
Q

what are the CRA ratings?

A
  • Outstanding
  • Satisfactory
  • Needs to improve
  • Substantial noncompliance
79
Q

Part 309 restricts what?

What is acceptable/allowable disclosure?

A

inappropriate or unapproved disclosure of ROE findings and ratings

disclosure allowed to:

  • parent holding company or majority shareholder
  • employees or agents of the bank where disclosure is necessary for them to complete their job
  • accounts and attorneys acting in their capacity as a bank employee/agent
80
Q

what should work paper documentation contain?

A

should generally describe:

  • key audit/risk scope decisions,
  • source documents reviewed,
  • general examination procedures performed
81
Q

what should the summary statement of a workpaper include?

A
  • Detailed exam findings and recommendations
  • Supporting facts and logic
  • Record managements responses and proposed completed dates
82
Q

for each significant job task performed what should be done?

A

Appropriate documentation should be prepared and retained in the workpapers

83
Q

how should documents be stored?

A

securely

electronically in RADD

84
Q

work paper retention timelines:

BSA?

Line sheets?

Officer’s Qs (RM, IT, Trust)?

all other?

A

BSA - 5 years

Line sheets - on exam cycle

Officer’s Qs - 5 years from exam start date OR indefinitely if irregularities are discovered

other - purge after one exam cycle, UNLESS:

  • composite 3 or worse (retain till satisfactory again)
  • existing or pending administrative action
  • special docs relating to past insider abuse
  • docs subject to previous criminal referral letters
  • other sensitive docs
  • other as deemed useful
85
Q

what should examiners do if exam info is compromised?

A

contact help desk within 1 hour of discovery

notify supervisor ASAP

local police (if theft of equipment involved)

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