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Foundations > Business of bank supervision > Flashcards

Business of bank supervision Flashcards

1
Q

Why do we supervise banks?

A

(1) Protect the depositor. (2) provide an efficient and competitve financial system. (3) protection of consumer rights.

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2
Q

What responsibilities do Reserve banks have for examining various banking organizations?

A

(1) compliance with laws and regulations issued by the Board of Governors. (2) ensure compliance with consumer protection laws and regulations issued by the Board and the Consumer Financial Protection Bureau.

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3
Q

Camels

A 
Capital adequacy
Asset quality
Management
Earnings
Liquidity
Sensitivity to market risk
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4
Q

SR 95-51 6 safety and soundness risks. CML OLR

A

Credit risk
Market risk
Liquidity risk

Operational risk
Legal risk
Reputational risk

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5
Q

3 “M”s Tradeoff between earnings and liquidity

A

Mix
Marketability
Maturity

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6
Q

Fed funds sold. Asset

A

Short term loans from other institutions that are paid back with interest on the following business day.

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7
Q

Asset securitization - deposit liability

A

The conversion of bank loans or othet assets into marketable securities for sale to investors.

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8
Q

Core deposits

A

Dda. Now. Money market mmda. Cds less than 250 k

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9
Q

Non core deposits

A

Cds more than 250k. Fed funds purchased. Fhlb advances. Any other borrowed funds. Known as wholesale funds

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10
Q

CFP. Contingency funding plan

A

Outline policies to manage stress environments

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11
Q

PCA

A

Prompt corrective action

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12
Q

Net short term non core funding dependence ratio

A

A positive ratio means the bank is supporting a portion of its long term assets with st-non core funding. A negative ratio occurs when the level of st investments exceeds the amount of st non core funding

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13
Q

Dependence ratio- st non core depsits over lt assets

A

Net Non-Core Funding Dependence Ratio - This ratio measures the degree to which the bank is funding longer-term assets (loans, securities that mature in more than one year, etc.) with non-core funding. Non-core funding includes funding that can be very sensitive to changes in interest rates such as brokered deposits, CDs greater than $100,000, and borrowed money. Higher ratios reflect a reliance on funding sources that may not be available in times of financial stress or adverse changes in market conditions.

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14
Q

Irr. Interest rate risk

A

The risk that interest income will erode due to adverse changes in interest rates

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15
Q

Rsa- rate sensitive assets

Rsl- rate sensitive liabilities

A

Gap analysis- slotted into time intervals according to their maturity dates (if they are fixed rate instruments ) or earliest repricing opportunities (for variable rate instruments)

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16
Q

Liability sensitive. Less than 100%. Rsa/rsl more liab than assets reprice. Exposure to rising interest rates

A

Rsa-rsl = negative. It means that more liabilities than assets reprice in that period

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17
Q

Rsa-rsl asset sensitive

Greater than 100%. Rsa over rsl. More assets than liab reprice. Exposure to falling interest rates

A

Positive. More assets than liabilities reprice in that period

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18
Q

Ear- earnings at risk. Accounting approach

A

For each “what if” scenario, the resulting net interest income is compared against the base case scenario to assess the bank’s irr exposure

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19
Q

Eve- economic value of equity= present value asset less present value liab. Economic value pertains to the quality of future earnings and earning potential

A

Focuses on how the value of a bank’s capital changes in response to changes in the interest rate environment. Really an economic interpretation of IRR. The cash flows of from assets and liabilities are calculated out until maturity and then discounted back to their present value

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20
Q

Alm. Asset liability management.

A

Focuses on stabilizing net interest income and meeting liquidity needs

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21
Q

Manage IRR

A

The bank can mitigate a liabilty sensitive position by selling lt securities and reinvesting in st maturities. Conversely, the banker can purchase lt securities to help reduce the exposure to a falling rate environment

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22
Q

5 P and 5 c

A 
People character
Payment capacity
Prospects condition
Protection collateral
Purpose capital
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23
Q

Asc450 - historical experience

A

Asc 310. Individual loans

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24
Q

Total classified asset ratio

A

Total classified assets over tier 1 capital + alll

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25
Q

Weighted classified asset ratio

A

Substandard 20%+ doubtful 50% + 100% loss over tier1 capital + alll

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26
Q

Earning

A

Mix volume trend

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27
Q

Roaa. Return on avg asset

A

Net income/ avg asset

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28
Q

Nim. Net interest margin

A

Net interest income / avg earning assets

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29
Q

Provision expense/ avg assets

A

Nim

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30
Q

Level trend peer why

A

What do you do when you analyze a ratio

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31
Q

Annualize

A

When looking at reports

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32
Q

Reg b

A

Equal credit opportunity act. Ecoa

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33
Q

Reg c

A

Home mortgage disclosure act hmda

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34
Q

Reg z

A

Truth in lending act - tila

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35
Q

Reg h

A

Flood disaster protection act - fdpa. Sec 208.25 fdpa

36
Q

Reg x

A

Real estate procedures act - respa interim rule respa. real estate settlement procedures act

37
Q

Fha

A

Fair housing act

38
Q

Reg dd

A

Truth in savings act

39
Q

Reg e

A

Electronic funds transfer act

40
Q

Reg cc

A

Expedited funda availabilty act

41
Q

Reg bb

A

Community reinvestment act. Cra

42
Q

Reg v

A

Fair credit reporting act

43
Q

Reg p

A

Privacy of consumer financial information

44
Q

4 elements of compliance mgmt

A

Board and management oversight.
Policies procedures and limits.
Risk monitoring and management information systems.
Internal controls

45
Q

Community reinvestment act - cra

A

Lending test- meet credit needs of its community

Service test - effectiveness to deliver bank services

Investment test- donation community development activities

46
Q

Cra composite ratings 4- banks overall rating to the public

A

Outstanding
Satisfactory
Needs to improve
Substantial non compliance

47
Q

5 component rating cra- banks performance on individual test component

A 
Outstanding
High satisfactory
Low satisfactory
Needs to improve
Substantial non compliance
48
Q

Cmp

A

Civil monetary penalties

49
Q

Trust- uniform interagency trust rating system- uitrs

A

Moeca- management. Operations- earnings- compliance -assets (mgmt of assets)

50
Q

Non fdic insured products

A

Profit motive- conmissions
Marketing motive - full service , cross selling
Protection motive- retain customer base

51
Q

Sr 94-11

A

Interagency statement in retail sales of non deposit products

52
Q

Sr 94-34

A

Examination procedures for retail sales of ndip

53
Q

Sr 95-46

A

Interpretation of interagency statement on retail sales of non deposit prod

54
Q

Sr 99-8. Ursit. Uniform rating system for information technology

A

Audit
management
Development
Support and delivery

55
Q

BHC expansion

A

Section 3 (a) (1) of the BHC act - company must file an application and obtain approval from Federal Reserve. A company that owns less than 5% or less of a bank or BHC generally is not considered to have control

56
Q

Gramm-Leach-Bliley Act

A

authorizes qualifying bank holding company to be a FHC, financial holding company. must be and remain:

well capitalized,
well managed
have achieved a CRA rating satisfactory or better

57
Q

permissabel under section 4 (c)(8) of BHC act

A

extend credit

58
Q

statutory factors reviewed in Section 3 applications

A

financial, managerial, competitive, convenience and needs

59
Q

merge BHC with BHC

A

section 3(a)(5)

60
Q

reviewed in branch applications

A

financial condition, capital adequacy, CRA performance, convenience and needs, character of management

61
Q

change in bank control notice

A

10% - required if ownership is 10% or more and the person is the largest shareholder, or the institution has registered under the SEC . No if not the largest.

62
Q

Overt discrimination

A

blatant, relating to actions, policies, or procedures that are on their face discriminatory

63
Q

disparate treatment

A

subtle form of discrimination usually the bank applying its policies in a discriminatory manner - will absolutely discriminate

64
Q

disparate impact

A

lender applies a facially neutral policy in a uniform way to all applicants but the policy or practice has disproportionate adverse impact on a prohibited basis - unintentinal

65
Q

asset quality ratio :Total classification

A

Total classified assets divide by Tier1 capital + ALLL

66
Q

Tier 1 leverage capital ratio (UBPR page 11)

A

most referenced. Should be 4% except is CAMELS composite 1, then should be 3%

Tier 1 capital divided by average total assets

this is not risk weighted

67
Q

ASC 310-40 - individual (FAS 114): 2-3-5

ASC 450 - pools (FAS 5): 6-7

A

1) segregate portfolio into loans within scope of asc 310-40 or ASC 450
2) review individual loans for impairment under ASC 310-40
3) is the loan determined to be impaired
4) if no, transfer the loan to a loan group with similar characteristics to b reviewed under ASC 450
5) determine the amount of impairment for each loan using one of 3 valuation methods
6) review groups of loans to estimate loss under ASC 450
7) determine the amount of loss estimate for each group based on loan history or qualitative factors
8) summarize ALLL computed under ASC 310-40 and aSC 450 and compare it to existing ALLL amount to determine if provisions are needed

68
Q

earning ratio: ROAA return on average assets

A

net income full year divided by average total assets

NI / ATA

69
Q

earning ratio: NIM ratio

make sure the denominator is avg earning assets, not the avg total assets

A

NIM divided by avg earning assets.

calculate intersest income less interest expense first for the numerator

70
Q

earning ratio: provision expense ratio

A

provision expense full year divideded by average total assets

71
Q

non interest income ratio

A

non interest income / total avg assets

72
Q

tier 1 capital calculation pg 11A

A 
perpetual preferred stock
common stock
surplus
retained earnings
AOCI - accumulated other compreshensive income

less net unrealized g/l on AFS securities
less: disallowed goodwill

73
Q

tier 2 capital

A

total ALLL
gross risk weighted asssets (RWA)
multiply 1.25 of RWA

lesser of ALLL or 1.25 of RWA is allowable Tier 2 capital

74
Q

ST NC Liab divide by
LT assets

or
ST non core liab less ST investments divide by LT assets

A

A positive number in either dependence means that the bank is supporting the long term assets with ST non core liabilities.

a negative ratio (more favorable) occurs when the level of ST investments exceed the ST non-core funding since ST Non core liab - ST investments is the numerator

should be perfectly matched: LT asset should be supported by LT liab

75
Q

6 different discrimination factors

A

overt, underwriting, pricing, redlining, steering and marketing.

76
Q

CRA evaluated on 3 tests

A

lending test, investment test and service test for large bank.

small bank does not have investment test. only lending and service (or community development)

77
Q

CRA component ratings for lending, investing and service. bank is given one of 5. not released to public

A

outstanding, high satisfacotry, low satisfactory, needs to improve, and substantial non compliance

78
Q

component - bank performance on individual test component - not released to the public
CAMELS

A

composite - banks overall rating to the public

79
Q

MSA

A

metropolitan statistical area

80
Q

4 specialties

A

safety and soundness
Consumer affairs
trust
information technology

81
Q

determine duties and responsibilites of a fiduciary (trust)

A

1) governing instrument/ document/ trust agreement
2) state and federal laws and regulations
3) case law or court order

82
Q

NDIP Reg R

A

non deposit investment product- not FDIC insured

83
Q

Break the buck

A

requres that a fund’s net asset value (NAV) does not fall below $1 share

84
Q

earnings is the first line of defense for loss

A

capital is the 2nd line of defense

85
Q

source of capital

A

internal, external, sale or redistribution of assets

86
Q

Regulation Y

A

Bank Holding Companies and Change in Bank Control

Foundations (29 decks)

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