Business of bank supervision Flashcards
Why do we supervise banks?
(1) Protect the depositor. (2) provide an efficient and competitve financial system. (3) protection of consumer rights.
What responsibilities do Reserve banks have for examining various banking organizations?
(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.
Camels
Capital adequacy Asset quality Management Earnings Liquidity Sensitivity to market risk
SR 95-51 6 safety and soundness risks. CML OLR
Credit risk
Market risk
Liquidity risk
Operational risk
Legal risk
Reputational risk
3 “M”s Tradeoff between earnings and liquidity
Mix
Marketability
Maturity
Fed funds sold. Asset
Short term loans from other institutions that are paid back with interest on the following business day.
Asset securitization - deposit liability
The conversion of bank loans or othet assets into marketable securities for sale to investors.
Core deposits
Dda. Now. Money market mmda. Cds less than 250 k
Non core deposits
Cds more than 250k. Fed funds purchased. Fhlb advances. Any other borrowed funds. Known as wholesale funds
CFP. Contingency funding plan
Outline policies to manage stress environments
PCA
Prompt corrective action
Net short term non core funding dependence ratio
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
Dependence ratio- st non core depsits over lt assets
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.
Irr. Interest rate risk
The risk that interest income will erode due to adverse changes in interest rates
Rsa- rate sensitive assets
Rsl- rate sensitive liabilities
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)
Liability sensitive. Less than 100%. Rsa/rsl more liab than assets reprice. Exposure to rising interest rates
Rsa-rsl = negative. It means that more liabilities than assets reprice in that period
Rsa-rsl asset sensitive
Greater than 100%. Rsa over rsl. More assets than liab reprice. Exposure to falling interest rates
Positive. More assets than liabilities reprice in that period
Ear- earnings at risk. Accounting approach
For each “what if” scenario, the resulting net interest income is compared against the base case scenario to assess the bank’s irr exposure
Eve- economic value of equity= present value asset less present value liab. Economic value pertains to the quality of future earnings and earning potential
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
Alm. Asset liability management.
Focuses on stabilizing net interest income and meeting liquidity needs
Manage IRR
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
5 P and 5 c
People character Payment capacity Prospects condition Protection collateral Purpose capital
Asc450 - historical experience
Asc 310. Individual loans
Total classified asset ratio
Total classified assets over tier 1 capital + alll
Weighted classified asset ratio
Substandard 20%+ doubtful 50% + 100% loss over tier1 capital + alll
Earning
Mix volume trend
Roaa. Return on avg asset
Net income/ avg asset
Nim. Net interest margin
Net interest income / avg earning assets
Provision expense/ avg assets
Nim
Level trend peer why
What do you do when you analyze a ratio
Annualize
When looking at reports
Reg b
Equal credit opportunity act. Ecoa
Reg c
Home mortgage disclosure act hmda
Reg z
Truth in lending act - tila
Reg h
Flood disaster protection act - fdpa. Sec 208.25 fdpa
Reg x
Real estate procedures act - respa interim rule respa. real estate settlement procedures act
Fha
Fair housing act
Reg dd
Truth in savings act
Reg e
Electronic funds transfer act
Reg cc
Expedited funda availabilty act
Reg bb
Community reinvestment act. Cra
Reg v
Fair credit reporting act
Reg p
Privacy of consumer financial information
4 elements of compliance mgmt
Board and management oversight.
Policies procedures and limits.
Risk monitoring and management information systems.
Internal controls
Community reinvestment act - cra
Lending test- meet credit needs of its community
Service test - effectiveness to deliver bank services
Investment test- donation community development activities
Cra composite ratings 4- banks overall rating to the public
Outstanding
Satisfactory
Needs to improve
Substantial non compliance
5 component rating cra- banks performance on individual test component
Outstanding High satisfactory Low satisfactory Needs to improve Substantial non compliance
Cmp
Civil monetary penalties
Trust- uniform interagency trust rating system- uitrs
Moeca- management. Operations- earnings- compliance -assets (mgmt of assets)
Non fdic insured products
Profit motive- conmissions
Marketing motive - full service , cross selling
Protection motive- retain customer base
Sr 94-11
Interagency statement in retail sales of non deposit products
Sr 94-34
Examination procedures for retail sales of ndip
Sr 95-46
Interpretation of interagency statement on retail sales of non deposit prod
Sr 99-8. Ursit. Uniform rating system for information technology
Audit
management
Development
Support and delivery
BHC expansion
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
Gramm-Leach-Bliley Act
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
permissabel under section 4 (c)(8) of BHC act
extend credit
statutory factors reviewed in Section 3 applications
financial, managerial, competitive, convenience and needs
merge BHC with BHC
section 3(a)(5)
reviewed in branch applications
financial condition, capital adequacy, CRA performance, convenience and needs, character of management
change in bank control notice
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.
Overt discrimination
blatant, relating to actions, policies, or procedures that are on their face discriminatory
disparate treatment
subtle form of discrimination usually the bank applying its policies in a discriminatory manner - will absolutely discriminate
disparate impact
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
asset quality ratio :Total classification
Total classified assets divide by Tier1 capital + ALLL
Tier 1 leverage capital ratio (UBPR page 11)
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
ASC 310-40 - individual (FAS 114): 2-3-5
ASC 450 - pools (FAS 5): 6-7
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
earning ratio: ROAA return on average assets
net income full year divided by average total assets
NI / ATA
earning ratio: NIM ratio
make sure the denominator is avg earning assets, not the avg total assets
NIM divided by avg earning assets.
calculate intersest income less interest expense first for the numerator
earning ratio: provision expense ratio
provision expense full year divideded by average total assets
non interest income ratio
non interest income / total avg assets
tier 1 capital calculation pg 11A
perpetual preferred stock common stock surplus retained earnings AOCI - accumulated other compreshensive income
less net unrealized g/l on AFS securities
less: disallowed goodwill
tier 2 capital
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
ST NC Liab divide by
LT assets
or
ST non core liab less ST investments divide by LT assets
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
6 different discrimination factors
overt, underwriting, pricing, redlining, steering and marketing.
CRA evaluated on 3 tests
lending test, investment test and service test for large bank.
small bank does not have investment test. only lending and service (or community development)
CRA component ratings for lending, investing and service. bank is given one of 5. not released to public
outstanding, high satisfacotry, low satisfactory, needs to improve, and substantial non compliance
component - bank performance on individual test component - not released to the public
CAMELS
composite - banks overall rating to the public
MSA
metropolitan statistical area
4 specialties
safety and soundness
Consumer affairs
trust
information technology
determine duties and responsibilites of a fiduciary (trust)
1) governing instrument/ document/ trust agreement
2) state and federal laws and regulations
3) case law or court order
NDIP Reg R
non deposit investment product- not FDIC insured
Break the buck
requres that a fund’s net asset value (NAV) does not fall below $1 share
earnings is the first line of defense for loss
capital is the 2nd line of defense
source of capital
internal, external, sale or redistribution of assets
Regulation Y
Bank Holding Companies and Change in Bank Control
