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TE > Capital > Flashcards

Capital Flashcards

1
Q

What is the purpose of capital?

A

Absorb losses, prompt public confidence, restrict excessive asset growth, protect depositors and DIF

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2
Q

Why is the capital review of an exam important?

A

Protects the DIF and is the first line of defense after earnings

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3
Q

What is the goal of Basel III?

A

Designed to strengthen quality and quantity of bank capital

Promote industry strength and help create resilience to economic stress

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4
Q

Why is CET1 the predominant form of capital?

A

Most loss absorbing, permanent, places shareholder funds at risk in event of insolvency

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5
Q

What is an advanced approach institution?

A

Consolidated assets of $250B or more
On-bal foreign exposure of $10B or more
Subsidiary of an advanced approach institution
Elects to use advanced approach

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6
Q

What are the 3 types of capital?

A

CET1, additional T1, T2

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7
Q

What’s in CET1?

A 
Common stock
Surplus
LESS: treasury stock + unearned ESOP shares
Retained earnings
AOCI
Qualifying CET1 minority interests
Applicable adjustments and deductions
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8
Q

What’s in additional T1 capital?

A

Noncumulative perpetual preferred stock
Bank issued SBLF and TARP instruments previously qualified as T1
Qualifying T1 minority instruments
LESS: certain investments in other unconsolidated financial institution’s instruments that qualify as T1

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9
Q

What’s in Tier 2 capital?

A

ALLL up to 1.25% of RWA
Qualifying preferred stock
Subordinated debt
Qualifying T2 minority interests
LESS: deductions from T2 instruments of an unconsolidated subsidiary
IF OPT-OUT: 45% of pretax net unrealized gains on AFS preferred stock equity securities and AFS equity exposures

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10
Q

What are the full deductions from CET1?

A

Goodwill
DTAs form NOLs and tax credit carryforwards
Other intangibles (non-MSAs)
Gains on sale of securitization exposures
Adjustments for unrealized g/l on certain CF hedges

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11
Q

What is the deduction that occurs after the full deductions, but before the threshold deductions?

A

Non-significant investment in unconsolidated financial institutions CET1 instruments - aggregate 10% deduction

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12
Q

What are the threshold deductions from CET1?

A

MSAs
DTAs related to temp timing differences that could not be realized through NOLs
Significant investments in another unconsolidated financial institutions common stock

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13
Q

What is a significant investment in an unconsolidated financial institution?

A

Significant = 10% control of issued and outstanding COMMON SHARES

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14
Q

What are the individual and aggregate CET1 thresholds?

A

Individual – 10%, Aggregate 15%

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15
Q

What do you multiply CET1 (after full deductions and non-significant investment deduction) by to get the aggregate threshold (15%) amount?

A

17.65%

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16
Q

How do you calculate CET1 $ amount used for the 15% threshold?

A

CET1 (after full deductions and non-significant investment deduction) LESS aggregate amount of threshold deductions (DO NOT deduct the 10% deductions from the aggregate amount)

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17
Q

How do you calculate leverage ratio assets?

A

Average total consolidated assets LESS CET1 deductions

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18
Q

How do you calculate CET1 ratio?

A

CET 1 Capital / RWA

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19
Q

How do you calculate T1C ratio?

A

CET1+AT1 / RWA

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20
Q

How do you calculate TC ratio?

A

CET1+AT1+T2 / RWA

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21
Q

How do you calculate T1 Leverage Capital ratio?

A

T1 / leverage ratio assets

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22
Q

What is the RW for any threshold deduction items that remain in capital?

A

250%

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23
Q

What is HVCRE and what is RW?

A

Subset of ADC loans

150%

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24
Q

What are HVCRE exclusions?

A

• 1-4 fam residential ADC projects
• Agricultural properties
• Community development projects
• ADC Projects where:
o LTV at or below supervisory maximums AND
o Borrower contributed at last 15% of as-completed value in cash/unencumbered marketable securities AND
o Contributed capital is contractually required to remain throughout project life

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25
Q

What are PD/NA asset RWs?

A

150% - does not apply to 1-4 fam RE or loan balances with eligible guarantees or collateral where RW can vary

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26
Q

What is a securitization?

A

An instrument or exposure where credit risk is tranched

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27
Q

What are the three ways to RW securitizations?

A

1250% (dollar-for-dollar), SSFA, Gross-up

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28
Q

What is the premise of the Gross-up approach?

A

Weighted avg of underlying exposure RWs

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29
Q

What is the premise of the Simplified Supervisory Formula Approach (SSFA) approach?

A

Risk sensitive and forward looking
Assigns lower RW to more senior-class tranches/securities and higher RW to support tranches
Minimum RW of 20%

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30
Q

What are due diligence requirements for securitizations?

A

Commensurate with risk,
mgmt. Must understand the securitization,
pre-purchase with qtrly monitoring thereafter
must consider structural features and performance features

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31
Q

If mgmt. does not fully understand a securitization, what RW can be required by regulators?

A

1250% (dollar-for-dollar) capital

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32
Q

What are the equity investment RWs?

0%

A

0%  FRB stock

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33
Q

What are the equity investment RWs?

20%

A

20%  FHLB stock

34
Q

What are the equity investment RWs?

100%

A

100%  general account BOLI, community development exposures, effective portion of hedged pairs, non-significant investments in T1 and T2 instruments of UFIs

35
Q

What are the equity investment RWs?

250%

A

250%  significant investments in common shares of unconsolidated financial institutions NOT deducted from CET1 (when BASEL III is fully phased in)

36
Q

What are the equity investment RWs?

300%

A

300%  publicly traded equities (includes non-signif. Investments in common shares of publicly-traded)

37
Q

What are the equity investment RWs?

400%

A

400%  non-publicly traded equities (includes non-signif. Investments in common shares of non-publicly-traded)

38
Q

What are the equity investment RWs?

600%

A

600%  investments in hedge fund or investment funds that has greater than immaterial leverage

39
Q

What are the equity investment RWs?

mutual funds

A

Mutual funds with various types of bonds  proportional RW based on underlying investments
- Equity Exposures to investment funds (includes separate account BOLI):
o Full Look-Through Approach – each sub-exposure is multiplied by its RW – as if the bank held the underlying assets itself
o Simplified Look-Through Approach – total carry value of exposure multiplied by RW of the highest credit risk equity exposure in the fund OR that it is permitted to hold under the fund’s prospectus
o Alternative Modified Look-Through Approach – divide the exposure amounts into buckets based on pro-rata share outlined in prospectus then multiply the bucket amounts by the corresponding RW
- Minimum RW = 20%

40
Q

What are the off-balance sheet credit conversion factors (CCFs)?

A

0, 20, 50, 100

41
Q

Items with Off Bal CCF = 0

A

unconditionally cancellable commitments (aka can be cancelled by the bank for any reason)

42
Q

Items with Off Bal CCF = 20

A

ORIGINAL maturity of 1 yr or less

  • unused commitments: NOT unconditionally cancellable
  • self-liquidating, trade related contingent items that arise from the movement of goods
43
Q

Items with Off Bal CCF = 50

A

unused commitments NOT unconditionally cancellable with ORIGINAL maturity of 1 yr or more
transaction-related contingent items: performance bonds, bid bonds, warranties, performance standby letters of credit

44
Q

Items with Off Bal CCF = 100

A

̵ guarantees
̵ repurchase agreements
̵ credit-enhancing representations and warranties that are not securitization exposures
̵ off-bal securities lending and borrowing transactions
̵ financial stand-by letters of credit
̵ forward agreements

45
Q

What is the concept of “collateralized transaction” RWing?

A

̵ Recognizing the risk mitigating effects of collateral to reduce RW – collateral includes: cash deposit, gold, investment grade securities, publicly traded equities/bonds, money market fund shares
̵ Must apply approach consistently for similar exposures or transactions

46
Q

What are the two methods of RW collateralized transactions?

A

Simple and collateral haircut

47
Q

What are the criteria for using the simple approach RW for collateralized transactions?

A

Simple approach – substituting RW of financial collateral for the RW of the exposure
̵ Must have collateral agreement for life of exposure
̵ Collateral revalued every 6 months
̵ Collateral and exposure in same currency denomination (i.e. both US dollars – only exception: gold)

48
Q

What are the criteria for using the collateral haircut approach RW for collateralized transactions?

A

Calculate exposure for repo-style transactions, eligible margin loans, collateralized derivative contracts, using mathematical formula and supervisory haircut factors (324.37)

49
Q

What are the criteria for eligible guarantees/guarantors?

A

banks have option of substituting RW of eligible guarantee or guarantor for RW of underlying exposure

Guarantors:
̵	Depository institutions and HCs
̵	The IMF (international monetary fund)
̵	FHLBs
̵	FAMC (fed agri mortgage corp)
̵	Entities with investment grade debt
̵	Sovereign entities
̵	Foreign banks
Guarantees:
̵	Written
̵	Unconditional or contingent obligation of the US govt or its agencies
̵	Cover all or a pro-rata share of all contractual payments
̵	Give the beneficiary a direct claim against the protection provider
̵	Other requirements in 324.2
50
Q

What is PCA Well capitalized?

A

T1LC ≥ 5%
CET1 ≥ 6.5%
T1C ≥ 8%
TC ≥ 10%

51
Q

What is PCA Adequately capitalized?

A

T1LC ≥ 4%
CET1 ≥ 4.5%
T1C ≥ 6%
TC ≥ 8%

52
Q

What is PCA Undercapitalized?

A

T1LC < 4%
CET1 < 4.5%
T1C < 6%
TC < 8%

53
Q

What is PCA Significantly Undercapitalized?

A

T1LC < 3%
CET1 < 3%
T1C < 4%
TC < 6%

54
Q

What is PCA Critically Undercapitalized?

A

Tangible Equity / Total Assets ≤ 2%

Tangible equity = T1 + outstanding non-T1 perpetual preferred stock and related surplus

55
Q

What can happen if a bank is below the LEVERAGE capital minimum (aka Adequately capitalized level)?

A

may be deemed to be engaged in an unsafe and unsound practice pursuant to Section 8 of FDI Act unless entered into and in compliance with written agreement or plan approved by FDIC

56
Q

What capital ratio is considered an unsafe and unsound CONDITION?

A

Tier 1 / TA < 2%

57
Q

What is a capital directive?

A

̵ Can be issued if an institution fails to maintain capital at or above minimum LEVERAGE capital requirements
̵ Requires an institution to restore its capital to the minimum leverage requirement within a specified time period.

58
Q

What is the supplementary leverage ratio and to what banks does it apply?

A

For advanced approach institutions ONLY

̵ Supplementary leverage ratio of 3% required as of 1/1/18
̵ Stand-alone ratio
̵ Calculation: T1C / total leverage exposure; complete calc for last day of each month in reporting period and take the avg.
̵ Total leverage exposure = on balance sheet items, less amounts deducted from tier 1, + other things (see manual)
̵ 1/1/18 – enhanced supplementary leverage ratio for largest orgs - must maintain leverage buffer of 5% (2% above regular minimum)

Largest Orgs = BHCs with $700B consolidated TA OR More than $10T in assets under custody
Banks under these BHC must maintain at least 6% supplementary leverage ratio to be considered well-capitalized

59
Q

What is the capital conservation buffer when fully phased-in?

A

2.5%

60
Q

What are the payout limitations when buffer ≤ 0.625?

A

0% payout allowed

61
Q

What are the payout limitations when buffer ≤ 1.25?

A

20% payout allowed

62
Q

What are the payout limitations when buffer ≤ 1.875?

A

40% payout allowed

63
Q

What are the payout limitations when the buffer ≤ 2.5?

A

60% payout allowed

64
Q

What are payout limitations when buffer is > 2.5?

A

No limitation

65
Q

What types of payouts are restricted by the capital conservation buffer?

A

Dividends, share buybacks, discretionary payments on T1 instruments, discretionary bonus payments to exec officers

66
Q

When can a bank NOT make payouts/distributions for the capital buffer?

A

Bank cannot make capital distributions or certain discretionary bonus payments during the current calendar quarter IF eligible retained income is negative and capital conservation buffer is less than 2.50 at end of previous quarter

67
Q

What is eligible retained income for buffer purposes?

A

bank’s NI from call report for four calendar quarters preceding the current quarter, net of any capital distributions and certain discretionary bonus payments that were made during those four quarters

68
Q

If a bank is below PCA adequately capitalized, then the bank is ______ and _______ unless________?

A

is deemed in violation of Part 324 and engaged in U&U practices unless bank has entered into and is in compliance with written plan approved by FDIC

69
Q

What does Subpart H/PCA allow the FDIC to do?

A

to reclassify a bank and make them comply with certain mandatory or discretionary supervisory actions as if they were the next lowest PCA capital category

70
Q

What are exam identified deductions from CET1?

A

̵ Identified losses and inadequate reserves
̵ Other Real Estate Reserves/Losses
̵ Liabilities not shown on books

71
Q

When are capital directives normally used?

A

Less than adequate capitalized – capital directives or other formal enforcement action to increase capital

72
Q

When are capital plans used?

A

banks with insufficient capital in relation to risk profile are often required to submit a capital plan in conjunction with formal enforcement action or other directive. Helps boards formulate a plan to restore capital. Can be requested formally or informally.

̵ Disallowing the use of bankruptcy – Section 2522(d) provides an eighth priority in distribution – strong place for FDIC to be. Must have a commitment to maintain capital from owners of bank, but commitment is no substitute for actual capital.
̵ An undercapitalized bank must submit a capital plan, but such plan can only be accepted once any company having control over the bank guarantees the bank’s compliance with the plan.

73
Q

What are the ways to increase capital?

A
  1. Increase earnings retention
  2. Sale of additional capital stock
  3. Reduce asset growth
74
Q

What are the 2 types of contingent liabilities?

A

Cat I and Cat II

75
Q

What are Category I contingent liabilities?

A

results in a concomitant increase in bank assets if the contingency converts to actual liabilities

76
Q

What are Category II contingent liabilities?

A

a claim on assets arises w/o an equivalent increase in assets

77
Q

How do you classify Cat. I contingent liabilities?

A

̵ Category 1 contingent liabilities should be evaluated from credit risk and if appropriate, be classified

NOTE: Contingent liability items are not included as adjustments to assets.

78
Q

How do you classify Cat. II contingent liabilities?

A

̵ Category 2 – should be evaluated based on the probability of the contingencies becoming direct liabilities
o Loss Contingency = an existing condition, situation, or set of circumstances that involves uncertainty as to possible loss that will be resolved when one or more future events fail to occur or fail to occur.
 Potential Loss = contingent liability where there is substantial and material risk of loss
 Estimated Loss = should be recognized if it is probable that an asset has been impaired or liability incurred as of exam date and amount of loss can be reasonably estimated

79
Q

How are contingent liabilities presented in ROE?

A

̵ Any category 1 and the potential loss portion of category 2 loss contingencies include in memo items on capital calculations page.
̵ Loss of Category I OR Estimated loss for Category 2 is reported in the “Other Adjustments to and Deductions from Commons Equity Tier 1 Capital” line item on capital calculations page.

NOTE: Contingent liability items are not included as adjustments to assets.

80
Q

Common Contingent Liabilities

A 
Litigation
Trust activities
Consigned items and non-ledger accounts
	Customer safekeeping
	Safe deposit box
Safekeeping
Custodial account
Collection items
Consigned items
Reserve premium accounts – Cat II = to banks deposit in the account (ABPFIC, mutual reinsurance company, loss reserves)
81
Q

When would you accrue an estimated loss on a Reserve Premium Account contingent liability?

A

Accrue estimated loss when it is probable the reinsurance company will demand payment from the account AND the amount can be estimated.

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