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FINN 3053 > Chapter 13 > Flashcards

Chapter 13 Flashcards

1
Q

CAMELS

A
  • Capital Adequacy
  • Asset Quality
  • Management Quality
  • Earnings Quality
  • Liquidity
  • Sensitivity
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2
Q

A recognized international rating system that banks supervisory authorities use in order to rate financial institutions

A

CAMELS

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3
Q

CAMELS Composite Rating

A

“1” - sound in every dimensions
“2” - transient, small weakness in one dimension
“3” - moderate-to-severe weakness, one to two dimensions
“4” - severe weakness in one dimension, moderate in many
“5” - immediate to near-term probability of failure

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4
Q
  • Vault Cash
  • Deposits at Federal Reserve
  • Deposits at other financial institutions
  • Cash items in process of collection

(aka) “Primary Reserves”

A

Cash and Due from Depository Institutions

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5
Q

Safety and soundness regulation:

layers of regulation have been imposed on Commercial Banks to protect depositors and borrowers against the risk of failure (4)

A
  • Diversification of assets
  • Capital requirements
  • Deposit insurance
  • Monitoring
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6
Q

regulation areas (6)

A
  • Safety and soundness
  • entry and charter
  • monetary policy
  • credit allocation
  • consumer protection
  • investor protection
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7
Q

monetary policy

A

regulators control and implement this by requiring minimum levels of cash reserves to be held against commercial bank deposits

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8
Q

limit the number of CBs in any given financial services sector, thus impacting the charter values of CBs operating in that sector

A

entry and chartering regulation

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9
Q

regulations support the CB’s lending to socially important sectors such as housing an farming

A

credit allocation regulation

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10
Q

laws protect investors who directly purchase securities and/or indirectly purchase securities by investing in mutual or pension funds managed directly or indirectly by CBs

A

Investor Protection Regulation

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11
Q
  • Called for regulators to be given broad authority to monitor and regulate nonbank financial firms.
  • Established a number of new government agencies tasked with overseeing the various components of the act and, by extension, various aspects of the financial system.
A

2010 Wall Street Reform & Consumer Protection Act

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12
Q

are responsible for ensuring that Commercial Banks are operating in accordance, and do so with special attention to a CB’s ability to provide social benefits to the overall economy.

A

Regulators

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13
Q
  • Commercial and Investment Banking Activities
  • Banking & Insurance
  • Commercial Banking and Commerce
  • Non-bank Financial Service Firms & Banking
A

Product Segmentation in the U.S. Commercial Banking Industry

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14
Q

Glass-Steagall Banking Act (1933)

A

A new legislation in 1933 that sought to impose a rigid separation between:
- commercial banking (taking deposits & lending)
- Investment Banking (underwriting, issuing, distributing stocks, bonds, etc)

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15
Q

The requirement to impose risk-based capital ratios on banks in major industrialized countries.

A

Basel Agreement

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16
Q

A law that serves to partially deregulate the financial industry. The law allows companies working in the financial sector to integrate their operations, invest in each other’s businesses and consolidate.
- State regulation of insurance
- Prohibited FDIC assistance to affiliates and subsidiaries of banks and savings institutions.

A

Financial Services Modernization Act (1999)

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17
Q

banking groups whose distress or disorderly failure would cause significant disruption to the wider financial system and economic activity.

A

Global systemically important banks (G-SIBs)

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18
Q

Intrastate Restrictions:
- Many states required banks to have a single location.

Interstate Restrictions:
- McFadden Act (1927)
- Riegle-Neal Act (1994)
- Subsidiaries were created in each state

A

Geographic Segmentation

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19
Q

McFadden Act (1927)

A

Federal legislation gave individual states the authority to govern bank branches located within the state. This includes branches of national banks located within state lines.

  • was repealed in 1994 by the Riegle-Neal Act.
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20
Q

Common Equity Tier I (CET1)

A
  • Common stock, Retained earnings, Accumulated income
  • Less goodwill
21
Q

Tier I (CET1 plus following:)

A
  • Noncumulative preferred stock
  • Instruments with no maturity
22
Q

Tier II

A
  • loan loss reserves, preferred stock, subordinated debt
    (CET1 + Tier 1)
23
Q

A capital buffer of a bank’s total exposures that needs to be met with an additional amount of Common Equity Tier 1 capital.

The buffer sits on top of the 4.5% minimum requirement for Common Equity Tier 1 capital. Its objective is to conserve a bank’s capital.

A

Capital Conservation Buffer

24
Q

An additional capital requirement for large, internationally active institutions - Can vary between zero and 2.5 percentage points, with 0 being the setting in normal times.

A

Countercyclical Buffer

25
Q

Capitalization Minimums: (WELL)

CET1 >=
Tier 1 >=
Total Capital >=
Tier 1 Leverage >=

  • plus capital conservation buffer of __ (extra CET1 capital)
  • unrestricted payout and bonuses
A

CET1 - 6.5%
Tier 1 - 8%
Total Capital - 10%
Tier 1 Leverage - 5%

buffer of 2.5%

26
Q

Capitalization Minimums: (ADEQUATELY)

CET1 >=
Tier 1 >=
Total Capital >=
Tier 1 Leverage >=

  • payout capped at ___%, restrictions on executive bonuses
A

CET1 - 4.5%
Tier 1 - 6%
Total Capital - 8%
Tier 1 Leverage - 4%

capped at 0%

27
Q

Capitalization Minimums: (Significantly Undercapitalized)

CET1 -
Tier 1 -
Total Capital -
Tier 1 Leverage -

A

CET1 - <3%
Tier 1 - <6%
Total Capital - <8%
Tier 1 Leverage - <4%

28
Q

Capitalization Minimums: (CRITICALLY UNDERCAPITALIZED)

A

If (Tangible Equity / Total Assets) is ≤ 2%

29
Q

How are bank’s restricted when they are not well capitalized?

A

Restrictions on:
- Payout
- Executive Bonuses

30
Q

Stress Test

A
  • Determines whether a bank has enough capital to withstand a negative economic shock.
  • These scenarios include unfavorable situations, such as a deep recession or a financial market crash.
31
Q

Banking groups whose distress or disorderly failure would cause significant disruption to the wider financial system and economic activity.
- Surcharge (1-3.5%)

(4.5%minimum+2.5%buffer+1.5%surcharge)

A

Global systematically important banks
(G-SIBs)

32
Q

Computation Period

A

Period over which average deposits determine a bank’s required reserves

33
Q
  • held at all times, % of CET1 capital
  • must be 2.5% to be unrestricted
A

capital conservation buffer

34
Q
  • declared per country during ‘excess expansion’
  • 0-2.5% of CET1 capital
A

countercyclical buffer

35
Q

Maintenance period

A

The period over which average reserves must cover average deposits over the computation period

36
Q

Reserve can be held in either _____ or ___

A

vault cash; deposit at the Fed

37
Q

Averaged over non-overlapping 14-day periods (maintenance window)

A

transaction deposits averaged (net of balances & collections)

38
Q

Reserve requirements –> Progressive Requirement

(0-$15.2 million) - __ requirement
($15.2 - $110.2 million) - __ requirement
($110.2 million and up) - __ requirement

A

0%; 3%; 10%

39
Q

A risk-based insurance premium (cents per $100 insured) that is conditional upon:
- CAMELS rating
- Capital Adequacy
- Loan mix & financial ratios
- DIF reserve ratio

A

Deposit Insurance (FDIC)

40
Q

credit equivalent amount =

A

notional value * conversion factor

41
Q

on balance sheet (2)

A
  • total assets
  • total risk-weighted assets
42
Q

off balance sheet (3)

A
  • total notional value
  • total credit equivalent assets
  • total risk weighted assets
43
Q

total exposure is the sum of

A

on balance sheet assets and off balance sheet credit equivalent assets

44
Q
  • Put all American branches and agencies of foreign banks under the control of U.S. banking regulators.
  • Allowed Federal Deposit Insurance Corporation (FDIC) insurance to be provided to these branches.
A

International Banking Act of 1978

45
Q
  • Enacted to increase the Federal Reserve’s authority over Existing foreign banks, and foreign banks seeking entry into the United States.
A

(FBSEA) Foreign Bank Supervision Enhancement Act of 1991:

46
Q
  • Retail / Community focus
  • Heavy mortgage focus
  • Small businesses
  • Heavily funded checking and savings accounts
A

Savings & Loan institutions

47
Q

Credit Unions institutions (6)

A
  • Funded by deposits
  • Safer Assets
  • Mutual ownership (owned by customers)
  • Higher rates on Deposits
  • Lower rates on Loans
  • Not-for-profit charters
48
Q
  • primarily just make loans.
  • No deposits
  • Funded through debt
    3 TYPES:
    1) Sales Finance
    2) Personal Credit
    3) Business Credit
A

Finance Companies

49
Q

The difference between the private costs of regulations and the private benefits for the producers of financial services.

A

net regulatory burden

FINN 3053 (14 decks)

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