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Rules and Regs > Earnings/Liquidity/SMR > Flashcards

Earnings/Liquidity/SMR Flashcards

1
Q

What is a brokered deposit?

A

deposit obtained through or with the assistance of a deposit broker.

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2
Q

Earnings Rating?

insufficient to support operations and maintain appropriate capital and ALLL

A

4

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3
Q

Earnings Rating?

can be static or slight decline

A

2

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4
Q

Earnings Rating?

more than sufficient to support operations, capital, and ALLL

A

1

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5
Q

What are the types of IRR?

A

PR BOY

Price Risk - FV of an instrument will change

Repricing Risk - A and L will reprice at different times

Basis Risk - different market indices won’t move in perfect correlation

Option Risk - Lenders sell options, borrowers buy options

Yield Curve Risk - Unanticipated changes in the shape or slope of the yield curve

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6
Q

What are IRR key assumptions that should be reviewed annually?

A

Projected interest rates

Driver rates

Prepayment Speeds

Non-maturity deposits

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7
Q

What are the key areas of a risk management framework for IRR?

A

Serious Boards protect strategies limits and monitor

Senior management oversight

Board oversight

Policies and procedures

Strategies

Limits

Monitoring and reporting

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8
Q

What are the earnings evaluation factors?

A

Queen England Absolutely Appreciates ALL

Quality and sources of earnings

Exposure to market risks

Ability for retained earnings

Adequacy of budgeting systems

Adequacy of PLLL

Level of earnings, including trends and stability

Level of overhead expense

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9
Q

Liquidity rating?

may lack ready access to funds on reasonable terms or may have significant weaknesses in FMPs

A

3

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10
Q

What is a GAP Analysis?

A

measurement to identify maturity and repricing mismatches between assets, liabilities, and off-B/S instruments.

(RSA-RSL)/AEA

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11
Q

What are the different NII simulations?

A

Rate shock scenario - immediate and sustained

Rate ramp scenario - gradual rate movements applied over the time period measured

Stair step scenario - rate shocks are administered at a more infrequent time interval, but each increment is sustained and of equal amount

Non-parallel yield curve

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12
Q

SMR Rating?

E and C provide substantial support

A

1

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13
Q

Earnings Rating?

critically deficient

A

5

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14
Q

Liquidity rating?

Satisfactory liquidity levels and FMP

A

2

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15
Q

What are the liquidity rating factors?

A

AAA-RAT-DC

Adequacy of liquidity sources and ability to meet liquidity needs without adverse effects

Availability of assets readily convertible to cash

Access to money markets and other sources of funding

Reliance on short-term volatile funding sources

Ability to securitize and sell certain pools of assets

Trend and stability of deposits

Diversification of funding sources

Capability of M and effectiveness of FMP

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16
Q

What is static spread?

A

Basis points when added to a set of implied forward rates, discounts the CFs of an instrument back to its observed MV.

No embedded option

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17
Q

What are ways to measure prepayment

A

Single Monthly Mortality (SMM)

Constant Prepayment Rate - annualized the SMM

Public Securities Association (PSA) - 100% PSA if its CPR starts at 0% and increased by 0.20% each month until it reaches 6% in month 30. After month 30, it remains at a constant 6%, so PSAs will increased by 100% with each 6% increase in CPRs. 12% CPR would be 200% PSA.

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18
Q

Earnings Rating?

intermittent losses

A

4

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19
Q

Earnings Rating?

strong

A

1

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20
Q

What are the exceptions to a deposit broker?

A

An insured depository institution or its employees placing funds with the insured depository institution

Certain trust departments of insured depository institutions

Certain trustees and plan administrators

An agent whole primary purpose is not to place funds with insured depository institutions

An insured depository institution acting as an intermediary or agent for a government sponsored minority or women-owned deposit program.

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21
Q

SMR Rating?

need to improve market risk control or there is significant potential that E or C position will be adversely affected

A

3

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22
Q

Earnings Rating?

nominal or unsustainable earnings

A

4

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23
Q

What are some risks involved by using securitizations as a funding source?

A

Early amortization clauses

Large concentration of residual assets

Market reputation

Timeframe to securitize loans

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24
Q

Formula for NII (TE)

A

Annualized total int income + tax benefit on tax exempt income - total int expense

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25
Q

Liquidity rating?

Liquidity levels of FMP in need of improvement

A

3

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26
Q

What is a deposit broker?

A

Person engaged in the business of placing deposits, or facilitating of deposits, of third parties with insured depository institutions.

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27
Q

Positive convexity?

A

Option Free Bonds

The price increase at a greater rate when interest rates decline vs price decreases when interest rates increase (happy face)

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28
Q

Earnings Rating?

Satisfactory and sufficient to support operations and maintain adequate capital and ALLL

A

2

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29
Q

SMR Rating?

RM are deficient

A

4

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30
Q

SMR Rating?

E and C may not adequately support

A

3

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31
Q

Liquidity rating?

Critically deficient that the continued viability is threatened;

A

5

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32
Q

SMR Rating?

RM practices are whole inadequate

A

5

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33
Q

Earnings Rating?

may not fully support operations and provide for accretion of capital and ALLL

A

3

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34
Q

What does a listing deposit need to satisfy to not be a deposit broker?

A

Entity providing the listing service is compensated solely by means of subscription fees and/or listing fees;

Fees paid are flat fees and not based on dollar amount of deposits;

Listing service performs no service except the gathering and transmission of info concerning availability of deposits

Listing service is not involved in placing deposits.

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35
Q

SMR Rating?

RM is satisfactory

A

2

36
Q

What is an extraordinary item?

A

Items that are unusual and infrequent

Unusual - highly abnormal or clearly unrelated to ordinary activities of the bank

Infrequent - not reasonably expected to occur in the foreseeable future

37
Q

What are some asset funding sources?

A

Cash and Due Froms

Loan Portfolio

Asset sales/securitization

Investment portfolio

38
Q

Liquidity rating?

immediate external financial assistance to meet maturing obligations or other liquidity needs.

A

5

39
Q

SMR Rating?

RM practices are strong

A

1

40
Q

Earnings Rating?

provided the level of earnings is adequate

A

2

41
Q

What is the purpose of earnings?

A

Absorb losses and augment capital

Serves as the first line of defense against capital depletion

42
Q

Liquidity rating?

Sufficient sources of funds on acceptable terms

A

2

43
Q

SMR Rating?

adequately controlled market risk and only moderate potential that E or C will be adversely affected

A

2

44
Q

Liquidity rating?

Strong liquidity levels and well-developed FMP

A

1

45
Q

For high rate deposit restriction, what is the national rate?

A

Simple average of rates paid by all insured depository institutions and branches for which data is available.

46
Q

Liquidity rating?

deficient liquidity levels or inadequate FMP

A

4

47
Q

What kinds of credit are available under the Fed Reserve Discount Window?

A

Primary - generally overnight to meet temporary needs. Available to AC institutions with Composite 1,2, or 3.

Secondary - for banks that don’t qualify for primary credit; comes at a higher cost

Extended - for banks under a liquidity strain

Emergency - used in rare circumstances.

48
Q

UBPR Earning Analysis Trail?

A 
Int Income
- Int Exp
= NII
\+ Non-int Income
= Adj Op. Income
- Non int expense
- PLLL
= Pre-tax Op Income
\+/- GL on Securities
= Pre-tax Net Op. Income
- Taxes
= NI
49
Q

SMR Rating?

E and C provide inadequate support

A

4

50
Q

What are factors that may indicate a need to maintain a higher liquid asset buffer?

A

HERES ACAI

High levels of assets with limited marketability

Expectations of elevated draws on unfunded commitments

Recent trends showing reductions in large deposit accounts

Easy customer access to alternative investments

Significant volumes of volatile funding

A concentration of credit to an industry with existing or anticipated financial problems

Close ties between deposit accounts and employers experiencing financial problems

A significant volume of assets pledged to wholesale borrowings

Impaired access to funds from capital markets.

51
Q

SMR Rating?

unacceptable control of market risk or the level taken is an imminent threat to viability

A

5

52
Q

What happens when the bank believes that the national rates does not correspond to actual rates paid in bank’s market area?

A

The bank can submit a determination that the bank is operating in a high-rate area.

If FDIC agrees with the determination, the bank may offer prevailing market rates instead of national rate.

In accepting deposits from outside the local market area, the bank must use the national rates.

53
Q

Liquidity rating?

may not have or be able to obtain a sufficient volume of funds on reasonable terms

A

4

54
Q

EVE?

A

PV of the expected cash flows on assets minus the PV of the expected cash flow on liabilities, plus or minus the expected cash flow of on-balance sheet instruments.

55
Q

Negative convexity?

A

Securities with Embedded Options

Price declines at a greater rate when interest rates increase vs price increases when interest rates decrease (sad face)

56
Q

What are the types of market risks?

A

ICP F

IRR

Commodity Risk

Price Risk

Foreign Exchange Risk

57
Q

Earnings Rating?

losses represent a distinct threat to viability through the erosion of capital

A

5

58
Q

What sources can lead to IRR?

A

Funding Sources

Derivatives

Mortgage banking

Fee incomes businesses

Product pricing strategies

Embedded options

59
Q

What is adjusted NOI?

A

After tax op. income + provisions - actual net losses

60
Q

What is option adjusted spread?

A

Basis points when added to a set of interest rates, discounts the CFs of an instrument back to its observed MV.

Measurement for embedded option

MBS OAS

61
Q

SMR Rating?

unacceptable market risk or high potential that E and C will be adversely affected

A

4

62
Q

What are the tax equivalent ratios?

A

NIM
NII
Yield on securities

63
Q

What happens when IRR weaknesses warrant a contravention to PS?

A

Cite the 1996 as the source guidance. 2010 advisory and 2012 FAQs may be reference for support

Contravention to Appendix A of Part 364 may also be warranted for institutions with seriously deficient IRR programs.

64
Q

What does liquidity stress testing accomplish?

A

Identifies and quantifies potential risks and to analyze possible effects on the institution’s cash flows, liquidity position, profitability, and solvency.

65
Q

What are elements of a liquidity policy?

A

All Dogs Play Catch, Minus Purple Poodles And Intelligent Cats. Poodles Are Exceptional To Borrow.

ALCO

Deposit Structure

Permissible funding sources and concentration limits

COF

Measure and monitoring liquidity

Permissible Investments

Periodic Testing

Assumptions

Internal Controls

CFP

Permissible wholesale funding sources

Authority levels

Exceptions

Target Liquidity

Borrowing Capacity

66
Q

What does a CFP do?

A

AEE-II-SP

Addresses liquidity shortfalls in emergency situations.

Establish a liquidity event-management framework

Establish a monitoring framework (early warning signals)

Identifies potential contingent funding events

Identifies potential funding sources

Stress testing

Periodic testing

67
Q

Earnings Rating?

significant negative trends

A

4

68
Q

What are the elements of a sound liquidity risk management program?

A

AAA Called Charlie’s Dad Exceptional Eater

Appropriate liquidity management policies, procedures, strategies, and risk limits

Adequate levels of marketable assets

Appropriate plans for potential stress events

Comprehensive liquidity risk measurement and monitoring

Comprehensive CFP

Diverse mix of existing and potential funding sources

Effective management and board oversight

Effective internal controls and independent audits

69
Q

What is Macauley Duration?

A

Calculates the weighted average term to maturity of a security’s CFs.

70
Q

SMR Rating?

well-controlled market risk and minimal potential that E or C will be adversely affected

A

1

71
Q

Explain the Fed Reserve Discount Window.

A

Available to any bank that maintains deposits subject to reserve requirements. Can’t have for more than 60 days in any 120-day period for UC institutions or institutions with a composite CAMELS rating of 5.

72
Q

Liquidity rating?

Modest weaknesses may be evident in FMP

A

2

73
Q

What is duration?

A

A measure of the % change in the EV of a position that will occur given a small changes in the level of interest rates.

Reflects the timing and size of CFs that occur before the bank’s contractual maturity.

74
Q

SMR Rating?

E and C are adequate

A

2

75
Q

Earnings Rating?

may have erratic fluctuations in NI or NIM

A

4

76
Q

Liquidity rating?

Reliable access to sufficient sources of funds on favorable terms

A

1

77
Q

Explain a pay-fixed swap

A

Stream of fixed interest payments may be contractually exchanged for a stream of floating-rate payments.

Shortens the duration of the commercial loan portfolio by reducing the A/L mismatch and improves profitability.

78
Q

Earnings Rating?

deficient

A

4

79
Q

What is modified duration?

A

Tells what % the price of the bond will change given a 100 bps change in market rates

Calculated from Macauley Duration; doesn’t assume price sensitivity for instruments with Embedded Options

80
Q

Earnings Rating?

may need to improve

A

3

81
Q

Earnings Rating?

Generally will have earnings well above peer group averages

A

1

82
Q

Earnings Rating?

substantive drop

A

4

83
Q

How many years should a profit plan cover and what should it include?

A

2 years

GAP FILL

Growth

Asset Mix

Pricing

Funding

Interest rate and maturity mismatches

Level and volatility of interest rates

Local economic conditions

84
Q

SMR Evaluation Factors?

A

State Member Not National

Sensitivity of earnings and capital to adverse changes in interest rates

Management’s ability to IMMC market risk exposure

Nature and complexity of IRR exposure

Nature and complexity of market risk exposure arising from trading and foreign ops.

85
Q

High-Rate Deposit Restrictions - What happens when a bank is not WC?

A

The bank may not offer deposit rated more than 75 basis points above average national rates for deposits of similar size and maturity.

86
Q

SMR Rating?

RM need to be improved

A

3

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