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Foundations > FRB BASE banking and supervision elements > Flashcards

FRB BASE banking and supervision elements Flashcards

1
Q

Earnings are a source of capital, but ______ is another primary driver of capital

A

Asset Quality. Asset quality affects earnings through provisions to the ALLL. An inadequate reserve will require additonal provisions, which reduces earnings. Poor asset quality can also affect earnings through reduced interest income. Loans that are past due and are not paying interest as scheduled have a negative impact on interest income.

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2
Q

Whan analyzing the UBPR, what aspects of a ratio should you consider?

A

Level - at above, or below comparative standards/benchmarks?

Trend - increasing, decreasing, or stable/static over time

Why - what are the underlying factors

Peer - significantly out of line with the national (or customized) peer group averages

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3
Q

How do you calculate the sensitivity ratio?

A

cumulative Rate sensitive assets RSA divided by cumulative Rate sensitive liabilities RSL.

RSA/RSL usually between 80% and 120%, which means +/- 20%.

Less than zero = liability sensitive RSA-RSL
Greater than zero =asset sensitive RSA-RSL

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4
Q

What is the rating system for Bank holding company(BHC)? list 6

A 
RFI/C (D)
Risk management (think of "M" in caMels)

Financial condition

Impact

Composite (think of final composite rating in CAMELS)

Depository Institutions

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5
Q

What is the rating system ofr Trust? list 5

A

MOECA/Composite

Management

Operations, controls, audit

Earnings

Compliance

Asset Management

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6
Q

Calculate Weighted classified Asset Ratio

A

substandard 20% + doubtful 50% + Loss 100% divide by Tier 1 capital + ALLL

This ratio provides a better view of the severity of asset quality problems and their potential impact on teh capital strength of the bank.

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7
Q

Name the 5 IT (information technology) risk elements in SR 98-9

A

MAISA

Management processes - planning, staffing

Architecture - hardware, software, network

Integrity - reliable, accuracy, completeness

Security - protect assets, prevent unauthorized access

Availability - backup in case of business disruption

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8
Q

Name a regulation that is designed to encourage capital growth and retention

A

Section 5199(b) restricts dividend payments to the current year’s earnings plus the prior two years’ retained net income. This rule is designed to prevent banks from eroding their capital base through the payment of cash dividends

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9
Q

Which rule restricts bank dividends to undivided profits, less any amount of statury bad debtsj that the bank has on its books that are in excess of the ALLL

A

Section 5204. This rule ensures that before any dividends are paid, banks must maintain adequate funding for the ALLL, relative to statutory bad debt.

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10
Q

When assessing the Management component rating of CAMELS, where do we first start looking at?

A

financial condition / performance of the institution.

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11
Q

What is the largest asset on the bank’s balance sheet?

A

Loans

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12
Q

If IRR (interest rate risk) which relates to the “S” sensitivity rating, is not managed satisfactorily, which 3 other CAMEL components are affected?

A

C - M - E

Capital adequacy - a decrease in earnings erode a bank’s capital

Management - must have experience and know-how to proactively manage exposure to market risk. Board oversight is critical to an effective risk management program

Earnings - performance is directly affected by the bank’s ability to manage its exposre to market risk.

No relationship to A, Asset Quality, or L, Liquidity.

IRR is Senstivity so of course it affects “S”

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13
Q

WHat are the 4 components of risk for IT (information technology)?

A

URSIT - Uniform rating system for information technology SR 99-8

A - M - D - S

Audit - self assess
Management - board oversight
Developement and Acquisition - install / deploy
Support and Delivery - service business needs - secure and safe

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14
Q

What are 3 categories of securities under ASC 320 (formerly FAS 115)

A

HTM - AFS - Trading

held to maturity - no income/loss impact
available for sale - equity
trading - flow to income statement

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15
Q

What should be included in the board of directors package?

A

monthly financial statements
mintues of all committee meetings (ie ALCO)
reports of problem assets
assessments of loan loss reserve adequacy
reports on income vs. budget with explanation of major variances
reports of liquidity needs
interest rate sensitivity reports

(1) budget variance (2) watch list (3) loan loss list (4) IRR

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16
Q

What are the 6 safety and soundness components

A 
CAMELS
Capital adequacy
Asset quality
Management
Earnings
Liquidity
Sensitivity
17
Q

What are advantages of a BHC (bank holding company) formation

A

hold bank stock, among other assets (classic “shell” structure)

provide ubmrella oversight (“big picture” management, parent-subsidiary relations

achieve greater fiscal flexibility (through tax benefits, centralization of services, debt issuance, stock redemption)

engage in non-banking activities (those that are financial in nature or closely related to banking)

serve as a funding vehicle (by using the BHC credit rating for less costly affiliate funding)

18
Q

Why should the internal loan review function never report to the chief lending officer?

A

loan officers reviewing loans would compromise INDEPENDENCE of the results. A loan review officer or outsource provider should periodically review the loans for independence in assessing loan quality.

19
Q

Where are the trust assets in the Bank’s balance sheet

A

It is not in the Bank’s balance sheet. The trust accounting system is a different system that the bank’s loan or deposit system. The trust department is responsible for all trust assets, however they are segregated from teh bank’s assets. They can’t be accounted for on the bank’s balance sheet.

20
Q

When reviewing a bank budget, you would review past performance and apply to the current situation, you will determine whether the budger is ______ and _______

A

attainable and reasonable.

21
Q

What is the first line of defense against losses?

A

Earnings which is also a means to support asset growth. Earnings also support the bank’s ability to pay dividends to shareholders, which can improve the bank’s ability to raise capital externally

Earnings help: cover expenses, provide for loans and losses, support growth, add to capital, pay dividends and attract and retain competent management.

22
Q

What is your key resource to review the financial condition of the bank?

A

UBPR

Uniform Bank Performance Report

23
Q

What are the 4 elements of a compliance management system?

CA06-8: Risk focused consumer compliance supervision program

A

B - P - M - IC

Board management oversight
Policies, procedures and limits
MIS - risk measurement/ reporting/ monitoring
Internal control

24
Q

What 3 risk components is the bank exposed to for Fair lending violations

A

OLR
Operational - Legal - Reputational

not these - C - M- L
Credit - Market - Liquidity

25
Q

What are the safety and soundness risks?

A

C - M- L

Credit - Market - Liquidity

OLR

Operational - Legal - Reputational

26
Q

Name the types of public accountant reports

A

Qualified audit, unqualified audit, adverse, disclaimer, explanatory

27
Q

What are 3 attributes that a BHC (bank holding company) must have to be a financial holding company?

A

Well managed
well capitalized
CRA rating must be satisfactory

28
Q

Widely recognized benfefits of BHC formation

A

tax benefits - BHC normally reports a loss. Dividends are not taxed and interest paid on BHC debt is tax deductible.

operating efficiencies - HR, loan review, internal audit, treasury, data processing

leverage - BHC allows organizations to incur higher debt levels than would be permitted when it issues debty to support subsidiary operations

non-bank activities - BHC are allowed to engage in activities through non-bank subsidiaries that are impermissable for banks. Reg Y list permissable non bank activities: industrial banking, mortgage banking, investment/ financial advice, leasing, data processsing, insurance sales and underwriting, real estate appraisal and foreign exchange

29
Q

All trust departments should review these operations?

A 
Accounting and recordkeeping
securities processing
asset control
income collection
disbursement
distribution of income and asset
30
Q

What group is the responsible for setting policies and limits

A

Board of directors NOT senior management

31
Q

What is the most important duties of a fiduciary?

A

Duty of loyalty - requires that the fiduciary’s actions with respect to each account must relect an undivided loyalty to the beneficiaries of that acount. Specifically, the actions cannot benefit one account at the sacrifice of another account, and the bank can’t benefit from the action (ie kickbacks)

32
Q

Is CAMELS for a point in time or forward looking?

A

CAMELS is for a point in time. The 6 safety and soundness specific risks are forward looking.

CML: credit market liquidity

OLR - operational, legal, reputational

33
Q

What are service charges and trust income?

A

non interest income

34
Q

What is the control procedure when there is active involvement of 2 people

A

Dual control

35
Q

What are 3 steps involved in a risk focused exam

A

Assess overall risk
determine examination strategy
prepare scope memo

Foundations (29 decks)

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