Management Flashcards
What section of the FDI Act grants examiners access to bank records and employees and allows examiners to make thorough examinations?
Section 10 (b) (6)
M rating?
Critically deficient M and B performance or RM practices
5
What makes a LLL violation?
Only the note that puts the bank over the LLL is a violation. Until its paid in full, its a personal liability of the Ds.
SBLOC should be added to loans in calculation the LLL for an individual borrower.
M rating?
In general, significant risks and problems are effectively IMMC
2
For Reg O, what is a principal shareholder?
A person who directly or indirectly owns, controls, more than 10% of any class of voting stock
Includes shares held by immediate family
M rating?
level of problems and risk exposure is excessive
4
M rating?
Problems and risks are inadequately IMMC and require immediate action to preserve the soundness of the bank
4
What are transaction covered under 23B?
Any covered transaction with an affiliate, except transactions that involve: parent/institution, sister bank, transactions secured by US government securities or earmarked deposit
sale of securities or other assets to an affiliate
contract or lease entered into
transaction in which affiliate acts as an agent or broker
transactions that benefit the affiliate
What is a rebuttable presumption of control for Reg O?
An EO or D and they directly or indirectly own, control, or vote more than 10% of any class of voting securities, or
The person directly or indirectly, own, control, or vote more than 10% of any class of voting securities and nobody owns, controls, or has the power to vote a greater percentage of that class of securities
M rating?
Minor weaknesses but not material
2
23 A
Examples of a Low Quality Asset?
SM of Adv Classified at most recent exam
NA
PDs more than 30 days
TDRs
Foreclosed assets or repos
Non-investment grade securities.
What is the purpose of 23B?
banks and their subs can engage in any transaction allowed as long as its on terms substantially the same as comparable transactions from non-affiliates.
Absent any comps, its on terms that would be offered to non-affiliates.
How can banks with less than $100MM in deposits increase their aggregate lending limit? Reg O
The B can pass an annual resolution to increase the aggregate limit to 200% if:
The B determines its prudent, S&S, and is necessary to attract and retain Ds
The B documents its reasons, and lists the current level
The bank must meet or exceed on a fully phased-in basis, all applicable capital requirements was rated a Composite 1 or 2 at its last exam
If the bank becomes less than AC, 1, or 2, it has to shut off additional lending to insiders until its within the 100% general limit
For Reg O, what is a Director?
Members of the BOD regardless of whether they receive compensation.
Advisory D are not considered D, if:
not elected by the shareholders,
not authorized to vote on matters that come before the BOD, and
Provides only general policy advice to the B
What are the components of an effective MIS?
QQT
Quality
Quantity
Timeliness
What is control for Reg O?
A person directly or indirectly, or acting through or in concert with one or more persons:
Owns, controls, or has the power to vote 25% or more of any class of voting stock, or
Controls the election of a majority of Ds, or
Has the power to exercise controlling influence over M or policies.
M rating?
replacing or strengthening M or the B may be necessary
4
23A
In what instances can a bank purchase a low quality asset?
Bank has to commit to purchasing them prior to the downgrade and subject to an independent credit evaluation.
What is the rebuttable presumption of control for 23A?
A company or shareholder owns or controls 15% or more of the equity capital of the other company.
What is the definition of unimpaired capital &; surplus as it pertains to reg O?
T1C+ T2C + Disallowed ALLL
Within how many days of starting a new activity does the FHC need to notify the FRB?
within 30 days of starting the activity
Bank’s cant pay overdrafts for who? Reg O
EO or D of the bank, or of the bank’s affiliates
23A
What are the individual and aggregate limits for covered transactions? What are exemptions?
Individual - 10% of B Capital + Surplus
Aggregate - 20% of the B Capital + Surplus
C + S = Tier 1 + Tier 2 + amount of ALLL not included in tier 2.
For Reg O, what is a related interest?
Company controlled by that person, or a political or campaign committee that is controlled by that person or funds/services will benefit that person.
What are the responsibilities of management?
Implementation of the Board’s policies and objectives in the bank’s day to day operations.
What is an Insider for Reg O?
Executive Officer, Director, Principal Shareholder, and their Related Interests
What are the conditions for a BHC to enter into new activities?
All bank subs must be:
Well-Cap
Well-managed
Satisfactory in CRA
Grandfather provision: non-conforming activities can’t exceed 15% of consolidated annual gross revenues
What is the definition of control under BHC Act?
The company directly or indirectly or acting through one or more persons owns, controls, or has the power to vote 25% or more of any class of voting securities
Company controls the election of a majority of D
FRB determines after notice and opportunity for hearing, the company has a controlling influence over M or policies
What requirements are there for extension of credit to EO of the bank? Reg O
Only applies to bank’s EO
Promptly reported to the Board
Creditworthy and on the same terms of other non-insiders, and does not involve more than the normal risk of repayment
Preceded by the submission of a current PFS from the EO
Made subject to the condition in writing, at the option of the bank that the extension of credit will become due at any time the EO is indebted to any other bank or banks in an aggregate amount greater than the Reg O limits for EO
What are the primary causes of violations?
What Mark Needs Upstairs
Willful non-compliance
Misinterpretation
Negligence
Unfamiliarity
What are the presumption of control for the BHC Act?
Company owns, controls, or hard the power to vote more than 5% of any class of voting securities AND that are common EOs or D at the bank and company AND nobody else owns, controls, or has the power to vote as much as 5% of any class of securities.
Company can vote more than 5% of any class of voting securities AND the aggregate holdings of individuals or members of their immediate families who are EO and D, together with the company holdings total 25% or more of any class of voting securities
Presumption for first two doesn’t apply when securities are held in a fiduciary capacity and company does not have sole authority to exercise voting rights.
Company has an agreement showing it exercises significant influence over M
Company enters into an agreement in which the holder’s rights in voting securities are restricted (unless its a mutual agreement amount SH granting 1st refusal)
Company controls securities that are convertible into voting securities, presumably owns or controls those securities.
How does a BHC become a FHC?
Notifies the FRB
Each insured depository institution must be well capitalized and well managed
23A
What is considered a covered transaction?
Loan or extension of credit to an affiliate
purchase or investment in a security issued by an affiliate
purchase of assets from an affiliate that haven’t been exempted
acceptance of securities issued by the affiliate as collateral for a loan to any person or company
issuance of a LOC on behalf of an affiliate
transaction with a third party if the proceeds of the transaction are used for the benefit of or transferred to the affiliate.
What is the individual lending limit for Reg O?
Not Fully Secured: 15% of the bank’s unimpaired capital and surplus
+
Fully Secured: 10% of the bank’s unimpaired capital and surplus, if fully secured by readily marketable collateral with a MV that’s determined by reliable and continuously available price quotes at least equal to the loan
Prohibition does not apply to an extension of credit by a bank to its holding company or to other subsidiaries of the BHC
23 A
What are ineligible types of collateral?
Intangible assets
Equity and Debt Securities that are issued by the bank and represent capital of the bank
Low quality assets
Guarantee of LOC
Securities issued by any affiliate
M rating?
Strong performance and RM practices
1
What are exceptions to the limits that a bank can lend to an EO? Reg O
Loans to finance children’s education
Loans to finance or refi the purchase, construction, maintenance, or improvement of a residence provided that: secured by first lien and the residence is owned or expected to be owned by the EO, and in case of refinance, use only the amount to repay the original loan plus closing costs
Loans fully secured by safe collateral - secured by instruments guaranteed by the US or segregated deposit.
23 A
What transactions are exempt from quantitative limits and collateral requirement? Note: still must be made S&S standards and cant purchase low quality assets
Sister banks (80% ownership)
Parent institution/subsidiary transactions (80% ownership)
Purchases of non-recourse loans from an affiliate.
What are the exceptions to the Tangible Economic Benefit Rule for Reg O?
Extension of credit is made on the same terms as extension of credit with non-insiders
Does not involve more than the normal risk of repayments
proceeds are used in a bona fide transaction to acquire property., goods, or services from the insider.
BHC are prohibited from?
owning shares of any company that’s not a bank
engaging in activities other than banking
furnishing services to their subs that aren’t specifically authorized by the BHC Act or the Fed
Under 23 B what type of asset purchase is prohibited?
The bank, as fiduciary, cant purchase any securities or other asset from any affiliate unless the purchase is permitted:
under the instrument creating the fiduciary relationship
by court order, or
by law of the jurisdiction governing the fiduciary relationship.
What are the key components of IRC
Control environment Risk Assessment Control Activities Information and Communication Monitoring
What is the limit on the amount that a bank can lend to an executive officer? Reg O
Higher of 2.5% of the bank’s unimpaired capital and surplus or $25K, but in no event more than $100K.
M rating?
Haven’t demonstrated the ability to correct problems and implement appropriate RM practices
5
According to the Statement Concerning the Responsibilities of D and O, what are the most important responsibilities of a Director?
To act loyal and with care
What type of companies are excluded from being an affiliate for 23A?
Most bank subs - except insured depository institutions (banks still considered affiliates)
Companies that hold bank premises
Companies that engage in safe deposit services
Companies that hold U.S. Government securities, or securities guaranteed by US govt securities
Companies that were acquired by debts previously contracted.
M rating?
Capabilities of the B may be insufficient
3
M rating?
Problems and risks are inadequately IMMC and now threaten viability
5
What is considered an affiliate under 23B?
Same as 23A, except
Banks aren’t affiliates under 23B
Companies engaged in:
Premises
Safe deposit business
Holding obligations of the US or its agencies or obligations fully guaranteed by them
Company where control results from DPC
What are the responsibilities of the Board?
Federal Employee Program
Formulation of sound policies and objectives
Effective supervision of bank affairs
Promotion of bank welfare
M rating?
Problems and significant risks may be inadequately IMMC.
3
What are general restrictions imposed by Reg O?
Extension of credit should be on the same terms as non-insiders and doesn’t involve more than normal risk of repayment
Restrictions don’t apply to a benefit or comp program that’s widely available to all employees and doesn’t give preference to the insider
Prior B approval is needed when the aggregate extension exceeds the greater of $25M or 5% of unimpaired capital + surplus; must get B approval for anything over $500M
What are exceptions to the aggregate lending limit? Reg O
Loans that are secured by bonds, notes, or T-bills of the U.S government; anything guaranteed by the U.S. government, or segregated deposits at the bank.
M rating?
Replacing or strengthening M or the B is necessary
5
When are overdrafts for EO or D ok? Reg O
EO or D has a written, pre-authorized, IB extension of credit plan, or transfer agreement
OD in an aggregate amount of $1K or less provided that the account is not overdrawn for more than 5 business days and charges the same fee as any other bank customer.
23 A
What must a bank do when collateral has amortized or been retired and is below the required collateral min requirements?
Replace the collateral or add additional collateral to keep the percentage of required at the inception of the collateral.
M Rating?
Risks are consistently and effectively IMMC
1
What is the aggregate lending limit for Reg O?
100% of unimpaired capital and surplus
M rating?
Satisfactory M and B performance
2
What are the concerns of a one man bank?
May deprive the bank of competent management
Harder for regulators to address deficiencies
For Reg O, what is an executive officer?
Person who has the authority to or who participates in major policy functions
COB, Pres, any VP, Cashier, Secretary, and Treasurer
Can be excluded by annual resolution of the B if the person doesn’t participate in major policy making
Can be additional people if they do participate in major policy-making
What companies are not considered HCs?
Industrial Loan Co
Savings banks
Companies that are majority-owned by the U.S. govt
CEBA credit card banks
What is considered an affiliate for 23A?
Parent Company
Companies under common control by a parent company
Companies under common control
Companies with interlocking directorates
What are the benefits of an external audit?
Helps BOD meet their fiduciary responsibilities and provide greater assurance that financial reports are accurate and complete
M rating?
M and B performance need improvement or RM practices that are less than satisfactory
3
When is permission given to the FDIC to communicate with bank’s external auditors?
Once an institution notifies the FDIC of the accountant’s name or the accounting firm is engaged. (by letter or submitting a copy of the audit report).
M rating?
Deficient M and B performance or RM practices that are inadequate
4
M rating?
Promptly and successfully address existing and potential problems and risks
1
What are the management evaluation factors?
Los Angeles City Absolutely Appreciates Citizens Roaming or Driving West of Rodeo Drive
Level and quality of oversight and support
Ability to adapt to changing business conditions
Conformance with internal policies
Accuracy, timeliness, and effectiveness of MIS
Adequacy of audits and internal controls
Compliance with laws and regulations
Responsiveness to recommendations
Depth and Succession
Willingness to serve community
Overall performance and risk profile
Reasonableness of compensation policies and avoidance of self-dealing
Dominant individuals
What is the definition of control for 23A?
Company or shareholder directly or indirectly owns, controls, or votes 25% or more of any class of voting securities
Controls the election of a majority of D
FRB determines after notice and opportunity for hearing, exercises a controlling influence over the management or policies of other company
not considered controlled if shares are held under a fiduciary capacity except in a trust situation
23A
What are the collateral requirements?
100% - secured by US government securities/agencies, cash
110% - secured by obligations of a state or political subdivision
120% - other type of debt instruments including receivables
130% - stock, lease, RE, personal property
What is the most important characteristic of a Director?
Personal Integrity
Directors are held liable for?
Not Until Fred Makes a Basket
Negligence resulting in loss: failure to exercise the degree of care
Ultra Vires Acts: actions beyond the powers of a corporation
Fraud: intentional deception resulting in injury
Misappropriation of funds
Breach of Trust
What is a FHC?
company that can engage in any activity and may acquire shares of any company engaged in a financial activity
