Technicals Flashcards
What does the middle office do?
Supports the function of the front office, and acts as a bridge between the front office and the back office.
Daily tasks?
The middle office primarily focuses on supporting the front office by managing risk, ensuring compliance, and supporting the back office in processing loan transactions. Key functions include risk assessment, tracking profits and losses, working agreements, and ensuring compliance with legal and regulatory requirements.
What are debt Covenants
Are restrictions that lenders impose on borrowers to prevent them from taking actions that might harm their ability to pay back
Two types of covenants
- Maintenance Covenant
- Incurrence Covenant
Maintenance Covenant
A form of Covenant in a Debt Instrument that requires the borrower to satisfy certain financial performance thresholds, such as the obligation to achieve specified financial targets, among other requirements
Incurrence covenant
An incurrence covenant is a type of financial covenant in a loan agreement that restricts a borrower’s ability to take certain actions, like incurring new debt, paying dividends, or making acquisitions.
Underwriting
Process through which an individual or institution takes on financial risk for a fee
Credit risk
refers to the potential loss a lender faces when a borrower fails to repay a loan or meet other debt obligations
Interest rate risk
the potential for losses or reduced returns on investments due to changes in market interest rates
Liquidity risk
The risk is that a company or institution will be unable to meet its financial obligations when they come due, either because it lacks sufficient cash or because it cannot easily convert assets into cash.
Price Risk
to the potential for financial loss due to fluctuations in the price of an asset, commodity, or security.
Foreign Exchange Risk
is the potential financial loss or gain that a business or individual can experience due to fluctuations in the exchange rates between different currencies.
Transaction Risk
The potential for negative impacts on a completed transaction due to factors like foreign exchange rate fluctuations or commodity price changes before the transaction is settled
Compliance Risk
The potential for an organization to face legal penalties, financial losses, or reputational damage due to failing to adhere to laws, regulations, industry standards, and internal policies
Strategic Risk
The potential for an organization to fail to achieve its long-term objectives or goals due to internal or external events that could impact its strategic direction
Loan Policy
- Evaluate whether the loan policy provides adequate guidance to
control the quantity of credit risk. - Determine whether the quantity of credit risk has changed or is likely
to change because of policy changes - Review the bank’s charge-off policy.
- Have clear lines of authority and responsibility for monitoring
adherence to policies, procedures, and limits been established by the
board and senior management - Analyze the level and composition of policy exceptions and determine
the potential impact on the quantity of risk.
Evaluate whether the loan policy provides adequate guidance to
control the quantity of credit risk. Consider the following:
- Approval process:
- Underwriting:
- Loan quality monitoring and evaluation:
- Portfolio limits and strategic goals
- Compliance:
Underwriting
- Review the current underwriting guidelines. Assess how changes
since the previous examination have affected the quantity of risk. - Evaluate the bank’s analysis when considering a credit application.
Consider: - Analyze the level, composition, and trend of underwriting exceptions
and determine the impact on the quantity of risk.
Review the current underwriting guidelines. Assess how changes
since the previous examination have affected the quantity of risk.
Consider:
- Customer size standards, external ratings, credit scores, and credit
history; - Debt service coverage, methods of calculating cash flow,
debt/income ratios; - Leverage standards, liquidity standards, and other covenant
requirements; - Amortization requirements, maturity standards;
- Collateral coverage and collateral valuation;
- Guarantor standards; and
- Reporting requirements.
Evaluate the bank’s analysis when considering a credit application.
- Purpose of loan,
- Loan structure,
- Borrower’s repayment capacity,
- Collateral requirements,
- Portfolio goals and limits
