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Test advanced editor Flashcards

1
Q
A
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2
Q

What is the key characteristic of a Special Mention loan?

A

Has potential weakness (vs. actual/well-defined) weakness; generally relates to the structure of a loan

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3
Q

Characteristics of a Special Mention Item

A

? Inadequate supervision of credit ? Questions on condition or control of collateral ? Economic/market conditions may unfavorably affect obligor in future ? A declining trend in financial condition ? Structure

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4
Q

What is the key characteristic of a Substandard loan?

A

Has well-defined weakness

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5
Q

What are the loan classifications?

A

Pass Criticized - Special Mention Classified – Substandard, Doubtful, Loss

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6
Q

Classification on Investment Security

A

CCC+ rated bond w/ impairment = SS – amort. cost SS – inadequately protected, well-defined weakness, institution will sustain some loss if not corrected Doubtful – same as above plus collection or liquidity in full is questionable Loss – uncollectible; should be promptly charged off

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7
Q

Consumer Retail Classification Matrix

A

Past Due 90 days 120 days 180 days Open-End Substandard Loss Closed-End Substandard Loss 1-4 Family and Substandard Loss (loan in Home Equity, excess of LTV > 60% collateral value)

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8
Q

What is required for a retail loan that secured by residential real estate?

A

Loans that are secured by residential real estate require a current assessment of value at 180 days past due (not the original value!)

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9
Q

Weighted-Classification Ratio For CAMELS-rated banks

A

Weightings of classification ratios: ? Substandard @ 20% ? Doubtful @ 50% ? Loss @ 100% ? Value Impaired @ Variable % (ATRR) Take weighted total and divide by Tier 1 Capital and the ALLL

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10
Q

Asset Quality CAMELS Rating Guidelines

A

Rating WCR 1 0 – 5% Strong 2 5 – 15% Satisfactory 3 15 – 30% Fair/Less than satisfactory 4 30 – 50% Deficient 5 > 50% Critically Deficient

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11
Q

Asset Quality ROCA Rating Guidelines

A

Rating WCR 1 0 – 0.5% Strong 2 0.5 – 1.5% Satisfactory 3 1.5 – 3.0% Fair/Less than satisfactory 4 3.0 – 5.0% Deficient 5 > 5.0% Critically Deficient

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12
Q

If ALLL methodology is sound, but implementation is faulty, is the reserve adequate?

A

Yes, the reserve is adequate

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13
Q

FAS 114

A

Standards for specific reserve; loan-by-loan review of impairment

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14
Q

What should the FAS 114 reserve methodology include?

A

Three measurement techniques: ? PV of expected CFs ? Observable market rate ? Estimated fair value of underlying collateral Reserve allowance is difference btw the book value and the result from above valuation

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15
Q

Methodology Reasonableness Test

A

Tests adequacy of reserves – results should be compared to bank’s internal methodology Formula: ? Deduct identified losses ? 50% of doubtful ? 15% of substandard

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16
Q

Where are Credit Losses booked?

A

B/S I/S Loans ALLL Provision Undrawn Commitments & Letters of Credit O/Liab O/Expense Derivatives O/Liab O/Income

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17
Q

Accounting for Provision to the ALLL

A

Dr. Provision (expense) $10,000 Cr. Reserve (contra asset) $10,000 Loans $1,000,000 Reserve (10,000) Net Loans 990,000

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18
Q

Accounting for a Loan Charge-off

A

Dr. Reserve $5,000 Cr. Loans $5,000 Loans $995,000 Reserve (5,000) Net Loans 990,000

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19
Q

Accounting for a Loan Recovery

A

Dr. Cash $1,000 Cr. Reserves $1,000 Loans $995,000 Reserves (6,000) Net Loans 989,000

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20
Q

Why is a loan designated as Nonaccrual?

A

The purpose of designating a loan nonaccrual is to distinguish between: ? Loans that are of sound quality and performing as agreed Versus ? Loans that are weak and unable to perform, or will be unable to perform as agreed

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21
Q

When should a loan be placed on Nonaccrual?

A

When full payment of principal and interest is no expected; the loan can be < 90 days if feel loan collection is in doubt

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22
Q

Accrual/nonaccrual decision tree – when can a loan be put on accrual when the principal or interest are 90 days or more past due?

A

When the loan is both well-secured and in process of collection

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23
Q

Calculating Troubled Debt Restructuring Original bal. = $500,000 Paid down = $350,000 Recorded/accrued interest = $20,000 Modified note = $350,000 Due in 1 yr., interest rate = 4%

A
  1. Calculate the recorded amt. of the loan Principal bal. at restructuring $350,000 Accrued interest (to maturity) 20,000 Less any unamort. principal 0 Add any unaccreted discount 0 Deduct any charge-off netted 0
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24
Q

What credit score is considered subprime?

A

660

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25
Q

When is an appraisal not required?

A

? In which value is $250,000 or less ? A business loan with value of $1M or less and not dependent on the sale of, or rental income from, real estate as the primary repayment source ? Subsequent transactions resulting from an existing extension of credit

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26
Q

What are the supervisory Loan-to-Value limits?

A

Loan Category LTV limit Raw land…………………………..65% Land development…………………75% Construction Commercial, multifamily, & other nonresidential……….80%

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27
Q

What is Other Real Estate?

A

? Real property other than premises owned or controlled by the bank ? Usually acquired in satisfaction of a debt previously contracted ? Can also be: o Property formerly used for bank business o Originally acquired for expansion

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28
Q

What is required for ORE accounting?

A

? Should be booked at ORE upon physical possession ? Amount booked should be lesser of o Fair value less estimated costs of sale o Recorded amt. of loan plus any senior debt on the property ? Loss on loan, including costs, must be charged to ALLL at time of foreclosure

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29
Q

How is a lien perfected?

A

SAPS ? Search: UCC-11, search country records for previous ownership of collateral ? Attach: security agreement in coordination with promissory note ? Perfect: UCC-1 (Financing Stmt) filing ? Search: perform another UCC-11 search to ensure

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30
Q

What are the bankruptcy code chapters?

A

Chapter 7 – liquidation of debtor’s assets and distribution among creditors Chapter 11, 12, 13 – Reorganization ? Chap. 11 – Bus/ Indivs. that do not have steady income stream ? Chap. 12 – Farmers and farm family ? Chap. 13 – Wage earners & their proprietorships

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31
Q

Who determines Legal Lending limits?

A

? Established by laws of the state where bank’s headquarters is located ? National banks are subject to lending limits set forth in 12 USC 84

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32
Q

What is the Cash Coverage Ratio?

A

Net Cash from Operating Activities Financing Costs* + CPLTD** *Including interest expense, dividends **Current portion of LTD @ the end of the prior year Should be greater than 1

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33
Q

How do you calculate Cash After Debt Amortization?

A

Net Cash from Operating Activities - Financing Costs = Net Cash Income - CPLTD = Cash After Debt Amortization

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34
Q

Define Interest Rate Risk

A

The exposure of current and future earnings and capital arising from adverse movements in interest rates

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35
Q

What are the four forms of IRR?

A

Mismatch/Repricing risk Yield curve risk Basis risk Options risk

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36
Q

Who manages IRR?

A

Asset-Liability Committee (ALCO) Treasury Department Risk Manager Internal Audit

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37
Q

What are the most common IRR models?

A

Re-pricing Gap Income simulation/Earnings-at-Risk (EAR) Economic Value of Equity (EVE)

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38
Q

What does the Re-pricing Gap model capture?

A

Mismatch/Repricing risk

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39
Q

What are the key assumptions of the Repricing Gap model?

A

? All repricing within a specific time bucket occurs simultaneously ? Slotting assets, liabilities and OBS items based on the first repricing interval ? All maturing assets and liabilities are reinvested at overnight rates

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40
Q

What are the positives and negatives of the Repricing Gap model?

A

? Positives o Easy to produce and understand o Inexpensive o Clearly illustrates repricing gaps ? Negatives o Static, ST perspective

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41
Q

Asset Sensitive v. Liability Sensitive

A

Rates Asset Sensitive Liability Sensitive Increase + - Decrease - +

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42
Q

What does the Income Simulation/EAR model simulate?

A

A bank’s exposure to loss of earnings over a period of time

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43
Q

What are the key assumptions of the Income Simulation/EAR model?

A

? The BS is used to project earning is accurate ? Selected interest rate scenarios are robust ? New business will product expected results ? Runoff schedules and prepayment speeds are accurate ? Core deposit behavior is realistic

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44
Q

What is the key negative of the Income Simulation/EAR model?

A

? Not a reliable estimate of LT risk exposure

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45
Q

What does EVE calculate?

A

? PV of CFs from assets, liabilities, and OBS items based on a forecasted change in interest rates ? EVE = PV of assets – PV of liabs. +/- OBS

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46
Q

IRR Models: Strengths and Weaknesses

A

Criteria Gap Simulation EVE ST Exposure Yes Yes NA LT Exposure Yes No Yes Repricing Yes Yes Yes Basis No Can Can Yield Curve No Can Can

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47
Q

What are three types of rate scenarios?

A

? Shocks – Take base curve +/- 100 bps, 200 bps, and 300 bps ? Historical – analyze real life stress periods, adjust base case curve to mimic actual rate changes ? Hypothetical – macro-economically plausible ‘what if’ scenarios

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48
Q

At a minimum, what rate scenario must the bank look at?

A

At a minimum, the bank must look at instantaneous +/- 200 bps parallel shift in market rates

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49
Q

What does the ‘S’ component consider?

A

? Quality of Risk Mgmt – The ability of management to identify, measure, monitor, and control risk ? Market Risk Exposure – Give the bank’s size, complexity, and the adequacy of capital and earnings

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50
Q

Describe the 5 levels of rating for the ‘S’ component

A

1 – IRR sensitivity well controlled, min. potential that earnings/ capital will be adversely affected. RM is strong. Earnings /capital provide substantial support. 2 – IRR sensitivity is adequately controlled, moderate potential earnings/capital will be adversely affected. RM is satisfactory. Earnings/ capital provide adequate support 3 – IRR needs improvement or that there is significant potential earnings/capital will be adversely affected. RM need to be

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51
Q

What can be determined from the Balance Sheet?

A

Whether the bank has enough liquidity to handle a crisis

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52
Q

Net non-core funding dependence

A

= Net non-core funding – ST inv Loans, ORE, and Securities > 1 yr. Negative ratio is favorable Positive ratio means bank is relying too much on volatile liabilities

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53
Q

The Parent Company must …

A

Serve as the Source of Strength!

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54
Q

Double Leverage Ratio

A

= Equity Invested in Subs Parent Co Equity Capital If > 120%, too big

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55
Q

What is expected from the Board of Directors in managing Market Risk?

A

? Approving policies, procedures, and strategies ? Liquidity risk profile ? Identifying executive level lines of authority ? Monitoring performance periodically ? Reviewing contingency funding plans

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56
Q

What is required in a contingency funding plan?

A

? Triggers ? Roles and responsibilities ? Scenario analysis ? Alternate funding sources

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57
Q

What are early signs of a liquidity problem?

A

? Deterioration in asset quality ? Changes in fund providers ? Decreased size of individual transactions ? Difficulty accessing longer-term maturities ? Increased pricing costs, increased Loan/Deposit ? Changing markets

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58
Q

Who is an insider?

A

? Directors ? Principal Shareholders ? Executive Officers ? Policymakers ? Related interests (business owners and immediate family that resides in house)

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59
Q

When is a shareholder a “principal” shareholder?

A

Must own >= 10% of stock for control

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60
Q

Which of these is a principal shareholder – (a) Bob owns 7% of the bank and his ex-wife Rachel who remarried and moved away owns 7% (b) Rachel owns 7% of the bank. Her daughter Sarah who owns 4% is staying with her while she looks for a job (c) Paul owns 6% of the bank. He is the 10% owner and managing partner of a law firm which owns 5% of the

A

a) No b) Yes c) Yes

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61
Q

What are the two categories of related interests?

A

1) Business which they control (25% is automatically control of business) 2) Immediate family living in house

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62
Q

When is an individual considered to have a controlling interest in a bank? In a company?

A

10%, 25%

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63
Q

What loan credit criteria apply to all loans made to insiders?

A

Must be same terms as loan to independent 3rd party

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64
Q

What loan pricing criteria apply to most loans make to insiders?

A

Same as the general public

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65
Q

What loan pricing exception is permitted?

A

Insider can receive the same discounts as all insiders

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66
Q

Who is an executive officer?

A

Treasurer President Corporate Secretary VP (unless Board Resolution to not included VPs)

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67
Q

How much can a bank lend to its executive officers?

A

Up to $100,000

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68
Q

What two types of loans to executive officers don’t count against the lending limit?

A

Loans for a home (1st Mortgage) or education

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69
Q

When is an overdraft a violation of Regulation O?

A

When there is no preliminary agreement and it is over $1000

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70
Q

What is a BHC?

A

A company (bank, corporation, or business trust) that has control (>= 25% of voting shares) of a bank

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71
Q

What is the largest asset on a BHC’s balance sheet?

A

Investment in bank subsidiary

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72
Q

What is the main expense on a BHC’s income statement?

A

Interest on debt

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73
Q

Originally, what activities were BHC’s allowed to engage in?

A

Activities closely related to banking (i.e. loans, securities, mortgage lending)

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74
Q

What is a chain banking organization?

A

2 or more banks controlled by the same individual or related interests

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75
Q

Which FR regulation implemented the BHC Act and Change in Bank Control Act of 1978?

A

Regulation Y

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76
Q

What is the primary advantage of a BHC?

A

Provides financial flexibility ? Consolidated tax returns ? Tax advantage to bank subs ? Treasury stock (repurchase) Wider investment powers Centralization of operations

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77
Q

What is a BHC allowed to charge for operations?

A

No more than a 3rd party – used to determine that method for allocating costs is appropriate

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78
Q

What is the primary “doctrine” for BHCs?

A

To serve as a source of strength to is subsidiaries

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79
Q

What is the Gramm-Leach Bliley Act of 1999?

A

? Allowed banks to be affiliated with securities firms and insurance companies ? Preserve separation of banking & commerce – allows activities “financial in nature” ? Held to higher standard (well-cap., well-managed, satisfactory CRA rating)

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80
Q

What are disadvantages of a BHC?

A

? Additional FR regulations and inspections ? Additional filings (FR-Y) ? Possible securities law regulations ? Possible dealings with minority shareholders

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81
Q

What are the four subcomponents of the “R” in the BHC rating system?

A

? Board and Sr. Mgmt. oversight ? Policies, procedures, and limits ? Risk monitoring and MIS ? Internal controls (this rating is “forward looking”)

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82
Q

What are the four subcomponents of the “F” in the BHC rating system?

A

? Capital ? Asset quality ? Earnings ? Liquidity (this rating is “point in time”)

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83
Q

What does the “I” for the BHC rating system capture?

A

? Assesses the impact of nondepository entities on the depository subs (includes Parent and all nondep. subs)

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84
Q

What is the rating scale for “I” of the BHC Rating System?

A

? Low likelihood of significant negative impact ? Limited likelihood ? Moderate likelihood ? Considerable likelihood ? High likelihood

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85
Q

How can a BHC have an adverse effect on bank subs?

A

? Excessive risk and fail ? Adverse intercompany transactions and excessive dividends

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86
Q

What should be considered for “I” of the BHC Rating System?

A

? Is capital adequately distributed across all subs? ? Do intra-group exposures undermine condition of banks? ? Is parent cash flow dependent on excessive dividends? ? Impact of strategic growth plan, op losses or poor control environment of parent/nonbanks ? Legal/Rep risk of parent and non-banks

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87
Q

What is included in the “C” component of the BHC Rating System?

A

? Overall assessment ? Forward-looking and static assessment of consolidated BHC ? Not a numeric average

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88
Q

What is included in the “D” component of the BHC Rating System?

A

? “D” stands outside of composite rating ? Use primary/functional regulator’s rating ? For multi-bank holding company, weighted average of composite ratings

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89
Q

What is the definition of “Control”?

A

When a person or persons acting in concert acquire ownership, control, or the power to vote (directly or indirectly) 25% or more of any close of voting security - Outright Control

90
Q

What is the definition of “Rebuttable Presumption of Control”?

A

When a person or persons acting in concert acquire ownership, control or the power to vote (directly or indirectly) 10% or more of any class of voting security, and if: ? the institution is registered with the SEC, or ? no other person will own, control, or hold the power to vote a greater percentage

91
Q

Who has control and presumption in the following scenario: Jones Mr. A Mrs. A Mr. B Mrs. B Mr. S Mrs. S 22 21 6 20 6 13 10

A

No individual control Jones – Presumption (alone) A & B – Outright control (in concert) S – Presumption (in concert)

92
Q

Regulation DD

A

Truth in Savings Act ? Account disclosures ? Calculation of interest ? Advertising

93
Q

Regulation CC

A

Expedited Funds Availability Act ? Availability schedules ? Deposit holds ? Payment of interest on deposits

94
Q

Regulation E

A

Electronic Fund Transfer Act ? Disclosures ? Liability limits for unauthorized transfers ? Error resolution procedures ? Preauthorized transfer rules

95
Q

Regulation P

A

Privacy of Consumer Financial Information ? Governs treatment of consumers’ nonpublic, personal financial information ? Initial and annual notices

96
Q

Regulation B

A

Equal Credit Opportunity Act ? Prohibits discrimination in any aspect of the credit transaction Consequences for not complying ? Civil liability o Indiv - $10,000

97
Q

FHA

A

Fair Housing Act Prohibits discrimination based on a prohibited basis – ? in the sale or rent of a dwelling ? To otherwise make unavailable or deny a dwelling ? In making available a residential RE-related transaction ? In the terms or conditions of such a transaction

98
Q

FCRA

A

Fair Credit Reporting Act

99
Q

Regulation C

A

HMDA – Home Mortgage Disclosure Act Data reported by banks and FIs is used for: ? Fair lending exams ? CRA exams ? Public disclosure If a banks not comply, may result in CMPs

100
Q

Regulation BB

A

CRA – Community Reinvestment Act (CRA) Requires that banks do not arbitrarily exclude low and moderate income areas in area where the bank does business ? Bank should help meet credit needs of community

101
Q

Regulation Z

A

Truth in Lending Act Primary disclosures are: ? APR ? Finance charges ? Variable-rate terms ? Closed-end prepayment penalty provisions

102
Q

Regulation H

A

Flood Disaster Protection Act

103
Q

Regulation X

A

Real Estate Settlement Procedures Act (RESPA) ? Covers federally related mortgages – loans secured by a first or subordinate lien on residential property

104
Q

What are the three forms of discrimination?

A

Overt – apparent Disparate treatment – evident that criteria is discriminating Disparate impact – discovered when testing policies and procedures

105
Q

What is an assessment area?

A

? Area where the bank does business ? One or more MSAs or political subdivisions ? Does not arbitrarily exclue low and moderate income areas

106
Q

What are the Compliance Ratings?

A

? 1 – Strong ? 2 – Generally strong ? 3 – Less than satisfactory ? 4 – Unsatisfactory (requires close supervision) ? 5 – Substantial noncompliance (in need of strong supervisory attention)

107
Q

What are the CRA small bank ratings?

A

? Outstanding – Excellent performance ? Satisfactory – Reasonable performance ? Needs to improve – poor performance ? Substantial noncompliance – very poor performance

108
Q

What risks related to compliance?

A

? Legal ? Reputational ? Operational ? Credit

109
Q

Credit Risk

A

Arises from the potential that a borrower or obligor will fail to perform on an obligation

110
Q

Market Risk

A

Risk to a financial institution’s condition resulting from adverse movements in market interest rates or prices

111
Q

Liquidity Risk

A

Potential that an institution will be unable to meet its obligations as they come due because of an inability to liquidate assets or obtain adequate funding

112
Q

Operational Risk

A

Arises from the potential that inadequate information systems, operational problems, breaches in internal controls, fraud, or unforeseen catastrophes will result in unexpected losses

113
Q

Legal Risk

A

Arises from the potential that unenforceable contracts, lawsuits, or adverse judgments can disrupt or otherwise negatively affect the operations or condition of a banking organization

114
Q

Reputational Risk

A

The potential that negative publicity regarding an institution’s business practices, whether true or not, will cause a decline in the customer base, costly litigation, or revenue reductions

115
Q

OREO

A

? usually RE used to secure debt ? Must write off difference between loan amount and the property’s fair value o Excess charged against the ALLL ? Capital expenditures can be added to the OREO acct to extent of the value added

116
Q

OBS Items

A

? L/C ? SBLC – not directly linked to shipment of goods ? Unfunded loan commitment ? Lines of credit

117
Q

Past Due Loans

A

Loan that is 30-89 days delinquent – a banker can accrue interest

118
Q

Noncurrent Loans

A

Loans that are past due 90 days or more or placed on nonaccrual status

119
Q

What should be reviewed to determine Asset Quality?

A

? WCR o 0 – 5% = 1 o 5 – 15% = 2 o 15 – 30% = 3 o 30 – 50% = 4 o 50% + = 5

120
Q

Total Classified Asset Ratio

A

TotalClassifiedAssets Tier1Capital ? ALLL

121
Q

Weighted Classified Asset Ratio

A

Subs tan dard 20% ? Doubtful50% ? Loss100% Tier1Capital ? ALLL

122
Q

ALLL

A

Contra-asset to absorb estimated credit losses associated with the loan portfolio ? Increase ALLL - debit the provision account (expense) and credit the ALLL ? Charged off loan - debit the ALLL and credit loans ? Recovery of charged-off loan – debit cash and credit ALLL

123
Q

Adequacy of ALLL

A

50% of doubtful loans 15% of substandard loans + estimated credit loses over 12 months Recommended ALLL (A) Bank’s ALLL

124
Q

What should be reviewed to determine Earnings?

A

ROAA = Annualize Net Income/Average Assets Ratin < $100- $300- $1-$5B > $5B g $100M $300M $1000M 1 1.15% 1.05% .95% .85% .75% 2 .95% .85% .75% .65% .55% 3 .75% .65% .55% .45% .35% 4 <.35%

125
Q

Net Interest Margin

A

NII/Ave. Earning Assets The difference between interest income and interest expense as a percent of average earning assets

126
Q

Non-Interest Income

A

NII/ Adjusted Operating Income Fees and charges for services, such as checking, safety deposit and trust, that are on a non-interest basis

127
Q

Overhead Expense (Efficiency Ratio)

A

Non-interest expense / Interest income + non-interest incom Total of operating expense for the bank, primarily salaries, occupancy, technology, and professional fees

128
Q

Provision Expense

A

? Periodic changes to income determined by mgmt. and the board based on their estimate of loan quality and the adequacy of the reserve ? Where a bank’s credit quality has the most discernible impact ? Has the potential for distorting a bank’s earnings

129
Q

Adjusted ROAA

A

? Shows if earnings are understated or overstated ? Adjusted ROAA should be within 10% of ROAA

130
Q

What should be reviewed to determine Capital?

A

? Tier 1 RBC Ratio, Total RBC, Tier 1 Leverage ? Regulatory min: 4%, 8%, 3% ? Asset quality – not rated more than 1 number above AQ b/c AQ is prime driver ? Earnings

131
Q

Tier 1 Capital

A

+Stockholders equity (CS, Surplus, Undiv. Profits) +/- Unrealized loss/gain on AFS securities + Non-cumulative Perpetual preferred stock +Minority interest in consolidate subs Less:Goodwill and all intangible assets (except some mortgage and credit card servicing rights)

132
Q

Tier 2 Capital

A

+ ALLL + Perpetual preferred stock + Hybrid capital instruments + Term subordinated debt and preferred stock = Tier 2 Capital Elements (dedicated to specific risks or repayment)

133
Q

Tier 1 RBC

A

Tier 1 Capital / Risk-Weighted Assets RWA – BS o 20% - Cash items in process of collection, Claims on depository institutions, US gov’t sponsored agency obligations, municipal securities o 50% - Loans secured by first liens on residence, municipal securities – revenue bonds

134
Q

Total RBC

A

Total Capital/Risk-Weighted Assets

135
Q

Prompt Corrective Action (PCA)

A

Well Adeq. Cap Under Sig Crit Cap Cap Under Under Cap Cap Tier 1 6% 4 <2

136
Q

Section 5199(b)

A

Restricts dividend payments to the current year’s earnings plus the prior two years’ retained net income, after allowing for transfers to surplus

137
Q

Section 5204

A

Restricts bank dividends to undivided profits, less any amount of statutory bad debts that the bank has on its books in excess of ALLL

138
Q

Reg I

A

Investment in FR stock – 6% of the member bank’s paid-up capital (CS) and surplus; half must be subscribed; Restricts the purchase of FR stock, up to 3% of bank’s capital

139
Q

Sources of capital

A

Earnings retention (internal) Raising capital via capital markets (ext) Through shareholders and directors (ext) Sale or redistribution of assets

140
Q

What is reviewed for liquidity?

A

Assets – mix, maturity, and marketability ? Loans – low liq. (earnings/liq. trade-off) ? Securities – med liq. (HTM, AFS) ? FFS – high liq. ? Cash – most liq. Liabilities – core versus noncore

141
Q

Two major types of liquidity

A

Asset liquidity – conversion of assets Liability liquidity – borrowings

142
Q

Net non-core funding dependence

A

Non-core funding – ST investments LT Assets (loans, OREO, Secs > 1yr.) # is negative if reliance on non-core funds is low; the bigger the negative #, the less the bank relies on non-core funds

143
Q

Price v. yield

A

Yield = Coupon rate, PAR Yield > Coupon rate, Discount Yield < Coupon rate, Premium

144
Q

BOD v. Sr. management

A

BOD - Strategic direction, competent mgmt. is in place, appropriate plans and policies, monitor ops and fin. performance, ensure CRA performance Sr. Management – day-to-day operations, implementation of P&P, ethical standards, compliance with laws and regs.

145
Q

5 COSO elements

A

Control environment Risk assessment Control activities Information and communication Monitoring

146
Q

Non-Accrual Loans

A

A banker can accrue interest on loans until (1) it is 90 days past due (unless well secured and in process of collection) or (2) collection of P&I is in doubt. Interest is classified as a loss.

147
Q

Impaired Loans

A

Creditor will be unable to collect all amounts due including P&I as scheduled according to loan agreement based on current information. If PV of expected future cash payments is less than recorded amount of loan then difference is amount of impairment.

148
Q

Restructured debt

A

Loans and leases whose terms have been modified because of deterioration in the financial condition of the borrower. Two methods for restructuring: (1) transfer of assets – recording the lower of fair market value or book value of asset transferred and charging-off any deficiency; (2) modification of terms

149
Q

How do banks absorb losses?

A

Through earnings, ALLL and capital

150
Q

Inventory DOH

A

Inventory/COGS * 365 days Should be low or declining

151
Q

AR DOH

A

Net AR/Net Sales * 365 days Indicates mgmt.’s collection abilities Lows or declining DOH means greater operating efficiency

152
Q

AP DOH

A

AP/Purchases or COGS * 365 days Measures creditor financing of inventory Increasing DOH may indicate CF problems

153
Q

Working Capital

A

Current assets – current liabilities LT financing of Current assets

154
Q

When is an appraisal required?

A

Non-residential txns. Over $250M

155
Q

When is an evaluation required?

A

? Transactions $250M or less ? Business loans $1M or less & repayment not from sale or rental income of real estate ? Existing loan with no big change in market value

156
Q

What constitutes a loan concentration?

A

Loans in a particular segment equal 25% or more of capital

157
Q

What are the four types of borrowing entities?

A

Sole proprietorships – business owned by one person who is liable for all debts General partnership – 2 or more people who operate business; all partners are liable jointly for debts Limited partnership – several partners have limited liability as long as 1 partner has unlimited liability Corporations – legal entity exists independently from people

158
Q

Current Ratio

A

Current assets/ current liabilities Current dollars available to pay current obligations If CR<100% means adverse funding situation

159
Q

Quick Ratio

A

Cash + marketable securities + AR Current liabilities More accurate measurement of liquid assets available to pay current liabilities

160
Q

Held to Maturity (HTM)

A

On BS at book value or historical cost; reflects management’s intent to hold the securities until they mature; cannot typically be sold without incurring an unfavorable accounting treatment for the remainder of the portfolio

161
Q

Available for Sale (AFS)

A

On BS at market value according to FASB115 – unrealized gains/losses are reported directly as a separate component of equity capital; A large % of a bank’s investment portfolio should be designated as AFS b/c investment securities provide a secondary source of liquidity

162
Q

Trading securities

A

On BS at market value; reported on GL at market value with unrealized gains/losses in value reported directly in income statement as part of earnings

163
Q

Mortgage-backed Securities (MBS)

A

Mortgage loans are secured; convert loans to securities and then sell them to investors. Benefits: (1) improves credit and liquidity risk, (2) reduction in RWA decreases capital requirements, (3) generates additional fee income.

164
Q

Collateralized Mortgage Obligations (CMO)

A

Represent ownership in specified cash flows from underlying pools of mortgages; CMOs take money and direct it to tranches; P&I payments are made to tranches according to specifications.

165
Q

GAP Model

A

RSA and RSL are slotted according to repricing date. EAR = Rate Change x GAP. Assumptions: time bucket slotting, static balance sheet, parallel change in yield curve Weaknesses: ST focus, does not capture option, basis, or yield curve risk and inappropriate for complex BS

166
Q

NII Simulation model

A

Advantages: Projects NII, addresses assumptions, can capture mismatch, basis, and option risk Weaknesses: ST focus, only captures option risk when options are in the money, difficult to project far into the future, results can be shaded by mgmt.

167
Q

Duration of Equity analysis

A

DE ? DA ( A) ? DL (L) ? DOBS / Equity Used to forecast the sensitivity of the EVE to a change of rates – Change in EVE = -DE x (% change in rates) Weaknesses: (1) only accurate for small rate changes, (2) duration of diff. instruments will change at diff. rates over time, (3) does not capture basis or option risk Strengths: One number result & captures IR risk from all time

168
Q

PV Scenario Analysis

A

PVE = PVA – PVL + PVO Calculates NPV of assets, liabs. and OBS & recalculates NPV for each instrument for a given rate. Strengths: LT measure of IR risk, captures all IRR and accurate even for larger rate change scenarios Weaknesses: Difficult to estimate appropriate interest

169
Q

BHC Advantages

A

1) geographic expansion 2) greater financial advantage 3) economies of scale 4) can redeem own stock which increases EPS 5) financial flexibility 6) strengthening of sub bank capital

170
Q

BHC Disadvantages

A

1) Additional FRB regulations and report filings 2) Audited financial stmts. For BHS >$500M in assets 3) Y-6A – changes in investments 4) FRY-8 – intercompany txns 5) FRY-9C – consolidated financial stmts. For BHCs >$150m in assets; FR Y-9SP (small BHC every 9 mos.); FR Y-9LP (lg BHC quarterly)

171
Q

Intercompany Transactions

A

? Dividends paid by subs to parent ? Fees paid by subs ? Tax allocation ? Competing balances

172
Q

BHC Min. Capital Ratios

A

? Total RBC/RWA = 8% ? Tier 1 Capital/RWA = 4% ? Tier 1 Leverage = 3%

173
Q

Single Leverage Ratio

A

Parent Co. Debt/ Parent Co. Equity If >$150M in assets, >30% means highly leveraged If 100% means highly leveraged

174
Q

Double Leverage Ratio

A

Equity investment in subs/parent co equity capital >100% means double leverage – not good!

175
Q

Double Leverage Payback Ratio

A

(Equity Inv. In Subs) – (Parent Co. equity capital) / (Annual Parent Co. NI) Measures times in years BHC is expected to repay its double leverage based on current earnings

176
Q

Formation of Small BHCs (Reg Y)

A

A BHC must finance at a minimum 25% of the purchase price of small bank acquisition with equity

177
Q

BHCs Transactions not requiring prior notice

A

? Has controlled 25% of more of voting stock of a bank or BHC since March 1979 ? Is presumed to have controlled the organization since March 1979 if the aggregate amount of voting securities held does not exceed 25% ? Future acquisitions of voting securities as long as such person remains the largest shareholder under 25%

178
Q

Exemptions from Board Approval

A

? Bank trust depts. may assume control over shares of another bank or BHC in a fiduciary capacity unless… ? Acquisition of securities in satisfaction of DPC; bank must divest securities within 2 years of the acquisition ? Passive acquisition of shares through stock split of stock dividend, acquisition through inheritance, gifts, or DPC

179
Q

Section 23A

A

To prevent misuse of bank’s resources stemming from transactions with affiliates: ? Limits aggregate amt of covered txns between bank and any one affiliate to 10% of bank’s capital ? Aggregate amt of covered txns of all affiliates shall not exceed 20% of bank’s capital ? Prohibits transfer of low quality assets between

180
Q

Exemptions to 23A

A

? Sister bank relationships, except low quality assets ? Loans to affiliates secured by US Treasuries or agencies

181
Q

Section 23B

A

Protects bank subs by mandating that any transaction with affiliates is made under similar terms and conditions as made to non-affiliated co.

182
Q

Regulation O

A

Prevents insiders (executive officers, directors, principal shareholders) form using their positions in bank to get loans or more preferential terms Executive officers – chairman, president, VP, cashier, secretary, treasurer Principal shareholders – power to vote 10% or more of voting securities

183
Q

Limit on loans to insiders

A

In excess of $25,000 or 5% of bank’s capital and surplus unless: (1) credit has been approved by majority of BOD and (2) interested party has abstained from voting in this manner.

184
Q

Overdrafts

A

No member bank may pay an overdraft of an executive officer or director unless made in accordance with (1) written pre- authorized interest bearing extension of credit plan, (2) written pre-authorized transfer of funds. Does not apply to aggregate of $1000 or less provided that (1) acct. is no overdrawn > 5 days and (2) bank charges same fee

185
Q

Regulation T

A

? Regulates extension of credit by and to brokers & dealers ? Provides for special purpose accts to record txns between a customer and a creditor ? Limits margin lending by requiring initial equity must be at or equal to 50% of stock’s market value

186
Q

Regulation U

A

? Governs the amount of money a bank may lend for a stock purchase where the loan is secured by margin stock ? Restricts loans made for the purpose of purchasing or carrying margin stock ? Credit granted must not be more than 50% of the value of the pledged stock

187
Q

Regulation X

A

Applies Regs. T & U to US people when they obtain credit outside the US to purchase or carry US securities

188
Q

Regulation Y

A

? Applies to acquisition of control of banks and BHCs by company and by individuals ? Defines the scope of permissible activities for BHCs ? Defines the administrative procedures for securing approval for the acquisition of banks and the conduct of non-banking activities

189
Q

Regulation Z

A

Fed rules that requires disclosure of credit terms, sets procedures for resolving billing errors, and implements the Truth in Lending Act

190
Q

Large Bank CRA Test

A

For banks with assets of $250M or more Lending test - # and amt. of loans Investment test – meet credit needs of assessment area Service test – Delivering retail banking services

191
Q

Fedwire

A

Provides for the electronic transfer of immediate and irrevocable pmts. between participating institutions. Both a clearing and settlement facility

192
Q

Daylight Overdraft

A

Banks exceeds the balance on its reserve account throughout the day

193
Q

CHIPS

A

Funds transfer network owned and operated by the NYCH delivering and receiving USD pmts. between domestic and foreign banks that have offices in NYC Txn can be reversed (unlike Fedwire)

194
Q

SWIFT and Telex

A

Two most common message systems Does not result in immediate transfer of funds from the issuing bank

195
Q

FBO Rating System

A

R – Risk Mgmt O – Operations C – Compliance A – Asset Quality

196
Q

Transfer Risk (ICERC)

A

Risk that an obligation cannot be paid in the currency it was denominated because of lack of restrictions on the availability of the currency Also stems from economic, social, or political problems

197
Q

Asset Maintenance

A

Used to protect depositors and creditors by ensuring that the office maintains liquid US assets in excess of 3rd party liabilities

198
Q

Reg K

A

Outlines office approval procedures and standards, powers, permissible activities, and disclosure of supervisory info. to home country

199
Q

Informal Enforcement Actions

A

Commitment Letter – least severe Board Resolutions MOU

200
Q

Formal Enforcement Actions

A

Written Agreements Cease & Desist – violation of law Prohibition & Removal Termination of Fed Membership & FDIC insurance – a conservator is appointed

201
Q

IT – Management Processes

A

Encompasses planning, investment, development, execution, & staffing of IT from a business perspective; includes strategic planning, reporting hierarchy, management succession and indep. review

202
Q

IT Architecture

A

Underlying design of automated IT system & components; encompasses physical & logical architecture; allows users to easily enter data at normal & peak times; risk is that components will not meet LT company objectives

203
Q

IT Integrity

A

Reliability, accuracy, & completeness of information delivered to user; risk is not being able to satisfy end-user requirements

204
Q

IT Security

A

Safety afforded to information assets & their data processing environments using physical and logical controls; prevents unauthorized access, destruction of information assets, maintenance or storage

205
Q

IT Availability

A

Delivery of info to end users; effective when information is consistently delivered on a timely basis in support of business & decision-making process

206
Q

SDLC

A

Process of developing, acquiring, implementing & maintained computerized systems; should define requirements, assess current systems, consider options, determine design, acquire components, conduct testing, implement changes

207
Q

Fiduciary Principles

A

Duty to administer assets in agreement with terms and conditions Duty to invest prudently Duty to act in the best interest of the client

208
Q

Prudent investor

A

Manage risk, diversify investments, exercise appropriate care, skill, and caution.

209
Q

Mismatch Risk

A

Where the repricing periods of assets and liabilities are not matches, causing one or the other to reprice at difference times. The time lag between the two instruments creates a mismatched exposure.

210
Q

Option Risk

A

Refers to both explicit and implicit put or call options embedded in financial instruments. The risk is that the proceeds or disbursements from exercising the option could be reinvested at a lower yield or purchase at a higher yield.

211
Q

Basis Risk

A

The risk that spread between instruments of similar maturities will change.

212
Q

Yield Curve Risk

A

The risk of unequal changes in the spread between two rates for the same instrument of different maturities, i.e. treasuries.

213
Q

Duration

A

? Weighted average time to receipt of the PV of cashflows. ? Coupon and maturity determine cashflows ? Yield and maturity determine the effect of the discount rate

214
Q

Hedging activities

A

? Forward contracts ? Future contracts ? Interest rates swap ? Put and call options

215
Q

4 Elements of Risk Management

A

? Board and Senior Mgmt. oversight ? Policies, procedures, and limits ? Risk measurement, monitoring and MIS ? Internal control

216
Q

Control Activities

A

? Segregation of duties ? Approval ? Verification ? Reconciliation ? Review operating performance ? Absences

217
Q

BHC Control Structure

A

Each of the following conditions constitute direct or indirect control of a bank: 1. Ownership, controls or power to vote 25% or more of the outstanding shares of a bank. 2. Control election of a majority of directors 3. Power to exercise controlling influence over management or policies

218
Q

Section 24A

A

Covers credit transaction between a bank and its parent or other affiliates. Sister banks are exempt Covered credit txns have limits ? 10% per affiliate ? 20% in aggregate for all affiliates

219
Q

Section 24B

A

Covers service related transaction between a bank and its parent or other affiliates ? Txns should be based on fair market value ? Made at arms length ? Made on terms similar to those offered to outsiders

220
Q

ROCA Asset Quality Ratio

A

20% SS + 50% Doubt + 100% of Loss Total non-related assets + Total class. Conting.

221
Q

FBO Due From and Due To accts

A

Due From – an asset account for an FBO if money is lent to HO Due To – a liability acct in which money is injected into FBO from HO

222
Q

Trust Ratings System

A

M - Management O – Operations, Control, Audit E – Earning C – Compliance A – Asset Mgmt.

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