100 Question Practice Test

Front 1

1.) Which of the following statements best describes a composite "4" rated institution?

I. Financial instititions in this group exhibit some degree of supervisory concern in one or more component areas. These financial institutions exhibit a combination of weaknesses that may range from moderate to severe.

II. Financial institutions in this group generally exhibit unsafe and unsound practices or conditions. There are serious financial or managerial deficiencies that result in unsatisfactory performance.

III. Financial instifutions in this group are fundamentally sound. Only moderate weaknesses are present and are well within the board of directors' and management's capabilities and willingness to correct.

A. I only
B. III only
C. None of the above
D. II only

Back 1

D. II only

Manual 1.1-3&4

Front 2

2.) Which of the following are some of the factors that are evaluated in arriving at the "Asset Quality" component rating?

I. Level, distribution and severity of classified assets

II. Bank growth experience

III. Adequacy of the allowance for loan and lease losses and other asset valuation reserves.

IV. The existence of asset concentrations

A. I and II only
B. I, II, and IV only
C. I, III, and IV only
D. All of the above

Back 2

C. I, III, and IV only

Manual 1.1-5

Front 3

3.) The Manual of Examination Policies indicates that examinations may be conducted in alternate (12 to 18 month) periods if the FDIC determines that a full scope, on-site examination completed by the appropriate state authority is acceptable. Which of the following statements are correct with regard to the alternate examination program?

I. Under no circumstances may an institution with a composite rating of “3” or worse be accepted into the program.

II. The length of time between the end of one examination and the start of the next should not exceed 12 to 18 months (depending on the circumstances).

III. No more than one consecutive state-prepared examination can be used in this program (i.e. examinations must alternate between state and FDIC for an institution to remain in the program).

IV. The Tier 1 (leverage) Capital Ratio must equal or exceed 8%.

A. II only
B. I III and IV only
C. II and III only
D. I II and III only

Back 3

A. II only

Manual 1.1-11

Front 4

4.) Lending policies should address/include the following areas, at a minimum.

I Guidelines under which unsecured loans will be granted

II Description of the bank's normal trade area

III Guidelines for adequate safeguards to minimize potential environmental liability

IV Guidelines addressing the bank's loan review and grading system ("Watch List")

V Guidelines addressing the bank's review of the Allowance for Loan Losses

A. All of the above
B. I III and IV only
C. I III IV and V only
D. I II IV and V only
E. I II III and IV only

Back 4

A. All of the above

Manual 3.1-1/2

Front 5

5.) Under the "income" approach to appraising real estate, the economic value of an income-producing property is the discounted value of the future net operating income stream, less any “reversion” value arising from potential sales proceeds.

A. True
B. False

Back 5

B. False

Manual 3.1-27

Front 6

6.) Which of the following statements are true, with regard to FASB 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (as it pertains to loan participations sold after 12-31-01)?

I. An originating lender’s right of first refusal always precludes sales treatment.

II. A loan transferred with recourse should be accounted for as a secured borrowing.

III. A contractual right to repurchase a loan participation does not necessarily preclude sales treatment.

IV. A loan participation sold with recourse is subject to the banking agencies’ risk-based capital requirements.

A. II and III only
B. I II and IV only
C. I and II only
D. II and IV only
E. All of the above

Back 6

D. II and IV only

Call Report Glossary A-79-85

Front 7

7.) Which of the following may contribute to the development of loan problems?

I Overlending
II Overemphasis on income
III Competition
IV Self dealing
V Failure to establish/enforce liquidation agreements (i.e. repayment terms)

A. All of the above
B. I II IV and V only
C. II IV and V only
D. I II III and IV only

Back 7

A. All of the above

Manual 3.1-38/40

Front 8

8.) “MERIT” examination procedures may not be used in which of the following circumstances?

I De Novo institutions

II Institutions with total assets in excess of $200 million

III Institutions with subprime lending programs.

IV No existing component rating of “3”

V Banks having a composite rating of “2” in each of the last two examinations

A. I II and V only
B. I and II only
C. I III and IV only
D. III only
E. I and III only

Back 8

C. I III and IV only

Manual 1.1-10

Front 9

9.) Which of the following elements are included in the calculation of an investment’s “Total Return”

I The coupon received

II The reinvestment interest on cash flows received during the measurement period

III The yield differential earned over the “risk-free” Treasury rate for an instrument of comparable duration

IV The change in market value over the measurement period

A. I only
B. I and II only
C. I and III only
D. I II and IV only
E. All of the above

Back 9

D. I II and IV only

Manual 3.2-24

Front 10

10.) You are examining the securities portfolio of G&L Bank and note the following investments, all purchased in 2003 and held in the held-to-maturity portfolio (Note: BVs in the following examples represent carrying value at amortized cost; MVs represent market value prices obtained during the examination; GO = general obligation). What are your report classification totals for these investments?

1) Princeton, Illinois GO bond, rated Ba by Moodys, not in default. BV $100,000; MV $92,000

2) Malden Fire Protection District GO, rated C by Moodys, in default with an established market value. BV $100,000; MV $85,000.

3) Buffalo Prairie sewer revenue bond, rated B by Moodys, in default. BV $150,000; MV $130,000

4) Seaton Strategic Defense System revenue bond, not rated and not in default. BV $50,000; MV $52,000.

A Substandard $215M; Loss $35M
B Substandard $187M; Doubtful $130M; Loss $20M
C Substandard $315M; Loss $35M
D Substandard $130M; Loss $20M
E Substa

Back 10

C. Substandard $315M; Loss $35M

Manual 3.2-11/14

Front 11

11.) Which of the following are true statements with respect to the May 26, 1998 Supervisory Policy Statement on Investment Securities and End-User Derivative Activities?

I The Policy Statement does not apply to derivative instruments such as swaps, futures, and options unless these instruments are held in a trading account.

II When price sensitivity is included as an aspect of the bank’s pre-purchase analysis, sensitivity should be tested up to at least a 300 basis point change in rates and should be based solely on a parallel shift in the yield curve.

III Reports should be submitted to the Board of Directors, which summarize the risks related to the bank’s investment activities as well as compliance with approved policies.

IV An institution’s failure to understand and adequately manage the risks inherent in its investment activities constitutes an unsafe and unsound practice.

A. III and IV only
B. I III and IV only
C. II III and IV only
D. All of the above

Back 11

A. III and IV only

Policy Statements pp5437-5442
http://www.fdic.gov/regulations/laws/rules/5000-4400.html#fdic5000supervisoryps

Front 12

12.) Appendix B to Part 364 – Interagency Guidelines Establishing Standards for Safeguarding Customer Information requires which of the following provisions?

I The bank’s Board of Directors shall assign specific responsibility for implementation of the bank’s Information Security Program

II The bank shall assess the likelihood and potential damage of threats that could result in unauthorized disclosure of customer information.

III The bank shall regularly test key controls, systems, and procedures of the information security program.

IV Each bank shall report to the board or an appropriate committee of the board at least annually regarding the status of the information security program.

A. I and III only
B. II and III only
C. All of the above
D. I only
E. I III and IV only

Back 12

E. I III and IV only

FDIC Rules and Regulations Part 364 – Appendix B pp 3170/3172

Front 13

13.) The Interagency Guidance on Subprime Lending contains which of the following information?

I Subprime lending is defined as extending credit to consumers at a below market rate of return, such as below the consensus prime rate index of major money center banks.

II In addition to heightened credit risk, liquidity risk is potentially higher for subprime loans than for their prime loans.

III Regulatory agencies may impose higher minimum capital requirements for institutions engaging in subprime lending.

IV Institutions that securitize and sell subprime loans must comply with the provisions of FAS 125 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, as modified by FAS 140

A. I II and III only
B. I II and IV only
C. II III and IV only
D. I III and IV only
E. All of the above

Back 13

C. II III and IV only

FDIC Statements of Policy 5479-5484

Front 14

14.) Which of the following are forms of market risk?

I Liquidity risk

II Interest rate risk

III Basis risk

IV Yield curve risk

A. I and II only
B. I II and IV only
C. II only
D. II III and IV only
E. All of the above

Back 14

E. All of the above

Manual 3.2-6

Front 15

15.) Which of the following criteria, if present at the inception of the lease, requires the lease to be capitalized in accordance with FAS 13?

I The terms of the lease meet the criteria stated in the definition of an operating lease

II Ownership of the property is transferred to the lessee at the end of the lease term

III The lease term represents at least 50% of the estimated economic life of the leased property

IV The present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair market value of the leased property to the lessor at the inception of the lease, net of any investment tax credits.

A. II or III only
B. II or IV only
C. II or III or IV only
D. I or II or IV only
E. I or II only

Back 15

B. II or IV only

Manual 3.4-1

Front 16

16.) DCA Bank recently sold a parcel of other real estate for $120,000. The carrying value of the ORE was $100,000 at the time of sale. A loan for $120,000 was made to facilitate the sale. A typical downpayment for this type of property is 10%. You have determined that the sale should be accounted for under the “Installment Method” of FASB 66 “Accounting for Sales of Real Estate”. According to the Manual, and related guidance of FASB 66, which of the entries can be recognized at the time of sale?

I A gain on sale of $20,000 can be taken to income immediately

II A loan for $120,000 can be booked.

III A gain of $12,000 can be booked immediately and an $8,000 gain can be deferred

IV A deferred gain of $20,000 can be booked and profits recorded as payments are received.

A. I and II only
B. II and III only
C. II and IV only
D. II only

Back 16

C. II and IV only

Manual 3.5-2

Front 17

17.) You are examining Last State Bank, Princeton, IL. The bank has the following balance sheet and other pertinent data. From the information presented, calculate the bank's Tier 1 capital ratio and select the answer from the choices presented at the end of the problem.

(000's omitted)
Cash $10,000
Securities $30,000
Loans (Net) $45,000
Fixed Assets $ 5,000
Other Assets* $10,000

DDA $10,000
SV $20,000
Time $50,000
FFs Purch. $10,000
Capital** $10,000

* Consists of $5,000M core deposit premium and the balance is accrued interest and miscellaneous other assets.
** Consists of $1,000M common stock, $1,000M limited life preferred stock, $1,000 subordinated debt, $5,000 surplus and $2,000 undivided profits.

The ALLL is $700M, average TA from last quarter is $95,000M (adjusted for intangibles and other effects) and risk weighted assets are $40,000M. The bank's composite rating is "3".

A. 4.21%
B. 3.89%
C. 3.16%
D. 8.42%
E. 8.00%

Back 17

C. 3.16%

Manual 2.1-2/3; Part 325 pp2241-2248.02

Front 18

18.) Using the preceding example, what portion of the ALLL is eligible for inclusion in Tier 2 capital?

Cash $10,000
Securities $30,000
Loans (Net) $45,000
Fixed Assets $ 5,000
Other Assets* $10,000

DDA $10,000
SV $20,000
Time $50,000
FFs Purch. $10,000
Capital** $10,000

* Consists of $5,000M core deposit premium and the balance is accrued interest and miscellaneous other assets.
** Consists of $1,000M common stock, $1,000M limited life preferred stock, $1,000 subordinated debt, $5,000 surplus and $2,000 undivided profits.

The ALLL is $700M, average TA from last quarter is $95,000M (adjusted for intangibles and other effects) and risk weighted assets are $40,000M. The bank's composite rating is "3".

A. $500M
B. $600M
C. $700M
D. $550M
E. $625M

Back 18

A. $500M

Manual 2.1-2/3; Part 325 pp2241-2248.02

Front 19

19.) Using the Tier 1 Capital Ratio (3.16%, composite rating is "3") calculated under question 17, what category does the bank fall into for Prompt Corrective Action purposes?

A. Well Capitalized
B. Adequately Capitalized
C. Undercapitalized
D. Significantly Undercapitalized
E. Critically Undercapitalized

Back 19

C. Undercapitalized

Part 325 pp2251-2252

Front 20

20.) Which of the following statements are true regarding the content and submission of a Capital Restoration Plan?

I A capital restoration plan is not required until a bank is deemed to meet the definition of a “significantly undercapitalized” institution.

II A capital restoration plan shall address the levels of capital to be attained during each year the plan will be in effect.

III The regulatory agencies shall not accept a plan unless a company having control of the institution guarantees that the institution will comply with the plan.

IV A capital restoration plan cannot be accepted if the actions contained in the plan appreciably increase the risk to which the institution is exposed.


A. I II and IV only
B. I only
C. II III and IV only
D. I II and III only
E. All of the above

Back 20

D. I II and III only

Section 38 FDI Act pp 1433/1434

Front 21

21.) Which of the following are basic alternatives available to banks to increase capital?

I Increase earnings retention through higher earnings or lower dividend outlays

II Sale of additional capital stock

III Reduction in total assets

IV Direct contributions from shareholders


A. I II and III only
B. All of the above
C. I and II only
D. I II and IV only

Back 21

D. I II and IV only

Manual 2.1-10

Front 22

22.) An institution with a Tier 1 capital ratio of below 3% is, by definition, operating in an unsafe and unsound condition.

A. True
B. False

Back 22

B. False

Part 325 pp2246

Front 23

23.) Which of the following statements are not true with respect to FAS 133, Accounting for Derivative Instruments and Hedging Activities?

I The 3 types of hedges qualifying for the special accounting treatment of FAS 133 are Fair Value Hedge, Cash Flow Hedge & Equity Instrument Hedge.

II Structured notes with interest rates indexed to the rate of inflation do not fall within the realm of FAS 133 accounting requirements.

III FAS 133 creates a new equity capital component for accumulated net gains (losses) on cash flow hedges which is not included in Tier 1 Capital.

IV Equity-indexed CDs (time deposits that pay a rate of return linked to changes in an index such as the S&P 500) require bifurcation (separation) of the embedded derivative from the host contract and are to be accounted for as derivative instruments.

A. All of the above
B. II and III only
C. III only
D. I only
E. II and IV only

Back 23

Answer: Could not verify, the answer key said the answer was F.

Regional Director Memo 01-027 & Financial Institution Letter 3-99 & Call Report Instructions

Front 24

24.) When analyzing a bank's earnings performance, earnings prospects should be analyzed as well as historical results. A primary tool to use is the bank's profit plan and/or budget. Which of the following items should be addressed in a bank's profit plan/budget?

I Anticipated level and volatility of interest rates

II Local economic conditions

III Funding strategies

IV Growth objectives

A. I III and IV only
B. III and IV only
C. II III and IV only
D. All of the above

Back 24

D. All of the above

Manual 5.1-7/8

Front 25

25.) Which of the following events would provide funds to satisfy a bank’s liquidity needs?

I. Disposal of assets

II. Short term borrowings are decreased

III. Long term liabilities are increased

IV. Capital funds are drawn down (decreased)


A. I III and IV only
B. All of the above
C. I II and IV only
D. I and IV only
E. I and III only

Back 25

E. I and III only

Manual 6.1-1

Front 26

26.) You are performing the evaluation of the bank’s wire transfer procedures at Gaddis Savings Bank, Irate, IL. You determine that the bank utilizes Fedline and you request a print-out of various security settings and access levels. This report reveals the following settings. Which of these settings are of potential concern?

I. No user has more than one User ID

II. The “Verify Threshold”screen is set at 0.00

III. Two users have the Local Administrator function, and no other assigned functions

IV. The Local Administrators also have access to Host Communications

A. All of the above
B. I and III only
C. II only
D. IV only
E. None of the above

Back 26

D. IV only

Examination Modules - Electronic Fund Transfer Risk Assessment (Questions 25-28)

Front 27

27.) Per the Memorandum on Information Technology Maximum Efficiency, Risk-Focused, Institution Targeted (IT-MERIT); and IT General Workprogram Guidelines, which of the following statements are true?

I. An institution’s Technology Profile category is the key factor used to determine the examination procedures to be used.

II. IT MERIT procedures may be used only for Type I and Type II institutions

III. Type II institutions must receive full URSIT ratings.

IV. Examiners must use the IT General Workprogram for Type IV institutions

V. Separate cover examinations must be performed for independent data centers or institutions that perform data processing services for other FDIC-insured financial institutions even if the other institution is an affiliate.

A. I III and V only
B. II III and IV only
C. III and V only
D. I and V only

Back 27

B. II III and IV only

Regional Director Memo 02-043

Front 28

28.) The quality of earnings is probably the single most important element in the successful operation of a bank.

A. True
B. False

Back 28

B. False

Manual 4.1-1

Front 29

29.) A bank's board of directors is ultimately responsible for which of the following duties?

I. Personnel administration

II. Observance of laws to which the bank is subject

III. Paying such dividends as may properly be paid

IV. Avoiding self serving practices

A. II III and IV only
B. I III and IV only
C. III and IV only
D. All of the above

Back 29

D. All of the above

Manual 4.1-2/4

Front 30

30.) Some of the more prevalent recordkeeping deficiencies encountered during a review of internal routine and controls include:

I. General ledger entries fail to contain an adequate description of the transaction

II. Failure to process securities transactions electronically

III. Teller cash records that lack adequate detail

IV. Failure to keep accounts and records posted on a current basis

V. Failure to record entries to the general ledger to reflect the bank's liability on undrawn letters of credit

A. All of the above
B. I II III and IV only
C. I III and V only
D. III and IV only
E. I III and IV only

Back 30

E. I III and IV only

Manual 4.2-3

Front 31

31.) (1) Jordan Bancorp, Inc., an Alpha, IL. based multi bank holding company, owns the following percentages of the stock of the following banks:

(2) Griffin State Bank 85% voting common
(3) Johnson National Bank 75% voting common
(4) Welsh Savings Bank 20% voting common & 100% non voting Class B preferred
(5) Ipjian National Bank 79% voting common

Vicki Jordan, a wealthy industrialist, owns 100% of Jordan Bancorp, 33% of the law firm general partnership of (6) Churchill, England and Wait, 100% of the Subchapter S Corporation (7) Hummels, Inc. and the sole proprietorship (8) C Span Enterprises.

You are examining Griffin State Bank and are preparing the affiliates page. Which of the following choices should be included as affiliates? (based upon the definition of control via stock ownership which is contained in Federal Reserve Board 23A)

A. (1)(3)(5)(6)(7) only
B. All of the above are affiliates
C. (1)(3)(4)(5)(6) and (7) only
D. (1)(7)(8) only
E. (1)(3)(5)(6)(7)(8) only

Back 31

A. (1)(3)(5)(6)(7) only

FRB §23A pp7512.07/7512.08; Manual 4.3-8/10

Front 32

32.) Directors and Officers Liability insurance coverage does not cover which of the following situations?

I. Conflicts of interest
II. Shareholder lawsuits alleging director misconduct
III. Dishonest acts
IV. Acts involving personal gain of the involved party

A. I and III only
B. I III and IV only
C. I II and III only
D. All of the above

Back 32

B. I III and IV only

Manual 4.4-5&6

Front 33

33.) According to the Manual for Examination Policies, applications for a newly organized institution should include initial capital of at least at organization unless unusual circumstances dictate otherwise, and an initial capitalization to provide a Tier 1 capital to assets ratio of at least 8% throughout the first years of operation.

A. $5,000,000; Three
B. $3,000,000; Five
C. $5,000,000; Five
D. $2,000,000; Three

Back 33

D. $2,000,000; Three

Manual 12.1-3:
Adequacy of the Capital Structure – Normally, the initial capital of a proposed depository institution should be sufficient to provide a Tier 1 capital to assets leverage ratio (as defined in the appropriate capital regulation of the institution’s primary federal regulator) of not less than 8.0% throughout the first three years of operation. Initial capital should normally be in excess of $2 million net of any pre-opening expenses that will be charged to the institution’s capital after it commences business. In addition, the depository institution must maintain an adequate allowance for loan and lease losses.
If the applicant is being established as a wholly owned subsidiary of an eligible holding company (as defined in Part 303), the FDIC will consider the financial resources of the parent organization as a factor in assessing the adequacy of the proposed initial capital injection. In such cases, the appropriate regional director (DOS) may find favorabl

Front 34

34.) According to the Manual of Examination Policies, which of the following actions, or lack thereof, may be deemed to be "Unsafe or Unsound"?

I. Operating with an inadequate level of capital for the kind and quality of assets held

II. Paying excessive dividends in relation to the bank's capital position, earnings capacity, and asset quality

III. Failure to post the general ledger promptly

IV. Extending credit without first obtaining complete and current financial information

V. Failure to maintain adequate insurance coverage on the bank’s fixed assets

A. All of the above
B. I IV and V only
C. I II IV and V only
D. I II III and IV only

Back 34

A. All of the above

Manual 15.1-3&4:
Lack of Action Deemed "Unsafe or Unsound"
1. Failure to provide adequate supervision and direction over the officers of the bank to prevent unsafe or unsound practices, and violation(s) of laws, rules and regulations.
2. Failure to make provision for an adequate allowance for loan losses.
3. Failure to post the general ledger promptly.
4. Failure to keep accurate books and records.
5. Failure to account properly for transactions.
6. Failure to enforce programs for repayment of loans.
7. Failure to obtain or maintain on premises evidence of priority of liens on loans secured by real estate.
Actions Deemed "Unsafe or Unsound"
1. Operating with an inadequate level of capital for the kind and quality of assets held.
2. Engaging in hazardous lending and lax collection practices which include, but are not limited to, extending credit which is inadequately secured; extending credit without first obtaining complete and current financial information; extendin

Front 35

35.) Per Part 303 of the FDIC Rules and Regulations, which of the following situations trigger prior notice to the FDIC of a proposed addition, or replacement, to the board of directors or employment, or change in responsibilities, of a senior executive officer?

I. The bank is not in compliance with the minimum capital requirements applicable to the bank.

II. The bank underwent a change of control within the past three years.

III. The bank has been determined to be in a "troubled condition".

IV. The institution received a rating of needs to improve or lower at its most recent FDIC Compliance Examination.

A. I III and IV only
B. I II and IV only
C. I and III only
D. All of the above

Back 35

C. I and III only

Part 303:
§ 303.82 Transactions requiring prior notice.

(a) Prior notice requirement. Any person acting directly or indirectly, or through or in concert with one or more persons, shall give the FDIC 60 days prior written notice, as specified in § 303.84, before acquiring control of an insured state nonmember bank or any parent company, unless the acquisition is exempt under § 303.83.

(b) Acquisitions requiring prior notice--(1) Acquisition of control. The acquisition of control, unless exempted, requires prior notice to the FDIC.

(2) Rebuttable presumption of control. The FDIC presumes that an acquisition of voting shares of an insured state nonmember bank or a parent company constitutes the acquisition of the power to direct the management or policies of an insured bank or a parent company requiring prior notice to the FDIC, if, immediately after the transaction, the acquiring person (or persons acting in concert) will own, control, or hold with power to vote

Front 36

36.) Section 13(c) of the FDI Act authorizes the FDIC to take which of the following actions when deemed necessary to, among other things, prevent the default of an insured depository institution.

I. Assume the liabilities of the institution
II. Make contributions to the institution
III. Arrange for borrowings at the Federal Discount Window
IV. Make deposits in the institution
V. Purchase the assets of the institution

A. All of the above
B. I II IV and V only
C. I III and IV only
D. I IV and V only

Back 36

B. I II IV and V only

Section 13(c) FDI Act pp1219:
(c)(1) The Corporation is authorized, in its sole discretion and upon such terms and conditions as the Board of Directors may prescribe, to make loans to, to make deposits in, to purchase the assets or securities of, to assume the liabilities of, or to make contributions to, any insured depository institution--

(A) if such action is taken to prevent the default of such insured depository institution;

(B) if, with respect to an insured bank* in default, such action is taken to restore such insured bank to normal operation; or

(C) if, when severe financial conditions exist which threaten the stability of a significant number of insured depository institutions or of insured depository institutions possessing significant financial resources, such action is taken in order to lessen the risk to the Corporation posed by such insured depository institution under such threat of instability.

(2)(A) In order to facilitate a merger or c

Front 37

37.) Dexter State Bank, Kewanee, IL has the following capital structure: Common Stock, $500M; Surplus $1,000M; U.P. $500M; and an ALLL of $100M. The following loans have been granted to President Cooley: $100M first mortgage on personal residence (purchase); $20M education loan for his son, David Carey; 40M unsecured debt consolidation; $5M automobile; $6M overdraft protection. Is this line in violation of the Other Purpose limitations of Part 337 of the FDIC Rules and Regulations? (Assume all have been granted since the effective date of the regulation)

A. No
B. Yes

Back 37

A. No

Unimpaired capital and surplus = common stock ($500M) + surplus ($1,000M) + U.P. ($500M) + ALLL = $2,100 x .025 = $52.5M; $40M debt consolidation + $5M auto + $6M ODP = $51M.

Part 337 pp2638 & Part 215.5 of Regulation O pp7642/7645, & 7648-7648.01

§ 337.3 Limits on extensions of credit to executive officers, directors, and principal shareholders of insured nonmember banks.

(a) With the exception of 12 CFR 215.5(b), 215.5(c)(3), 215.5(c)4, and 215.11, insured nonmember banks are subject to the restrictions contained in subpart A of Federal Reserve Board Regulation O (12 CFR Part 215, subpart A) to the same extent and to the same manner as though they were member banks.

(b) For the purposes of compliance with § 215.4(b) of Federal Reserve Board Regulation O, no insured nonmember bank may extend credit or grant a line of credit to any of its executive officers, directors, or principal shareholders or to any related interest of any such person in an amount that, when aggregated with

Front 38

38.) Using the Dexter State Bank example: Common Stock, $500M; Surplus $1,000M; U.P. $500M; and an ALLL of $100M, assume the following situation. Chairman of the Board Kleckner has been granted the following loans; again, after the effective date of the regulation: $125M first mortgage on personal residence (purchase); $75M second mortgage on personal residence (remodeling); 60M personal, unsecured loan. Has a violation of the Other Purpose limit occurred?

A. Yes
B. No

Back 38

A. Yes

Unimpaired capital + surplus = common stock ($500M) + surplus ($1,000M) + U.P. ($500M) + ALLL ($100M) = $2,100 x .025 = $52.5M. Kleckner's non-exempt loans = $75M (2nd REM) + $60M (personal) = $135M.

Front 39

39.) According to Part 323 of the FDIC Rules and Regulations (appraisal regulation), which of the following situations would not comply with the provisions of the regulation?

I. RE loan for $325,000 supported by an independent appraisal performed for another financial institution, but reviewed by management prior to acceptance.

II. RE loan for $105,000 supported by an appraisal performed for the borrower.

III. Commercial RE loan supported by lease payments received on the underlying property for $300,000 and performed by a licensed appraiser.

IV. RE loan for $250,000 supported by an appraisal performed by a certified appraiser; however, the appraiser is not a member of the appraisal organization, MAI (Master Appraisers Institute a/k/a "Made As Instructed")

A. II and IV only
B. All of the above
C. None of the above
D. I II and IV only
E. III only

Back 39

E. III only

Part 323 pp2239/2240.03
My guess is that the auther feels that lease payments received, without other supporting analysis, is not considered an appropriate determination of fair market value under 323; however, I cannot guess as to why an appraisal was needed since the loan amount was less than $1MM.

Front 40

40.) If a bank is required to have an anti-money laundering compliance program, then its Customer Identification Program must be a part of this program.

A. True
B. False

Back 40

B. False

Department of the Treasury’s Financial Recordkeeping Regulations pg 8516.06D

Front 41

41.) Which of the following statements are true regarding Part 349 (nka Part 350?) of the FDIC Rules and Regulations?

I. Annual reports of indebtedness to correspondent banks must be filed by all Directors and Officers of an insured State nonmember bank.

II. The annual report should include the maximum amount of indebtedness of the party and its related interests outstanding during the calendar year.

III. The bank must retain copies of the annual reports for a minimum of three years.

IV. Copies of these reports must be made available to the general public upon request.
.
A. II III and IV only
B. I and III only
C. II and III only
D. III and IV only

Back 41

D. III and IV only

FDIC Rules and Regulations, Part 349 pp 2895/2897

§ 350.3 Requirement for annual disclosure statement.

(a) Contents. Each bank shall prepare as of December 31 and make available on request an annual disclosure statement. The statement shall contain information required by § 350.4(a) and (b) and may include other information that bank management believes appropriate, as provided in § 350.4(c).

(b) Availability. A bank shall make its annual disclosure statement available to the public beginning not later than the following March 31 or, if the bank mails an annual report to its shareholders, beginning not later than five days after the mailing of such reports, whichever occurs first. A bank shall make a disclosure statement available continuously until the disclosure statement for the succeeding year becomes available.

Front 42

42.) According to Part 337.2 – “Unsafe and Unsound Banking Practices – Standby Letters of Credit”, a commercial letter of credit shall be combined with all loans for purposes of applying any legal limitation on loans at the bank.

A. True
B. False

Back 42

B. False (I'm not sure I agree with this answer)

Part 337 pp2637 (See Footnote 1)
§ 337.2 Standby Letters of Credit.

(a) Definition. As used in this § 337.2, the term "standby letter of credit" means any letter of credit, or similar arrangement however named or described, which represents an obligation to the beneficiary on the part of the issuer (1) to repay money borrowed by or advanced to or for the account of the account party, or (2) to make payment on account of any indebtedness undertaken by the account party, or (3) to make payment on account of any default (including any statement of default) by the account party in the performance of an obligation. The term "similar arrangement" includes the creation of an acceptance or similar undertaking.


As defined in this paragraph (a), the term "standby letter of credit" would not include commercial letters of credit and similar instruments where the issuing bank expects the beneficiary to draw upon the issuer, which do not "guaranty" payme

Front 43

43.) While making a deposit at the teller line at First Bank, Anytown, IL, a bank customer laments about the low interest rates offered by the bank. The teller indicates that the bank also offers mutual funds and suggests that the customer invest in the bank’s in-house “First Bank Funds”, an international stock fund. The teller states that the fund in not FDIC insured, nor is it an obligation of the bank. He further states that because these investments are insured by the SIPC there is no risk of loss, as this insurance coverage functions in an identical manner to FDIC coverage. The teller asks if the customer understands what has been said, to which the customer indicates “yes”. An application is then completed and the customer places $5,000 into the fund. At the conclusion of the day, the transaction is reported to the branch manager and the teller is paid a $10 referral fee, in accordance with the bank’s policy of paying fees for all referrals, regardless of whether or not a sale was mad

Back 43

C. I II III and IV only

Interagency Statement on Retail Sales of Nondeposit Investment Products pp5443-5448

Front 44

44.) Which of the following statements are true with respect to an evaluation of Market Risk?

I. Gap analysis is effective for evaluating interest rate risk on a static balance sheet basis and for capturing intraperiod repricing risk.

II. Modified duration attempts to measure an instrument’s percentage price change given an assumed parallel yield curve shift.

III. Simulation attempts to measure the effect of interest rate changes on short-term net interest income, net income, and, in some cases, an institution’s economic value of equity (EVE).

IV. Instruments containing embedded options display positive convexity.

A. I and II only
B. I III and IV only
C. II and III only
D. All of the above
E. I and IV only

Back 44

C. II and III only

Manual 7.1-7/6
The gap ratio can and should be used to calculate the potential impact on interest income for a given rate change. This is done by multiplying the gap ratio by the assumed rate change. The result estimates the change to the net interest margin.
For example, a bank has a 15% one-year average gap. If rates decline 2%, then the net interest margin will decline by 30 basis points (15% x .02). This estimate assumes a static balance sheet and an immediate, sustained interest rate shift.
Gap analysis has several advantages. Specifically, it:
• Does not require sophisticated technology.
• May be relatively simple to develop and use.
• Can provide clear, easily interpreted results.
However, gap’s weaknesses often overshadow its strengths, particularly for larger, more complex banks. For example, gap analysis:
• Generally captures only repricing risk.
• May not identify intra-period repricing risk.
• Does not measure EVE.
• Generally captures only reprici

Front 45

45.) A Suspicious Activity Report should be filed in which of the following instances?

I. A teller embezzles $1,500 from his/her cash drawer

II. The bank suffers an $8,000 loss related to a check kiting scheme involving an identified bank customer

III. $15,000 is missing from customer accounts as a result of outside intrusion into the bank’s Internet Banking system by an unknown assailant.

IV. The bank has determined that a $3,000 transaction in a customer’s account involves money laundering.

A. I and III only
B. I and II only
C. All of the above
D. I III and IV only
E. II and III only

Back 45

B. I and II only
(thresholds of $25,000 and $5,000 were not met in III and IV)

Part 353 pp2965-2967
§ 353.1 Purpose and scope.

The purpose of this part is to ensure that an insured state nonmember bank files a Suspicious Activity Report when it detects a known or suspected criminal violation of federal law or a suspicious transaction related to a money laundering activity or a violation of the Bank Secrecy Act. This part applies to all insured state nonmember banks as well as any insured, state-licensed branches of foreign banks.

§ 353.3 Reports and records.

(a) Suspicious activity reports required. A bank shall file a suspicious activity report with the appropriate federal law enforcement agencies and the Department of the Treasury, in accordance with the form's instructions, by sending a completed suspicious activity report to FinCEN in the following circumstances:

(1) Insider abuse involving any amount.
(2) Transactions aggregating $5,000 or more where a suspect can be identif

Front 46

46.) Which of the following statements are true with respect to the FDIC’s examination program, including its risk-focused approach to supervision?

I. Effective risk management has become less important due to the emergence of new technologies, product innovation, and the speed of financial transactions.

II. Examination Modules (ED) may be used as a tool to establish an appropriate examination scope.

III. When significant deficiencies or weaknesses are noted in the Core Analysis review (ED Modules), the examiner is required to complete the Expanded Analysis section in its entirety.

IV. The use of ED modules is discretionary.

A. All of the above
B. I II and IV only
C. II III and IV only
D. II and IV only
E. III and IV only

Back 46

Answer: A. All of the above (perhaps answers including I. help to explain the financial crisis of late 2008)

Manual 1.1-20/21

Front 47

47.) Which of the following criteria are required attributes of a trust department in order to utilize the T-MERIT program?

I. The department must have $100 million or less in total trust assets

II. The department must have a composite rating of “1” or “2”

III. Employee benefit plans must utilize collective investment funds

IV. The department must have stable management

V. With the possible exception of earnings, no component rating may be rated “3”, “4”, or “5”

A. All of the above
B. I II and III only
C. I III IV and V only
D. II IV and V only
E. I II and IV only

Back 47

Answer: C. I III IV and V only

Trust Examinations (Refer to Regional Director Memo 02-025 and Trust Examination Manual)

Front 48

48.) Connie Lindquist is opening a checking account at Bank Two, a state, nonmember bank. The bank teller requests a driver’s license for purposes of establishing the identity of Ms. Lindquist. Since the customer is in the United States on a work visa, she presents a passport instead. The teller records the customer’s name, address, and date of birth on the new account form, as taken from the passport. Since there are several customers in line, the teller completes the opening of the account and will forward the documents to bookkeeping personnel who will check the customer information against government lists (e.g. OFAC) at the end of the day. The bank provides notice of its customer identification procedures on several posters placed throughout the lobby. Which of the following statements are true?

I. The teller failed to record the phone number along with the other information about the customer as required by the regulation.

II. Use of a passport as the means of identification for a non-U

Back 48

Answer: C. I and II only

Department of the Treasury – Customer Identification Programs pp 8516.06D-8516.08A

Front 49

49.) Which of the following assets are considered "low quality assets" per the definition included in Section 23A of the Federal Reserve Act?

I. Loans listed for special mention

II. Loans on which principal or interest is past due more than 30 days

III. Renegotiated troubled debt as a result of a borrower’s deteriorating financial condition

IV. Loans failing to meet the prescribed collateral requirements

A. I III and IV only
B. I II and IV only
C. I II and III only
D. II and III only

Back 49

Answer: C. I II and III only

FRB §23A pp7512.08
BANKING AFFILIATES ACT OF 1982

Sec. 23A. (a) RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES.--

(10) the term "low-quality asset" means an asset that falls in any one or more of the following categories:

(A) an asset classified as "substandard", "doubtful", or "loss" or treated as "other loans especially mentioned" in the most recent report of examination or inspection of an affiliate prepared by either a Federal or State supervisory agency;

(B) an asset in a nonaccrual status;

(C) an asset on which principal or interest payments are more than thirty days past due; or

(D) an asset whose terms have been renegotiated or compromised due to the deteriorating financial condition of the obligor.

Front 50

50.) For the purposes of Section 23B of the Federal Reserve Act, a bank does not meet the definition of an "affiliate".

A. True
B. False
C. I don't know
D. I don't care
E. I have to get a job I can do

Back 50

Answer: A. True

FRB §23B pp7512.12
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES

SEC. 23B. (a) SEC. --

(3) DEFINITIONS.--For the purpose of this subsection--

(A) the term "security" has the meaning given to such term in section 3(a)(10) of the Securities Exchange Act of 1934; and

(B) the term "principal underwriter" means any underwriter who, in connection with a primary distribution of securities--

(i) is in privity of contract with the issuer or an affiliated person of the issuer;

(ii) acting alone or in concert with one or more other persons, initiates or directs the formation of an underwriting syndicate; or

(iii) is allowed a rate of gross commission, spread, or other profit greater than the rate allowed another underwriter participating in the distribution.

(c) ADVERTISING RESTRICTION.--A member bank or any subsidiary or affiliate of a member bank shall not publish any advertisement or enter into any agreement stating or suggesting that the bank shall in a

Front 51

51.) Which of the following statement(s) is/are true with respect to Section 215.4 of Federal Reserve Regulation O?

I. Prior Board approval is always required for extensions of credit to an Insider which exceed $500,000 in the aggregate.

II. The overdraft provisions of Regulation O never apply to overdrafts of Directors or Executive Officers if the account is not overdrawn more than 5 days and does not exceed $1,000

III. A bank waiving its general requirement to pay points on real estate loans, for a loan to a director, may violate the "substantially the same terms" provisions of Section 215.4(a) of Regulation O unless this waiver is made in connection with an employee benefit or compensation program that is widely available to all employees.

IV. For purposes of applying the prior approval provisions of Regulation O, all extensions of credit to the insider are aggregated with extensions of credit to the insider’s related interests.

A. II and IV only
B. II III and IV only
C. I III and IV

Back 51

Answer: C. I III and IV only

Regulation O pp7642/7648
§ 215.4 General prohibitions.
(a) Terms and creditworthiness.--(1) In general. No member bank may extend credit to any insider of the bank or insider of its affiliates unless the extension of credit:

(i) Is made on substantially the same terms (including interest rates and collateral) as, and following credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions by the bank with other persons that are not covered by this part and who are not employed by the bank; and

(ii) Does not involve more than the normal risk of repayment or present other unfavorable features.

(2) Exception. Nothing in this paragraph (a) or (e)(2)(ii) of this section shall prohibit any extension of credit made pursuant to a benefit or compensation program--

(i) That is widely available to employees of the member bank and, in the case of extensions of credit to an insider of its affiliates, is

Front 52

52.) Per Financial Recordkeeping regulations, which of the following entities may be exempted from the reporting requirements of the regulation (assume all exemptions were granted after the Phase II rules became effective 10-21-98)

I. A casino, but only if the account has been established for at least 12 months.

II. A majority owned subsidiary of an entity other than a bank listed on the New York Stock Exchange

III. A firm whose stock is listed on the NASDAQ stock market

IV. A payroll customer whose account has been maintained for at least 12 months

A. II III and IV only
B. II and III only
C. All of the above
D. II and IV only

Back 52

Answer: A. II III and IV only

Financial Recordkeeping Regulations pp 8486.02-G
Feds don't like casinos

Front 53

53.) You are examining the retail loan portfolio of the State Bank of Whitewater, Little Rock, Arkansas. According to the Uniform Retail Credit Classification and Account Management Policy, which of the following loans (barring mitigating circumstances) would be assigned a Loss classification?

I. Revolving credit card (open-end) balance past due 150 days
II. Closed end automobile loan past due 100 days
III. 75% LTV home equity loan past due 180 days
IV. Overdraft check protection (open-end) past due 240 days
V. Overdraft check protection (open-end) past due 155 days

A. II III and IV only
B. All of the above
C. I II IV and V only
D. IV only
E. IV and V only

Back 53

Answer: D. IV only
(to be Loss, open-end must be delinquent more than 180 days, closed-end more than 120 days, HELOCs more than 180 need an assessment of value with anything over FMV less costs to sell classified Loss,

Manual 3.2-44/45
In general, retail credit should be classified based on the following criteria:
• Open-end and closed-end retail loans past due 90 cumulative days from the contractual due date should be classified Substandard.
• Closed-end retail loans that become past due 120 cumulative days and open-end retail loans that become past due 180 cumulative days from the contractual due date should be charged-off. The charge-off should be taken by the end of the month in which the 120-or 180-day time period elapses.
• Unless the institution can clearly demonstrate and document that repayment on accounts in bankruptcy is likely to occur, accounts in bankruptcy should be charged off within 60 days of receipt of notification of filing from the bankruptcy court or within the delinquenc

Front 54

54.) According to Part 326.8(c) of the FDIC Rules and Regulations, a Bank Secrecy Act Compliance Program must:

I. Provide for independent testing to be completed by an external auditing firm

II. Provide training for appropriate personnel

III. Provide for a system of internal controls to assure ongoing compliance

IV. Designate the bank's compliance officer as the Bank Secrecy Act administrator

A. II and III only
B. I II and III only
C. II III and IV only
D. All of the above

Back 54

Answer: A. II and III only

Part 326 pp2265
Subpart B—Procedures for Monitoring Bank Secrecy Act Compliance

§ 326.8 Bank Secrecy Act compliance.

(c) Contents of compliance program.The compliance program shall, at a minimum:

(1) Provide for a system of internal controls to assure ongoing compliance;

(2) Provide for independent testing for compliance to be conducted by bank personnel or by an outside party;

(3) Designate an individual or individuals responsible for coordinating and monitoring day-to-day compliance; and

(4) Provide training for appropriate personnel.

Front 55

55) Which of the following statements are true with respect to risk based capital requirements for banks?

I. Commercial letters of credit are accorded a 50% conversion factor if the maturity of the letter of credit is less than one year.

II. Delinquent residential RE loans (in excess of 90 days) are assigned to the 200% risk-weight category.

III. Federal Reserve Bank stock is accorded a 0% risk weighting.

IV. At least one half of qualifying total capital must be comprised of core (Tier 1) capital elements.

A) All of the above
B) I, II, and III only
C) III and IV only
D) I, II, and IV only
E) IV only

Back 55

Answer: C) III and IV only

Part 325, Appendix A pp2257, 2262.06-O/2262.06-P1 & Call Report Instructions RC-R-24

Table II.—Summary of Risk Weights and Risk Categories

Category 1—Zero Percent Risk Weight

(1) Cash (domestic and foreign).

(2) Balances due from Federal Reserve banks and central banks in other OECD countries.

(3) Direct claims on, and portions of claims unconditionally guaranteed by, the U.S. Treasury, U.S. Government agencies,1 or central governments in other OECD countries.

(4) Portions of local currency claims on, or unconditionally guaranteed by, non-OECD central governments (including non-OECD central banks), to the extent the bank has liabilities booked in that currency.

(5) Gold bullion held in the bank's own vaults or in another bank's vaults on an allocated basis, to the extent that it is offset by gold bullion liabilities.

(6) Federal Reserve bank stock.

3. Items With a 20 Percent Conversion Factor. Short-term, self-liquidating, trade-relat

Front 56

56) Which of the following statements are true with respect to Subpart H of Part 103 – Financial Recordkeeping and Reporting of Currency and Foreign Transactions (Subpart H deals with special information sharing procedures between Federal law enforcement agencies and financial institutions)?

I. A financial institution must search its records for any current account maintained by a named suspect

II. If the financial institution identifies an account or transaction identified with a suspect, it must report this information to its applicable federal bank regulator

III. A financial institution shall designate a contact person for which all communications from FinCEN are to be directed to

IV. A financial institution is required to freeze all accounts associated with the suspect identified in the information request.

A. I only
B. All of the above
C. I III and IV only
D. I and III only

Back 56

Answer: B. All of the above
(I didn't see the whole freeze thing in the reg)

§ 103.100 Information sharing between Federal law enforcement agencies and financial institutions.

(2) Obligations of a financial institution receiving an information request.--(i) Record search. Upon receiving an information request from FinCEN under this section, a financial institution shall expeditiously search its records to determine whether it maintains or has maintained any account for, or has engaged in any transaction with, each individual, entity, or organization named in FinCEN's request.

(ii) Report to FinCEN. If a financial institution identifies an account or transaction identified with any individual, entity, or organization named in a request from FinCEN, it shall report to FinCEN, in the manner and in the time frame specified in FinCEN's request, the following information:

(A) The name of such individual, entity, or organization;

(B) The number of each such account, or in the case of a trans

Front 57

57) Per Section 38 of the FDI Act, a "Critically Undercapitalized" institution may not conduct the following activities without the FDIC's prior written approval.

I. Pay excessive compensation or bonuses
II. Extend credit for any highly leveraged transaction
III. Make any material change in accounting methods
IV. With limited exceptions, amend the institution's charter or bylaws

A. All of the above
B. I and IV only
C. I II and III only
D. I III and IV only
E. I and III only

Back 57

Answer: A. All of the above

Section 38, FDI Act pp1439

i) RESTRICTING ACTIVITIES OF CRITICALLY UNDERCAPITALIZED INSTITUTIONS.--To carry out the purpose of this section, the Corporation shall, by regulation or order--

(1) restrict the activities of any critically undercapitalized insured depository institution; and

(2) at a minimum, prohibit any such institution from doing any of the following without the Corporation's prior written approval:

(A) Entering into any material transaction other than in the usual course of business, including any investment, expansion, acquisition, sale of assets, or other similar action with respect to which the depository institution is required to provide notice to the appropriate Federal banking agency.

(B) Extending credit for any highly leveraged transaction.

(C) Amending the institution's charter or bylaws, except to the extent necessary to carry out any other requirement of any law, regulation, or order.

(D) Making any material change i

Front 58

58) Part 337.6 of the FDIC Rules and Regulations addresses utilization of brokered deposits by "well capitalized, adequately capitalized and undercapitalized" institutions. A well-capitalized institution may solicit, accept, renew and roll over any brokered deposit without restriction by this section.

A. True
B. False

Back 58

Answer: A. True

Part 337 pp2646

Front 59

59) According to the Manual of Examination Policies, which of the following statements are true regarding board meetings that are conducted at the conclusion of an examination?

I. If a composite rating of “3” is anticipated, a board meeting should be held

II. If a committee of the board is selected for the meeting, as opposed to the full board, the committee must include acceptable representation of board members who are not full-time officers

III. A regional office designee must be present at a board meeting of a “4” rated (anticipated) bank

IV. A board meeting must be held if 24 months have elapsed since the last such meeting with the directorate was held

A. I and III only
B. III and IV only
C. I and II only
D. I II and III only

Back 59

Answer: D. I II and III only

Manual 1.1-17 & 19
Meetings with Directors
In order to encourage director involvement in and enhance director awareness of the FDIC's supervisory efforts and to increase the effectiveness of such efforts, policies have been established governing meetings with bank boards of directors. The bank's composite rating is the single most important variable in the decision as to if and when these meetings should be held. Specifics of the Division's policies are detailed below.
Banks Assigned or Likely to be Assigned a Composite 4 or 5 Rating
The EIC and the Regional Director or designee should meet with the board of directors (with the required quorum in attendance) during or subsequent to the examination. Additional meetings or other contacts with the board of directors or appropriate board committee may be
scheduled at the Regional Director's discretion.
Banks Assigned or Likely to be Assigned a Composite 3 Rating
The EIC should meet with the board (with the required quorum

Front 60

60) According to the Manual of Examination Policies, in developing an approved list of securities dealers, a bank's board of directors should, at a minimum:

I. Review the firm’s most current financial statements

II. Always maintain securities purchased from each dealer in safekeeping with that dealer

III. Inquire into the dealer's general reputation by contacting current or previous customers

IV. Review available information from state or federal securities regulators and industry self-regulatory bodies to determine the existence of any formal enforcement actions against the dealer, its affiliates, or authorized personnel

A. All of the above
B. I and IV only
C. I III and IV only
D. I II and IV only

Back 60

Answer: C. I III and IV only

Front 61

61) Examiners finding severe deficiencies in a bank’s safety and soundness standards (internal controls, credit underwriting, earnings, etc.) may recommend that the bank file a compliance plan to correct deficiencies, as provided under Part 308 of the FDIC Rules and Regulations.

I. Schedule a violation of the guidelines contained in Appendix A to Part 364
II. Include appropriate comments concerning the noted deficiencies in the Risk Management pages of the Report of Examination
III. Reflect the impact of the deficiencies in the appropriate CAMELS rating(s)
IV. If the deficiencies are considered to be severe, the examiner may recommend that the bank file a compliance plan to correct the deficiencies, as provided under Part 308

A. All of the above
B. I II and IV only
C. II and III only
D. II III and IV only
E. I II and III only

Back 61

Answer: D. II III and IV only

Part 364 pp3165/3169; Cross Reference to Part 308 pp2166.16-2166.17

§ 308.302 Determination and notification of failure to meet a safety and soundness standard and request for compliance plan.

(a) Determination. The FDIC may, based upon an examination, inspection or any other information that becomes available to the FDIC, determine that a bank has failed to satisfy the safety and soundness standards set out in part 364 of this chapter and in the Interagency Guidelines Establishing Standards for Safety and Soundness in appendix A and the Interagency Guidelines Establishing Information Security Standards in appendix B to part 364 of this chapter.

(b) Request for compliance plan. If the FDIC determines that a bank has failed a safety and soundness standard pursuant to paragraph (a) of this section, the FDIC may request, by letter or through a report of examination, the submission of a compliance plan and the bank shall be deemed to have notice of the request thre

Front 62

62) According to the Manual of Examination Policies, which of the following statements are true with respect to interest rate risk (IRR) management?

I. Gap analysis, duration analysis, and simulation analysis are three common forms of IRR measurement.

II. Option-free instruments (no call options, no possibility of prepayment) display negative convexity (i.e. the price change of the underlying instrument begins to decelerate as the degree of interest rates changes increase)

III. An earnings approach to IRR management typically focuses on a long-term horizon whereas economic value of equity (EVE) measurement tools focus on potential changes in the net fair value of equity on a short-term horizon.

IV. An instrument’s duration represents its estimated percentage price change given an assumed parallel yield curve shift.

A. I, II and III only
B. I and IV only
C. II III and IV only
D. I, III and IV only
E. III and IV only

Back 62

Answer: B. I and IV only

Manual 7.1-7/9

Front 63

63) Per the Manual of Examination Policies, a "chain banking group" is considered to be two or more banks, thrifts, or similar financial institutions owned by a single bank holding company.

A. True
B. False

Back 63

Answer: B. False

Manual 4.3-12
A chain banking organization is defined as a group (two or more) of banks or savings and loan associations and/or their holding companies which are controlled directly or indirectly by an individual or a company acting alone or through or in concert with any other individual or company. Control is defined as: ownership, control or power to vote 25 percent or more of an organization's voting securities; the power to control in any manner of the election of a majority of the directors of an organization; or the power to exercise a controlling influence over the management or policies of an organization. These criteria are to be interpreted narrowly. For example, institutions should not be deemed to be a chain organization simply because an individual holds a title such as chairman or president unless the individual actually has control.

Front 64

64) You are examining Bank of Ribar, Milo, IL a $125,000,000 state nonmember bank. The bank's unimpaired capital and unimpaired surplus, as defined in Regulation O, is $10,000,000. The following loans are extended to the bank's insiders (directors, officers and principal shareholders): First mortgage loans on principal residences, $3,500,000; unsecured loans, $7,000,000; education loans, $2,900,000. The aggregate total of debt is in apparent violation of 215.4(d) of Regulation O which limits total outstanding debt to insiders to 100% of the bank's unimpaired capital and unimpaired surplus in this instance.

A. True
B. False

Back 64

Answer: A. True

Reg O
§ 215.4 General prohibitions.
4) Participation in the discussion, or any attempt to influence the voting, by the board of directors regarding an extension of credit constitutes indirect participation in the voting by the board of directors on an extension of credit.

(c) Individual lending limit--No member bank may extend credit to any insider of the bank or insider of its affiliates in an amount that, when aggregated with the amount of all other extensions of credit by the member bank to that person and to all related interests of that person, exceeds the lending limit of the member bank specified in § 215.2(i) of this part. This prohibition does not apply to an extension of credit by a member bank to a company of which the member bank is a subsidiary or to any other subsidiary of that company.

(d) Aggregate lending limit--(1) General limit. A member bank may not extend credit to any insider of the bank or insider of its affiliates unless the extension of credit is

Front 65

65) Which of the following statements are true with respect to the "Other Purpose" loan limitations included in Part 337 of the FDIC Rules and Regulations?

I. The restrictions are applicable to directors and executive officers, but not principal shareholders

II. The "Other Purpose" limitation is the greater of 5% of capital and unimpaired surplus, or $25,000, but not to exceed $100,000.

III. Executive Officers of a bank’s parent holding company are also subject to these restrictions.

IV. "Other Purpose" debt may include the entire debt of partnerships to which the executive officer is a partner.

A. III and IV only
B. I II and III only
C. I and III only
D. IV only
E. II only

Back 65

Answer: D. IV only

Reg O
§ 337.3 Limits on extensions of credit to executive officers, directors, and principal shareholders of insured nonmember banks.

(b) For the purposes of compliance with § 215.4(b) of Federal Reserve Board Regulation O, no insured nonmember bank may extend credit or grant a line of credit to any of its executive officers, directors, or principal shareholders or to any related interest of any such person in an amount that, when aggregated with the amount of all other extensions of credit and lines of credit by the bank to that person and to all related interests of that person, exceeds the greater of $25,000 or five percent of the bank's capital and unimpaired surplus,3 or $500,000 unless (1) the extension of credit or line of credit has been approved in advance by a majority of the entire board of directors of that bank and (2) the interested party has abstained from participating directly or indirectly in the voting.

(c)(1) No insured nonmember bank may extend credit

Front 66

66) Civil money penalties may be assessed due to the filing of misleading Reports of Condition and Income as well as due to the late filing of these reports.

A. True
B. False

Back 66

Answer: A. True

Part 308
(b) Statements.(1) A person who submits to the FDIC a false, fictitious or fraudulent statement is subject to a civil penalty of up to $5,000 per statement. A statement is false, fictitious or fraudulent if the person submitting the statement to the FDIC knows, or has reason to know, that:

(i) The statement asserts a material fact which is false, fictitious, or fraudulent; or

(ii) The statement omits a material fact that the person making the statement has a duty to include in the statement; and

(iii) The statement contains or is accompanied by an express certification or affirmation of the truthfulness and accuracy of the contents of the statement.

(2) Each written representation, certification, or affirmation constitutes a separate statement.

(3) A statement will be considered made to the FDIC when the statement is actually made to an agent, fiscal intermediary, or other entity, including any state or political subdivision thereof, acting for or on be

Front 67

67) You are examining EnronCom Bank, a $300MM State, Nonmember bank. Specifically, you have been assigned to review the audit program of this bank. You have the following observations: McArthur Anderson & Co. performs monthly internal audit work. In addition, this firm issues an annual, opinion audit on the financial statements of the bank. The board reviewed the independence issues associated with the same firm providing these services and has approved continuing this arrangement. You check the credentials of the accounting firm and notice they are not a registered public accounting firm. The board has not set up an audit committee; however, employees are encouraged to submit any audit concerns, complaints, etc. to Kenneth Hay or Jeffrey Smilling, two outside directors. Which of the following statements are true?

I. Since the bank’s total assets exceed $250 million, it is not permissible to have the same accounting firm perform internal and external audit work

II. Only registered public acco

Back 67

Answer: B. IV only

FIL 17-2003 Effect of Sarbanes-Oxley Act on Insured Depository Institutions

Front 68

68) According to the Manual of Examination Policies Criminal Violations, a violation of 18 U.S.C. Section 1014 (False Statements on a Loan or Credit Application) may be cited regardless of the size or nature of the misrepresentation or its capability of influencing a bank's credit decision.

A. True
B. False

Back 68

Answer: B. False

Manual 10.1-7
18 U.S.C. Section 1014 - False Statements on a Loan or Credit Application
This statute covers oral or written false statements or misrepresentations made knowingly on a loan or credit application to an insured bank (e.g., willful over-valuing of land, property, securities or other assets or understatement of liabilities). Such statements or misrepresentations must have been capable of influencing the bank's credit decision. Actual damage or reliance on such information is not an essential element of the offense. The statute applies to credit renewals, continuations, extensions or deferments and includes willful omissions as well as affirmative false statements. Obsolete information in the original loan application is not covered unless the applicant reaffirms the information in connection with a renewal request. The application will trigger the statute even if the loan is not made.

Front 69

69) You are calculating the past due ratio at Peterson State Bank, North Moline, IL and the following data is presented. Determine the past due ratio:

Commercial loans 0 29 days past due - $100,000; 30 90 days - $75,000;
Installment loans 1 payment past due - $90,000; 2 4 payments - $25,000; 5+ payments - $80,000;
RE loans 15 days past due - $100,000; 15 29 days - $150,000; 30 90 days - $125,000; 90+ days - $50,000;
ODs 0 29 days past due - $25,000; 30+ days - $35,000;
Credit card loans 59 89 days - $50,000; 90+ days - $55,000;
Gross loans - $55,000,000; Total loans - $54,000,000; Net loans - $53,000,000

A. 0.93%
B. 0.90%
C. 1.01%
D. 1.75%

Back 69

Answer: B. 0.90%

Call Report, RC-N pp1&2
Past Due – The past due status of a loan or other asset should be determined in accordance with its contractual repayment terms. For purposes of this schedule, grace periods allowed by the bank after a loan or other asset technically has become past due but before the imposition of late charges are not to be taken into account in determining past due status. Furthermore, loans, leases, debt securities, and other assets are to be reported as past due when either interest or principal is unpaid in the following circumstances:
(1) Closed-end installment loans, amortizing loans secured by real estate, and any other loans and lease financing receivables with payments scheduled monthly are to be reported as past due when the borrower is in arrears two or more monthly payments. (At a bank's option, loans and leases with payments scheduled monthly may be reported as past due when one scheduled payment is due and unpaid for 30 days or more.) Other multipayment obligatio

Front 70

70) The Customer Identification Provisions of Part 103 of the Financial Recordkeeping regulations require banks to determine if a customer appears on any list of known or suspected terrorist organizations issued by any Federal government agency (OFAC for example) at the time the account is opened.

A. True
B. False

Back 70

Answer: B. False

8000 - Miscellaneous Statutes and Regulations; Subpart I—Anti-Money Laundering Programs; § 103.121 Customer Identification Programs for banks, savings associations, credit unions, and certain non-Federally regulated banks.

(4) Comparison with government lists. The CIP must include procedures for determining whether the customer appears on any list of known or suspected terrorists or terrorist organizations issued by any Federal government agency and designated as such by Treasury in consultation with the Federal functional regulators. The procedures must require the bank to make such a determination within a reasonable period of time after the account is opened, or earlier, if required by another Federal law or regulation or Federal directive issued in connection with the applicable list. The procedures must also require the bank to follow all Federal directives issued in connection with such lists.

Front 71

71) You are examining Hochstatter State Bank and observe the following transactions with Hochstatter Bancorp, which owns 100% of the bank. Which of the following situations give rise to apparent violations of Section 23B of the Federal Reserve Act?

I. The bank incurs a taxable loss and has recoverable taxes when figured on a stand alone basis. However, since the holding company is unable to utilize the loss on a consolidated basis, no funds are downstreamed to the bank.

II. Instead of upstreaming taxes on a quarterly basis, the bank upstreams tax payments monthly.

III. The holding company incurs a taxable loss and allows the bank to upstream taxes based upon this lower, consolidated tax liability as opposed to the bank upstreaming higher taxes calculated on a stand alone basis.

IV. The consolidated return requires payment of an Alternative Minimum Tax. The holding company allocates the AMT based upon the portion of tax preferences and adjustments generated by each bank.

A. All of the above

Back 71

Answer: D. I and II only

SEC. 23B Restrictions on transactions with affiliates
SEC. 23B. (a) SEC. --

(1) TERMS.--A member bank and its subsidiaries may engage in any of the transactions described in paragraph (2) only--

(A) on terms and under circumstances, including credit standards, that are substantially the same, or at least as favorable to such bank or its subsidiary, as those prevailing at the time for comparable transactions with or involving other nonaffiliated companies, or

(B) in the absence of comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to, or would apply to, nonaffiliated companies.

Front 72

72) You are reviewing for compliance with Part 350 of the FDIC Rules and Regulations at Nature Boy Bank, (NBB) Peoria, IL. The bank is 100% owned by Goldberg Bancorp, a multi bank holding company. NBB is roughly 40% of the holding company's total assets. Consolidated schedules are presented in the Part 350 disclosures (as opposed to NBB only). An apparent violation is scheduled. Is this Correct?

A. Yes
B. No

Back 72

Answer: A. Yes

Part 350 – Disclosure of Financial and Other Information by FDIC-Insured State Nonmember Banks

§ 350.4 Contents of annual disclosure statement.

(a) Financial reports. The annual disclosure statement for any year shall reflect a fair presentation of the bank's financial condition at the end of that year and the preceding year and, except for state-licensed branches of foreign banks, the results of operations for each such year. The annual disclosure statement may, at the option of bank management, consist of the bank's entire Call Report, or applicable portions thereof, for the relevant dates and periods.

Front 73

73) Which of the following statements are correct, per the terms of The Policy Statement on Coordination and Communication between External Auditors and Examiners?

I. The bank may provide the most recent Report of Examination as well as recent correspondence with the regulator to the auditing firm for their review.

II. The bank may provide any supervisory memorandum of understanding or formal action under certain subsections of Section 8, that were initiated during the audit period

III. While auditors may attend board meetings held in connection with a regulatory examination, they may not attend exit conferences held at the completion of field work.

IV. Auditors may be provided with reports detailing civil money penalty assessments against the bank or any institution-affiliated party during the audit period.

A. I and IV only
B. I II and III only
C. I II and IV only
D. I and III only
E. All of the above

Back 73

Answer: C. I II and IV only

5000 - Statements of Policy
Other Information Provided By the Institution

Consistent with prior practice, a depository institution should provide its external auditors with a copy of certain reports and supervisory documents, including:

• The most recent regulatory Report of Condition (i.e., "Call Reports" for banks, and "Thrift Financial Reports" for savings institutions);

• The most recent examination report and pertinent correspondence received from its regulator(s);

• Any supervisory memorandum of understanding with the institution that has been put into effect since the beginning of the period covered by the audit;

• Any written agreement between a federal or state banking agency and the institution that has been put into effect since the beginning of the period covered by the audit; and

• A report of:

-- Any actions initiated or undertaken by a federal banking agency since the beginning of the period covered by the audit under

Front 74

74) Which of the following statements, pertaining to the Policy Statement on the Uniform Financial Institutions Rating System, are correct?

I. Evaluations of an institution’s sensitivity to market risk (the “S” in CAMELS) should focus on the sensitivity of the bank’s earnings, as opposed to the economic value of its capital, to adverse changes in interest rates, foreign exchange rates, commodity prices, and equity prices.

II. Evaluations of each component may take into account an institution’s size and sophistication as well as its risk profile

III. The composite rating generally bears a close relationship to the component ratings

IV. All component ratings should be given equal weight in arriving at the composite rating of the institution.

A. II and III only
B. II III and IV only
C. I II and III only
D. All of the above
E. III only

Back 74

Answer: A. II and III only

Policy Statement 5079/5080.7

Front 75

75) First Friedrich Bank, Honolulu, Hawaii has exposure to correspondent banks equal to the following % of total capital. Which of the following relationships do not comply with the provisions of Regulation F Interbank Liabilities?

I. First State Bank, adequately capitalized, 50%
II. Second State Bank, well capitalized, 50%
III. Third State Bank, undercapitalized, 30%
IV. Fourth State Bank, well capitalized, 100%
V. Fifth State Bank, undercapitalized, 20%


A. I III and IV only
B. III and IV only
C. I III and V only
D. III only
E. III and V only

Back 75

Answer: D. III only

7500 - FRB Regulations; Part 206 – Limitations on Interbank Liabilities (Regulation F)

§ 206.4 Credit exposure.

(a) Limits on credit exposure. (1) The policies and procedures on exposure established by a bank under § 206.3(c) of this part shall limit a bank's interday credit exposure to an individual correspondent to not more than 25 percent of the bank's total capital, unless the bank can demonstrate that its correspondent is at least adequately capitalized, as defined in § 206.5(a) of this part.

(2) Where a bank is no longer able to demonstrate that a correspondent is at least adequately capitalized for the purposes of § 206.4(a) of this part, including where the bank cannot obtain adequate information concerning the capital ratios of the correspondent, the bank shall reduce its credit exposure to comply with the requirements of § 206.4(a)(1) of this part within 120 days after the date when the current Report of Condition and Income or other relevant report nor

Front 76

76.) If an appraisal is not required by Part 323 of the FDIC Rules and Regulations, the FDIC requires that an evaluation of the property value be done. Which of the following statements, regarding the nature of these evaluations, are true?

I. The individual performing the evaluation should also be the servicing loan officer.

II. An evaluation should never be based primarily upon information derived from sales data services or current tax assessment information.

III. Institutions should document the qualifications and experience level of individuals deemed qualified to perform evaluations.

IV. An evaluation should include calculations, supporting assumptions, and, if utilized, a discussion of comparable sales.

A. I and IV only
B. II III and IV only
C. III and IV only
D. I II and IV only

Back 76

C. III and IV only
(watch out for words like primarily)

Manual 3.1-30/33

Front 77

77.) Which of the following statements are true regarding FAS 114 – Accounting by Creditors for Impairment of a Loan, as amended by FAS 118 – Accounting by Creditors for Impairment of a Loan – Income Recognition and Disclosures?

I. The enactment of FASB 114 supersedes all other accounting standards relating to the maintenance of the ALLL.

II. FASB 114 applies to individually evaluated loans as well as large groups of smaller-balance homogenous loans.

III. An additional allowance on an impaired loan (over and above what was established based on FAS 114/118) may be required if, for example, the examiner has concerns regarding the reliability of cash flow estimates.

IV. Impairment may be measured using the present value of expected future cash flows, the loan's observable market price, or the fair value of the collateral.

A. III and IV only
B. All of the above
C. II III and IV only
D. I III and IV only

Back 77

A. III and IV only

Manual 3.2-47

Front 78

78.) You are examining the commercial loan portfolio of McCracken Bank & Trust Co. and notice the following loan listed for impairment under FASB 114/118. You decide to verify that the bank is carrying the loan at the proper balance, per the guidelines contained in the FASB statement. Using the following information, determine the balance that the loan should be carried at (which is achieved by a debit to bad debt expense and an offsetting credit to the ALLL.) Original amount and present balance: $500,000, unsecured. Original terms: 5 annual interest payments at 10% plus $100,000 principal annually. Due to a change in the borrower's financial condition, the bank believes the borrower will only be able to make the $100,000 annual principal payments but no interest payments. The loan's effective interest rate (contract rate) at the time of impairment was 10% and the going rate for similar commercial loans was 8%.

A. $500,000
B. $399,270
C. $379,078
D. $412,675

Back 78

C. $379,078

Manual 3.2-6; (HP12C entries: clear, 5n, 10i, 100000PMT, PV)

Front 79

79.) Which of the following statements are true with respect to the registration and regulation of money services businesses (assume all selections exclude banks and other entities excluded from the definition of a money services business by the regulation)?

I. Each money services business must register with the Department of the Treasury.

II. A money services business includes a business that cashes checks in amounts greater than $1,000 for any person on any day in one or more transactions.

III. A money services business must register no later than 180 days after the business is established.

IV. A money services business must prepare and maintain a list of its agents but does not have to file the agent list with its registration form.

A. All of the above
B. I and III only
C. I II and III
D. II and III
E. I III and IV only

Back 79

A. All of the above

Department of Treasury’s Financial Recordkeeping regulations pp 8486/8486.01 & 8505/8506

Front 80

80.) Which of the following statements is/are true with respect to a bank’s investment in debt and equity securities?

I. Available-For-Sale securities are reported at fair value, with unrealized gains and losses included in the income statement.

II. Interest-only stripped mortgage-backed instruments cannot be reported as held-to-maturity.

III. Unrealized gains on available-for-sale debt securities are excluded from regulatory capital ratios.

IV. Debt securities in the held-to-maturity account should be carried at the lower of cost or market.

A. I and III only
B. I III and IV only
C. II and III only
D. III only
E. None of the above

Back 80

C. II and III only

Manual 3.3-15
AFS securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate capital component.

Manual 3.3-14
Securities with Substantial Prepayment Risks FAS 115, as amended by FAS 140, does not permit a debt security to be designated as held-to-maturity (HTM) if it can be prepaid or otherwise settled in such a way that the security holder would not recover substantially all of its recorded investment. Thus, those debt securities with a risk of substantial investment loss in the event of early prepayment, such as interest-only stripped mortgage backed securities and principal-linked structured notes, cannot be treated as HTM securities and carried at amortized cost. Rather, these securities should be categorized as either trading or AFS securities and reported at their fair value on the balance sheet for regulatory reporting purposes.

Manual 3.3-15
Only debt securities which management has the positive intent and

Front 81

81.) A bank's ALLL should provide for which of the following items, as appropriate?

I. Significant credits reviewed on an individual basis

II. Allocations for loans sold without recourse

III. A margin to account for imprecision inherent in estimates of expected credit losses

IV. Allocations for homogeneous loans that are not individually evaluated

A. All of the above
B. I and III only
C. I II and IV only
D. I III and IV only

Back 81

D. I III and IV only

Manual 3.1-4/5

Front 82

82.) Chapter 11 bankruptcy is available to individuals as well as partnerships and corporations.

A. True
B. False

Back 82

A. True

Manual 3.1-61

Front 83

83.) Which of the following items are potential risk exposures that can arise from investment and derivative activities?

I. Operating Risk
II. Market Risk
III. Liquidity Risk
IV. Credit Risk
V. Legal Risk
VI. Settlement Risk

Back 83

C. All of the above

Manual 3.3-6/7
Operational risk is the possibility that inadequate internal controls or procedures, human error, system failure or fraud can cause losses.

Market risk is the possibility that an instrument will lose value due to a change in the price of an underlying instrument, change in the value of an index of financial instruments, changes in various interest rates, or other factors.

Liquidity risk is the possibility that an instrument cannot be obtained, closed out, or sold at (or very close to) its economic value.

Credit risk is the possibility of loss due to a counterparty’s or issuer’s default, or inability to meet contractual payment terms.

Legal risk is the possibility that legal action will preclude a counterparty’s contractual performance.

Settlement risk is the possibility of loss from a counterparty that does not perform after the investor has delivered funds or assets (before receiving the contractual proceeds).

Front 84

84.) Banks with significant investments in structured notes should have the ability to do which of the following?

I. Demonstrate how these investments reduce the bank’s overall interest rate risk

II. Determine the change in MV of the notes given a reasonable range of changes in interest rates (say +/- 300 basis points)

III. For structured notes linked to yield differentials, the effects of a flattening or steepening yield curve should be evaluated

IV. Use, or otherwise obtain, pricing sources capable of evaluating imbedded options in the bonds

A. I II and III only
B. I II and IV only
C. All of the above
D. II III and IV only

Back 84

D. II III and IV only

Capital Markets Handbook

Front 85

85.) You are examining Goofy Bank, Disneyworld, FL and are responsible for preparing the Capital Calculations page. The bank's "going in" Tier 1 capital (before examination adjustments) is $5,500,000. The ALLL is $250,000. Total assets are $50,000,000. Risk-weighted assets (prior to examination losses) are $35,000,000. Average Total Assets, from the most recent Call Report date, is $48,000,000. Loans classified loss are $200,000, Other Real Estate losses are $50,000 and Other Asset losses are $25,000. The ALLL worksheet indicates that the bank needs a minimum ALLL level of $200,000 after elimination of examination loan losses. (Assume the deficiency is considered significant) From the foregoing data, calculate the bank's Tier 1 and Total Risk-Based Capital ratios. Select from the following choices:

A. 10.95% / 15.62%
B. 11.02% / 15.77%
C. 11.15% / 15.90%
D. 10.88% / 15.55%

Back 85

B. 11.02% / 15.77%
(I don't get it)

Manual 2.1-3/4 and Report of Examination Instructions

Front 86

86.) Which of the following statements are correct, with respect to Part 363 of the FDIC Rules and Regulations (Annual Independent Audits and Reporting Requirements)?

I. This Part does not apply to institutions controlled by a holding company with less than $5 Billion in consolidated assets.

II. Institutions subject to this regulation shall have annual financial statements prepared which are audited by an independent public accountant.

III. An independent audit committee is to be established with a majority of its members being outside directors.

IV. The required annual report of audited financial statements must be made available for public inspection.

A. II and IV only
B. All of the above
C. II III and IV only
D. I III and IV only

Back 86

A. II and IV only

Part 363 pp3161/3162.01

Front 87

87.) Which of the following statements are true, with respect to the concept of duration?

I. Duration considers all expected cash flows.

II. Unless adjusted for the effects of convexity, duration may only accurately estimate price sensitivity for relatively small (say 100 basis points) changes in interest rates.

III. The duration of an instrument always declines as time elapses.

IV. Duration is less than the maturity of an instrument if periodic principal payments are made, but is equal to the maturity if only periodic interest payments are made.

A. I II and IV only
B. All of the above
C. I and II only
D. I II and III only

Back 87

D. I II and III only

Manual 7.1-8/9

Duration analysis provides significant advantages over gap analysis. Duration analysis yields a single interest rate risk number and considers all expected cash flows. Thus, duration generates a more comprehensive interest rate risk measurement. Duration analysis can provide more accuracy than maturity gap analysis for measuring and managing IRR.

All duration measures assume a linear price/yield relationship. However, that relationship actually is curvilinear. Therefore, duration may only accurately estimate price sensitivity for rather small (up to 100 basis point) interest rate changes. Convexity-adjusted duration should be used to more accurately estimate price sensitivity for larger interest rate changes (over 100 basis points).

Duration, stated in months or years, always:
• Declines as time elapses,
• Equals less than maturity for instruments with payments prior to maturity,
• Equals maturity for zero-coupon instruments,
• Is lower for instrume

Front 88

88.) Using the following information, calculate the estimated potential net change in the bank’s economic value of equity.

1% increase in interest rates
$10,000,000 in rate sensitive assets (RSA)
$10,000,000 in rate sensitive liabilities (RSL)
Duration of RSA = 8.7 years
Duration of RSL = 5.1 years


A. $100,000
B. $360,000
C. $870,000
D. $510,000

Back 88

B. $360,000

Manual 7.1-9
EVE may be calculated using duration. For example, assume that a bank has rate sensitive assets (RSA) valued at $10,000 with a duration of 4 years and rate sensitive liabilities (RSL) valued at $9,000 with a duration of 4 years. For a 1% interest rate change, the following will occur:
• RSA value changes $400 ($10,000 x 4 x 1%),
• RSL value changes $360 ($9,000 x 4 x 1%), and
• EVE changes by $40 ($400 - $360).

Front 89

89.) Per Part 327 of the FDIC Rules and Regulations, an insured depository institution's deposit assessment rate is determined by which of the following factors?

I. Capital factors
II. Interest rate risk exposure
III. Supervisory risk factors
IV. Chartering authority

A. I and III only
B. I II and III only
C. IV only
D. All of the above

Back 89

A. I and III only

Part 327 pp2286
§ 327.9 Assessment risk categories and pricing methods.

(a) Risk Categories.--Each insured depository institution shall be assigned to one of the following four Risk Categories based upon the institution's capital evaluation and supervisory evaluation as defined in this section.

(1) Risk Category I. All institutions in Supervisory Group A that are Well Capitalized;

(2) Risk Category II. All institutions in Supervisory Group A that are Adequately Capitalized, and all institutions in Supervisory Group B that are either Well Capitalized or Adequately Capitalized;

(3) Risk Category III. All institutions in Supervisory Groups A and B that are Undercapitalized, and all institutions in Supervisory Group C that are Well Capitalized or Adequately Capitalized; and

(4) Risk Category IV. All institutions in Supervisory Group C that are Undercapitalized.

(b) Capital evaluations. An institution will receive one of the following three capital evaluations

Front 90

90.) An institution that has been issued an "express determination" letter by its primary federal regulator, need not request such a letter at subsequent examinations (i.e. the issuance of an express determination letter is a one-time event). Assume the bank intends to continue to file its taxes using the special tax rules that the express determination letter permits.

A. True
B. False

Back 90

B. False

Manual 3.2-50
Issuance of "Express Determination" Letters to Banks for Federal Income Tax Purposes
Tax Rules - The Internal Revenue Code and tax regulations allow a deduction for a loan that becomes wholly or partially worthless. All pertinent evidence is taken into account in determining worthlessness. Special tax rules permit a federally supervised depository institution to elect a method of accounting under which it conforms its tax accounting for bad debts to its regulatory accounting for loan charge-offs, provided certain conditions are satisfied. Under these rules, loans that are charged-off pursuant to specific orders of the institution's supervisory authority or that are classified by the institution as Loss assets under applicable regulatory standards are conclusively presumed to have become worthless in the taxable year of the charge-offs. To be eligible for this accounting method for tax purposes, an institution must file a conformity election with its Federal income tax return. The

Front 91

91.) Which of the following statements are accurate, based upon Part 206 of the Federal Reserve's Regulation F?

I. "Exposure" to a correspondent includes interday but not intraday transactions.

II. Policies to direct activities in this area must be written.

III. Transactions covered by valid netting agreements may be netted before applying any limitations on correspondent exposure.

IV. Banks must include the credit exposure to a correspondent of any unconsolidated subsidiary, when determining overall exposure to that correspondent.

A. I II and III only
B. All of the above
C. II and III only
D. II III and IV only

Back 91

C. II and III only

7500 - FRB Regulations; Part 206 – Limitations on Interbank Liabilities (Regulation F)
Regulation F pp 7586.31/7586.33

(d) Exposure means the potential that an obligation will not be paid in a timely manner or in full. "Exposure" includes credit and liquidity risks, including operational risks, related to intraday and interday transactions.

(a) General. A bank shall establish and maintain written policies and procedures to prevent excessive exposure to any individual correspondent in relation to the condition of the correspondent.

(c) Netting. Transactions covered by netting agreements that are valid and enforceable under all applicable laws may be netted in calculating credit exposure.

(e) Credit exposure of subsidiaries. In calculating credit exposure to a correspondent under this part, a bank shall include credit exposure to the correspondent of any entity that the bank is required to consolidate on its Report of Condition and Income or Thrift Financial Report.

Front 92

92.) An "adequately capitalized" insured depository institution, that has been granted a waiver of the prohibition regarding acceptance of brokered deposits, may accept such deposits without restriction.

A. False
B. True

Back 92

A. False

Part 337 - Unsafe and Unsound Banking Practices
§ 337.6 Brokered deposits.
(1) A well capitalized insured depository institution may solicit and accept, renew or roll over any brokered deposit without restriction by this section.

(2)(i) An adequately capitalized insured depository institution may not accept, renew or roll over any brokered deposit unless it has applied for and been granted a waiver of this prohibition by the FDIC in accordance with the provisions of this section.

(ii) Any adequately capitalized insured depository institution that has been granted a waiver to accept, renew or roll over a brokered deposit may not pay an effective yield on any such deposit which, at the time that such deposit is accepted, renewed or rolled over, exceeds by more than 75 basis points:

(A) The effective yield paid on deposits of comparable size and maturity in such institution's normal market area for deposits accepted from within its normal market area; or

(B) the national r

Front 93

93.) When preparing a report of examination, where the examiner believes Section 8 action is warranted, which of the following guidelines should be observed?

I. The terms "undesirable" and "objectionable" should not be used in the report, as only the FDIC's Board of Directors is statutorily authorized to draw such a conclusion.

II. Examiners should not follow the general report format guidelines contained in the Report of Examination Instructions.

III. Examiners should detail "undesirable" or "objectionable" practices in a separate memorandum to the Regional Director; however, suggested corrective measures should be formulated in the regional office and should not be included in this memorandum.

IV. While the Report of Examination may be a matter of record at any Section 8 hearing, the separate memorandum may not be called into evidence.

A. I and IV only
B. All of the above
C. None of the above
D. II and III only
E. II III and IV only

Back 93

1. Only the FDIC's Board of Directors is authorized to make a finding of "unsafe or unsound". Therefore, examiners should avoid the use of the statutory words "unsafe or unsound" in the examination report. Synonyms and other descriptive terms such as "undesirable, unacceptable and objectionable practices" are permissible.

2. Examiners should present their findings in the report on the Examination Conclusions and Comments schedule in a manner and format consistent with the guidelines and instructions found in the Report of Examination Instructions.

In a separate memorandum to the Regional Director, examiners should detail each specific "Undesirable and Objectionable Practice" regarded as unsafe or unsound, and the facts upon which that conclusion is based should be listed and discussed in the order of importance under appropriately descriptive subheadings and captions.

3. Examiners should detail in the memorandum to the Regional Director their suggested measures to correct the "Undesirable and Object