Commercial Banking Test 1 Koch C.s 2-3

Front 1

Define “securitization”.

Back 1

Securitization is the process of pooling a group of similar assets, such as credit card loans and mortgages, selling them off your books and issuing securities that are collteralized by the assets.

Front 2

What is “the originate-to-distribute model”? What was the result?`

Back 2

The originate to distribute model is the process of banks originating loans with no intent to hold them to maturity, but rather to sell them rather than hold them on the balance sheet of the original institution The process seperates loan origination from loan ownership. This resulted in low qualtiy loans because the originating bank is not concerned with the default risk. Banks grew their businesses by originating more loans to less qualified borrowers.

Front 3

What is CAMELS?

Back 3

CAMELS is the system state (OCC) and federal regulators (FDIC) use to assess overall quality of a commercial banks conditions. The system was created by the Uniform Financial Institutions Rating system. In each category, the bank is ranked numerically from 1-5, 1 being good and 5 being poor.

Front 4

Briefly describe what each letter of CAMELS stands for.

Back 4

- C: capital adequacy: make sure capital levels are sufficient
- A: Asset quality: measures relative volume of problem loans and leases.
- Management Quality: are officers in control of policies and performance.
Earnings Quality: make sure earnings level is sufficient with assets and equity levels.
L: Liquidity: measrues liquidity of institution
S: Sensitivity to market risk: considers managements ablility to identify, measure, monitor, and control price risk.

Front 5

What is HERA?

Back 5

Housing and Economic Recovery Act.

Front 6

What was HERA designed to do?

Back 6

to address problems with government agencies like Fannie and Freddie by establishing management and capital standards and restriciting asset growth and capital distribution and aiding forclosure situation. Basically designed to help economic and financial crisis of 2008-09.

Front 7

Briefly describe the six risk categories that depository financial institutions face.

Back 7

1. Credit Risk: risk of individuals not paying back loans.
2. Liquidity Risk: risk of bank being unable to obtain funds immediatly by either borrowing or selling assets.
3. Market Risk: risk to earnings and equity resulting from variation in market rates and prices.
4. Operational Risk: the risk of loss resulting from inadequate or failed internal processes, people and systems, or external events
5. Reputational Risk: risk of negative publicity that could potentially result in litigation.
6. Legal Risk associated with legal liabilities of the bank

Front 8

What is the primary motivation today of forming a financial holding company?

Back 8

To engage in activities not permitted in a bank holding company.

Front 9

What act repealed the restrictions on commercial banks affiliating with securities firms under the Glass-Steagall Act?

Back 9

Gramm-Leach-Bliley Act

Front 10

A primary purpose of maintaining the safety and soundness of banks is to...

Back 10

protect depositors.

Front 11

A new charter to start a federal savings association is obtained from the

Back 11

Office of Thrift Supervision

Front 12

All other things constant, securities that are extremely liquid

Back 12

have lower risk than less liquid securities.

Front 13

Securities that require unrealized gains or losses to be recorded as a change in stockholder’s equity are called

Back 13

available for sale assets

Front 14

A bank's equity multiplier measures a bank's...

Back 14

financial leverage

Front 15

A banks cumulateive GAP will always be

Back 15

the sum of the interim periodic GAPs.

Front 16

A shift from core deposits to non-core deposits will

Back 16

generally reduce net interest income.

Front 17

What is the Rate-Volume-Mix Analysis and what benefit does it provide to banks?

Back 17

Rates: the interest rate cost per liability varies from bank to bank. One bank may pay a higher rate on CD's than another. This may occur for many reasons such as a bank may have a higher risk premium than another.
Mix: The mix of core liabilities versus noncore liabilities may vary from bank to bank. A bank relying more on non-core liabilities will pay a higher rates.
Volume: banks ratio of interest bearing debt to equity. A bank with more debt will have a higher Equity Multiplier and will usually have higher interest expense. Banks can use the analysis to evaluate and maximize net interest income.

Front 18

What lead to the credit crisis?

Back 18

Lenders made subprime mortgages. They made loans with teaser rates that had the potential to increase. Often the payments were low enough that negative amortization actually caused the principle to increase. Borrowers were unable to make their payments. This ultimately resulted in banks writing-down mortgages and mortgage banks capital was depleted.

Front 19

Who were the major banks that collapsed?

Back 19

Bear Stearns
Lehman Brothers
Countrywide
Washington Mutual
Wachovia

Front 20

What were 10 government responses to the crisis?

Back 20

- Fannie Mae and Freddie Mac placed into conservatorship
- Loaned AIG over $150 billion
- Insured money market mutual funds
- Created Commercial Paper Funding Facility
- Increased FDIC coverage to $250,000
- Established Troubled Asset Relief Program – TARP
- Established Term Asset-Backed Securities Loan Facility – TALF
- Invested $125 billion in nine large U.S. banks
- Promoted mortgage loan modifications

Front 21

What is the advantage of a Financial Holding Company and what activities do they engage in?

Back 21

The primary advantage to forming an FHC is that the entity can engage in a wide range of financial activities not permitted in the bank or in a Bank Holding Company.
FHC's engage in
Underwriting and selling insurance and securities
- Commercial banking
- Merchant banking
- Insurance company portfolio investment activities

Front 22

To form an FHC, bank must be...

Back 22

well capitalized, well managed, satisfactory on CRA exam.

Front 23

CAN an FHC own an BHC or a BHC own an FHC.

Back 23

FHC may own BHC, not the other way around.

Front 24

How do Global Banks, Super-Regional Banks, and Community Banks differ?

Back 24

Global Banks
- Offer a wide array of products and services globally
Super-Regional Banks
- Similar to global banks but smaller in size and market penetration
Community Banks
- Smaller trade area with total assets under $1 billion

Front 25

What is a Bank Holding Company?

Back 25

a bank that owns controlling interest in one (one-bank BHC) or more (multi-bank BHC) commercial banks.

Front 26

Do holding company financial statements reflect aggreage consolidate performance or does it split it up for each subsidiary?

Back 26

aggregate consolidate performance.

Front 27

Do holding companies pay more or less income taxes compared to subsidiaries? Why?

Back 27

Less. Because 80% of dividends from subsidiaries is exempt. The remaining 20% is mostly offset by deductible expenses.

Front 28

What is the primary advantage of an S-corp bank and what is the primary disadvantage?

Back 28

advantage= no corporate income tax
disadvantage = <100 shareholders

Front 29

What is the primary advantage of a depository bank?

Back 29

FDIC insurance, which results in low rates on insured deposits.

Front 30

What is the primary disadvantage of operating as a bank?

Back 30

regulations

Front 31

Why did investment banks avoid being regulated as banks? What was the result?

Back 31

To operate with lower equity capital per dollar of risk assets and to enter lines of business no permitted to banks.
Result was greater financial leverage and operations in high risk areas.

Front 32

What is involved in transactions banking?

Back 32

Involves the provision of transactions services such as checking accounts, credit card loans, and mortgage loans that occur with high frequency and exhibit standardized features. Because the products are highly standardized, they require little human input to manage.

Front 33

What is relationship banking?

Back 33

emphasis on personal relationship between banker and customer.

Front 34

What does Universal Banking offer?

Back 34

allows for numerous services at lower costs. not necessarily successful.

Front 35

What are 5 channels for delivering banking services?

Back 35

Branch Banking
Automated Teller Machines
Internet (Online) Banking
Call Centers
Mobile Banking

Front 36

What time period was covered by the Glass-Steagall Act and what did it do?

Back 36

1933-1999.
It Created three distinct industries
- Commercial Banking
- Investment Banking
- Insurance

Front 37

Commercial Bank

Back 37

a bank that mostly specializes in short term business credit, but also makes consumer loans and mortgages, and has a broad range of financial powers. Commercial banks are stock corporations whose primary purpose is to maximize shareholder wealth.

Front 38

What are the limitations of commercial banks and what do these limitations result in?

Back 38

Limitations on:
- Geographic Scope
- Products and Services
Results:
- Large number of small banks
- Limited products and services banks could offer
- Limited geographic area to operate

Front 39

What are the 5 goals and functions of bank regulation?

Back 39

- Ensure the Safety and Soundness of Banks
- Provide an Efficient and Competitive Financial System
- Provide Monetary Stability
- Maintain the Integrity of the Payments System
- Protect Consumers from Abuses

Front 40

Who supervises and examines banks?

Back 40

OCC and FDIC

Front 41

What 2 things do regulators issue after examination? Describe each.

Back 41

Memorandum of Understanding: formal regulatory document that sites violations and prescribes corrective action.
Cease and Desist Order (C&D) unlike MOU is a legal document. Orders stoppage of unfair practice under threat of legal action.

Front 42

What is the dual banking system?

Back 42

Individual states as well as federal government issue charters.

Front 43

What institutions issue what charters?

Back 43

- Office of the Comptroller of the Currency Charters national banks
- states charter state banks
- Office of Thrift Supervision
Charters federal savings banks and savings associations
- National Credit Union Administration Charters federal credit unions
- State Credit Union authorities charter state credit unions.

Front 44

What are the differences between state and National banks?

Back 44

National banks must obtain FDIC insurance and must join the fed. State banks must be regulated by both state and federal authorities.

Front 45

What are the key differences between commercial banks, savings institutions, and credit unions

Back 45

- Commercial Banks Specialize in short-term business credit
- Savings Institutions
Specialize in real estate loans
owned by stockholders as opposed to Mutual Ownership
“Qualified Thrift Lender” meaning they must hold 65% of their assets in housing related of other qualified assets to maintian their status.
- Credit Unions
“Common Bond” requirement meaning the union is owned by the members. Credit Unions are exempt from Federal Taxation.

Front 46

What is the farm credit system? What services does it provide?

Back 46

The FCS supports the needs of credit for agriculture, It provides
credit and other services to:
- Agricultural producers and farmer-owned agricultural and aquatic cooperatives
- Agricultural processing and marketing activities
- Rural housing
- Farm-related businesses
- Rural utilities
- Foreign and domestic companies involved in international agricultural
trade
- does not allow deposits
- Federal Farm Credt Banks Funding Corporation issues debt on behalf of teh Farm Credit Banks.

Front 47

What is the goal of the FDIC in terms of funding deposits?

Back 47

To fund 1.25% of deposits.

Front 48

What does the FDIC do with failed banks as the receiver of these banks?

Back 48

It liquidates or sells them to redeem deposits.

Front 49

Why won't the FDIC allow large banks to fail.

Back 49

Banks that are "too big to fail" are saved because depositors would not get back 100% of deposits.

Front 50

What general banking activities can a national bank be involved in?

Back 50

Branching
Consulting and financial advice
Corporate governance
Correspondent service
Finder activities
Leasing
Lending
Payment services
General trust activities, employee benefit accounts, and real estate brokerage
Insurance and annuities activities
Securities activities
Digital certification
Electronic bill payments
Electronic correspondent services
Electronic storage and safekeeping
Internet access service
Internet and PC banking
Software development and production

Front 51

What investment activities are permissible to national banks?

Back 51

Asset-backed securities
Bank stock
Bankers acceptances
Corporate bonds
Collateralized mortgage-related investments
Commercial paper
Money market preferred stock,
Trust preferred securities
State and local bonds

Front 52

What are the three shortcomings of bank regulation?

Back 52

- Does not prevent bank failure
- Cannot eliminate economic risk
- Does not guarantee that bank management wil make good decisions.