Flashcards in BHC Deck (77)
Three areas do we analyze when determining the impact the parent company has on the depository institutions in the organization?
Leverage, Cash Flow, Liquidity
The Federal Reserve can require a nondepository institution to transfer capital to a depository institution?
What financial areas of a nonbank subsidiary can an examiner analyze to help assess the financial condition of the nonbank subsidiary?
Capital, Earnings, Liquidity, Asset Quality
A nonbank subsidiary generates break?even earnings, which meet the purpose of the company. Due to the lack of profitability, an examiner intends to criticize earnings?
A material nonbank subsidiary has capital on par with its peers. Examiners conclude the nonbank has adequate capital. Do you agree?
The laundry list 225.28(b) of Regulation Y contains approved activities that are deemed closely related to banking and produce public benefits.
Most nondepository activities may be performed by a bank?
The BHC Act permits selected nondepository activity?
ABC Corporation has an asset securitization subsidiary, which is very small in relation to consolidated assets (less than .5% of capital). Should this subsidiary be inspected onsite?
Section 106(b) of the BHC Act
Prohibits a bank from conditioning the availability or price of one product or service (the tying product) on a requirement that the customer obtain another product or service (the tied product) from the bank or an affiliate of the bank.
"A subsidiary engaged in working out loans has material advances from the parent company, which it
cannot repay on a demand basis. The debt to equity ratio is low; therefore, the examiner will assess
funding as satisfactory. Should the examiner go further in this analysis?"
A BHC’s fixed contractual obligations consist of?
(1) interest expense; (2) lease and rental expense; (3) contractual longterm debt payments; and (4) preferred stock cash dividend payments.
Fixed Charge Coverage Ratio Metrics
If the FCCR exceeds 100%, fixed charges are covered by after‐tax cash earnings, a sign of cash flow strength. However, if the FCCR is less than 100%, the BHC must rely on external sources of cash or cash reserves to meet its contractual obligations.
Measures the ability of the BHC to pay common stock cash dividends from residual cash earnings?
Common Stock Cash Dividend Coverage Ratio
Common Stock Cash Dividend Coverage Ratio Metrics
If the CSCDCR exceeds 100%, the BHC's common stock dividends are covered by its residual cash earnings. However, if the CSCDCR is less than 100%, common stock cash dividends must be funded from other external sources or excess cash reserves.
This ratio measures the BHC's level of salaries and other expenses that are covered by management fees and other income from subsidiaries?
BHC Fees and Other Income Ratio
BHC Fees and Other Income Ratio Metrics
The best scenario for this ratio would be for it to approximate 100%. However, if the ratio exceeds 100%, it would suggest that BHC could be overcharging its subsidiaries for the services provided. If the ratio is less than 100%, it would suggest that the BHC is bearing some of the cost for the services it provides.
What is the major factor in determining the financial strength of a BHC?
Definition of a company per Reg Y?
Bank, Corporation, Association, Partnership, Business Trust, or Similar Organization. An individual cannot be a BHC!
BHC Act of 1956
prohibit monopolies in the banking industry and ensure the separation of banking and commerce by restricting BHC activities
1. Financial Flexibility 2. Economies of scale 3. non-bank activities
Primary responsibility of BHC to its sub
to serve as source of strength
BHCs are permitted to invest in and engage in activities that
are closely related to banking
Transactions affect the cash account and would appear on the BHC’s cash flow statement
Equity in Undistributed Earnings (subtract), Depreciation (add), Amortization of Prepaid Expenses (add), Impairment of Goodwill (add), Purchase of Treasury Stock
The level of debt has little impact on the cash flow of the organization?
Restrictive covenants typically enhance the cash flow position of a BHC by providing
additional opportunities to borrow funds that previously were unavailable?
Measures the BHC's ability to cover its operating expenses and dividends with operating income?
Cash Flow Match Ratio
Cash Flow Match Ratio Metrics
If the ratio exceeds 100%, operating income adequately covers operating expenses and the payment of preferred and common dividends. If the ratio is less than 100%, the BHC would have to rely on cash reserves or externally provided sources to meet its operating expenses and pay dividends on its preferred and common stock.
This ratio measures the BHC's ability to pay for FIXED contractual obligations with after‐tax income?
Fixed Charge Coverage Ratio