CAPITAL Flashcards

Question

2.1 CAPITAL | What is a 1 rating?

Answer 1

• Strong capital levels relative to the institution's risk | profile.

Answer 2

• Satisfactory capital levels relative to the financial | institution's risk profile.

Answer 3

• Less than satisfactory levels of capital that do not fully support the institution's risk profile; • Capital needs for improvement, despite capital level exceeding the minimum regulatory and statutory requirements.

Answer 4

• Deficient level of capital; • Based on the institutions risk profile, viability of the institution may be threatened; • May require assistance from shareholders or other external sources of financial support.

Answer 5

• Critically deficient levels of capital; • Viability of the institution is threatened; • Requires immediate assistance from shareholders or other external sources of financial support.

Answer 6

* Absorb losses * Promote Public Confidence * Restrict Excessive Asset Growth * Provide Protection to Depositors and the DIF

Answer 7

• Common stockholders’ equity + • Noncumulative perpetual preferred stock + • Minority interests in equity capital accounts of consolidated subsidiaries MINUS • Disallowed goodwill and other intangibles besides MSAs, NMSAs, and PCCRs • Cumulative change in FV of liabilities accounted for under FV option • Non-eligible cred-enhancing interest-only strips (AFS Securities gains/losses)

Answer 8

PART 1 OF TIER 1 MINUS • Non-eligible credit-enhancing I/O strips - limited to 25% of Part 1 • Disallowed MSAs, NMSAs, and PCCRs - Allowable is the lesser of 90% of FV or 100% of remaining amortized BV - Limited in aggregate to 100% of Part 1 - Sublimit on MSA, NMSA, PCCR is 25% of Part 1 • Identified losses (other than loans) • Investments securities subsidiaries subject to 12 CFR Part 362 • Investments in financial subsidiaries • Ineligible deferred tax assets - Allowable is the lesser of 10% of Part 1 or amount expected to be realized within one year

Answer 9

• ALLL up to 1.25% of gross RWA • Cumulative perpetual preferred stock, Long-term preferred stock (orig. mat. at least 20 years) + related surplus - Discounted 20% per year after mat. falls below five years • Perpetual preferred stock where dividend is reset periodically based in whole or part on bank's credit rating • Hybrid capital instruments including mandatory convertible debt • Term sub. debt & Intermediate-term preferred stock (orig. mat. 5-20 years and not redeemable at option of holder prior to mat., except prior approval of FDIC) - Discounted 20% per year after mat. falls below five years - Limited to 50% of Tier 1 Capital • 45% pre tax net unrealized holding gains on AFS equity securities

Answer 10

Limited to 100% of Tier 1 capital

Answer 11

• Tier 1 + Tier 2, • MINUS investments in banking and finance subsidiaries that are not consolidated for regulatory purposes

Answer 12

* Common Stock and related surplus * Surplus * Retained Earnings (undivided profits) * Disclosed capital reserves (rarely seen) * AOCI Other Equity Capital Components

Answer 13

• Intermediate-term preferred stock & qualifying term subordinated are limited to 50% of Tier 1 • Aggregated amount of items above (excluding convertibles) and (including related surplus) includable in Tier 2 is limited to 50% of Tier 1

Answer 14

• Max amount of Tier 2 capital is limited | to 100% of Tier 1 Capital

Answer 15

• Deduct amount of Loss for items other than loans and leases from Tier 1 Capital • Deduct the amount of Loss on loans and leases from the ALLL in the calculation of Tier 2 Capital • If the ALLL is inadequate, estimate the amount of provision expense needed (after loan losses are deducted) to make the ALLL adequately funded • Subtract the needed provision expense from Tier 1 Capital and add to Tier 2 Capital • An adjustment from Tier 1 to Tier 2 for an inadequate ALLL should be made only when the amount is considered significant

Answer 16

• Cannot be redeemed at the option of the holder (perpetual) • Entitles holders to preference or priority over owners of common stock for dividends or asset distribution in case of liquidation (preferred) • No stated maturity (perpetual) • Issuer must have ability and legal right to defer or eliminate dividends (noncumulative) • Dividends do not accumulate, if not paid out (noncumulative)

Answer 17

The allowable combined amount of term subordinated debt and intermediate-term preferred stock (including any related surplus) that can be treated as Tier 2 capital is limited to 50 percent of Tier 1 capital.

Answer 18

• 1-2 years 20% • 2-3 years 40% • 3-4 years 60% • 4-5 years 80% • > 5 years 100% • The less than 5 year rule also applies to long-term preferred stock with an original maturity of 20 years or more. The entire amount is includible in Tier 2.

Answer 19

The lesser of: • 25% of Tier 1 Capital existing prior to the deductions of any disallowed MSA's, PCCR's, NMSA's, CEIO's, DTA's, and any NFEI, or • Sum of face value of all CEIOS's

Answer 20

• Tier 3 Capital is only used when the market risk risk-based capital rules apply; • Insured SNM banks whose trading activity (on a worldwide basis) equals 10% or more of total assets, or $1 billion or more

Answer 21

• Value-at-Risk Model to estimate the maximum amount the bank’s covered positions could decline during a fixed holding period. • Risk Management System which defines a risk control unit that reports directly to senior management and is independent from business trading units, and • Internal Risk Measurement Model - integrated into the daily management process, and must have policies and procedures that identify appropriate stress tests and back tests, which the bank must conduct.

Answer 22

• Fully paid up; • Original maturity of at least two years; • Does not contain and is not covered by any covenants, terms, or restrictions that are inconsistent with safe and sound banking practices • Unsecured subordinated debt; • Includes a lock-in clause precluding payment of either interest or principal (even at maturity) if the payment would cause the issuing bank's risk-based capital ratio to fall or remain below the minimum required under appendix A of this part; • Not redeemable before maturity without prior approval by the FDIC.

Answer 23

• ORE reserves are not a component of capital; but, they can be used to reduce the amount of loss on ORE that is deducted from Tier 1 Capital • Liabilities not shown on the banks books should be deducted from Tier 1 capital and include significant amounts of unpaid bills, material deferred tax liabilities, contingent liabilities classified Loss, losses from criminal violations, account shortages

Answer 24

• If less than 3% if the bank has a composite 1 rating and is not anticipating or experiencing any significant growth, and has well diversified risk, including IRR, excellent AQ, high liquidity, and good earnings • All other banks must have Tier 1 Leverage Capital of at least 4%

Answer 25

• Qualifying total capital to risk-weighted assets must be at least 8%, at least half of which (4%) must be comprised of Tier 1 capital. • If TRB capital falls below 8%, a contravention of Appendix to Part 325 must be cited

Answer 26

• Less than minimum will result in a violation of Part 325, Unsafe and Unsound Practice, unless entered into and in compliance with written agreement or submitted and in compliance with an FDIC-approved capital plan • Applications requiring FDIC approval will be automatically denied

Answer 27

Prompt Corrective Action (PCA) pursuant to Section 38 of the FDI Act is used measure capital and in determining the supervisory actions authorized by Section 38

Answer 28

Management must file a written capital restoration plan with the FDIC within 45 days of the date the bank receives notice of UC, SU, or CU.

Answer 29

• Less than minimum 2% will result in a violation of Part 325, Unsafe and Unsound Condition • Subject to 8A proceedings unless bank has entered into and in compliance with written agreement with FDIC to increase Tier 1 to appropriate level

Answer 30

``` • Increased earnings retention > Raise earnings or lower dividends/expenses • Sell additional capital stock > Shareholder dilution • Reduce asset growth ```

Answer 31

A bank shall be deemed to have been notified of its capital levels and its capital category as of the most recent date of: • Consolidated Report of Condition and Income (Call Report); • Final report of examination is delivered to the bank; or • Written notice is provided by the FDIC to the bank of its capital category for purposes of section 38 of the FDI Act and this subpart or that the bank's capital category has changed as provided in § 325.103(d).

Answer 32

Category I Contingent Liabilities - will result in a concomitant increase in bank assets if converted to actual liabilities • Unfunded Commitments • Letters of credit Evaluated for credit risk - if assigned a Loss, then Tier 1 is adjusted "Assets Other than Loans Classified Loss"

Answer 33

Category II Contingent Liabilities - a claim on assets that arises without an equivalent increase in assets • Lawsuits / litigation • Trust activities • Consigned items • Collection items • Reserve premium accounts Evaluated based on the probability that the contingency will become a direct liability

Answer 34

• Refers to Category II • An existing condition, situation, or set of circumstances that involves uncertainty as to possible loss that will resolved when one or more future events occur or fail to occur • Included on Capital Calculations page as Contingent Liability with Type I's

Answer 35

• Refers to Category II • Contingent liability in which there is substantial and material risk of loss • Consists soles of Type II, • Listed separately on the Capital Calculations Page Memo Section

Answer 36

• Refers to Category II • Should be recognized if it is probable that an asset has been impaired or a liability incurred as of the exam date & the loss can be reasonably estimated • Deducted from capital in the line "Other Adjustments to from) Tier 1 on Capital Calculations page • Amount of estimated Loss is not deducted from assets

Answer 37

• A final order issued to a SNM bank that fails to maintain capital at or above the minimum leverage capital requirement. • Equivalent to a C&D order (enforceable in the same manner and context) • Are issued by the FDIC's Board or Directors (designee)

CAPITAL Flashcards

(61 cards)