Chapter 12: Irregularities in Banking (Sections 12.1–12.5) Flashcards
(5 cards)
What is looting in a banking context?
When a bank’s managers or owners borrow heavily and pay themselves large early dividends—often by exploiting rate‐cycle mismatches—and then default once creditor recovery is unlikely.
Example: A thrift fund buys long‐dated bonds with cheap short‐term debt, pockets the early spread, and then lets the bond roll off when the short rate falls.
What is the walk-away option implicit in real-asset loans?
Borrowers can surrender collateral (like a house) instead of repaying debt, effectively holding an option on asset prices.
Example: During the U.S. housing boom, many subprime mortgages were underpriced because lenders neglected the value of borrowers’ ability to default strategically when home prices fell.
How does evergreening hide loan losses?
Banks extend or restructure non-performing loans—treating them as ongoing—rather than writing them off, to avoid breaching capital rules and masking true asset quality.
Example: A corporate borrower misses interest payments but gets a new facility with fresh terms, keeping the debt “performing” on the books.
What is the “crying wolf” problem in money laundering reports?
Because banks fear fines for missing illicit flows, they may over-report benign transactions, overwhelming authorities and annoying honest customers; alternatively, they may under-report to avoid false‐alarm costs.
Example: In the Danske Bank scandal, failures both to report large suspicious flows and to efficiently process genuine alerts led to massive compliance breakdowns.
What is Open Banking, and how does it help curb irregularities?
A regulatory regime forcing banks to share customer-authorized data via secure APIs with fintechs and other providers, improving fraud detection, credit scoring, and transparency.
Example: Under Europe’s PSD2 rules, third-party apps can flag unusual payment patterns across multiple accounts faster than legacy banks, helping spot laundering or fraud.
