Mgmt & IRC

Question 1

What are the responsibilities of the Board?

Answer 1

1. Formulation of sound policies and bank objectives
2. Effective supervision of bank affairs
3. Promotion of bank welfare

Question 2

What are the responsibilities of management?

Answer 2

1. Implementation of the Board of Director’s policies

2. Day-to-day operations

Question 3

What is the most important characteristic of a director?

Answer 3

Personal integrity

Question 4

What are the primary causes of violations? (4)

Answer 4

1. Unfamiliarity
2. Negligence
3. Misinterpretation
4. Willful noncompliance

Question 5

Directors are held liable for?

Answer 5

1. Breach of Trust
2. Misappropriation of funds -
3. Fraud - intentional deception resulting in injury to another, i.e. false statements, conceals or omits material facts.
4. Ultra Vires Acts – actions beyond the powers of a corporation, as stated in charter or laws of state where it is incorporated.
5. Negligence resulting in loss- failure to exercise degree of care prudent persons would exercise under similar circumstances

Question 6

What are the concerns of a “one man bank” situation?

Answer 6

1. May deprive the bank competent management

2. Harder for regulators to address deficiencies.

Question 7

What are the three factors for an effective Management Information System?

Answer 7

1. Quality
2. Quantity
3. Timeliness

Question 8

What is co-insurance based upon?

Answer 8

Replacement cost. Fire insurance is subject to this clause. Requires insured to maintain insurance equal to a certain percentage, usually 80%, of the replacement cost.

If replacement cost of building = 100M and insurance coverage is only 60M, then only 75% of loss will be covered (60M/80M). Therefore, with a 50M loss, the property would be covered to $37.5M

Question 9

What does single interest insurance coverage cover?

Answer 9

Covers losses to uninsured vehicles pledges as collateral for an extension of credit.

Question 10

What is errors & omissions insurance?

Answer 10

Insurance for inadvertent or expired insurance – does not cover an error in judgment.

Question 11

What are the basic elements of an internal control system? Org Structure

Answer 11

Organization Structure
 Directors’ Approvals – limitations imposed by BOD with regard to authority levels
 Segregation of Duties – participation of two or more persons or departments in a transaction
 Rotation of Personnel – planned and unannounced rotation of personnel duties
 Sound Personnel Policies – should address hiring, training, and evaluation
 Vacation Policies – Officers and employees should be absent from their duties for an uninterrupted two weeks

Question 12

What are the basic elements of an internal control system? Accounting

Answer 12

Accounting Procedures
 Operating Responsibilities – designed to facilitate preparation of internal reports that correspond with duties
 Current Records – Records should be updated daily
 Subsidiary Control Accounts – Subsidiary ledger accounts (loans, deposits) should be kept in balance with GL
 Audit Trail – Records and systems should be designed to trace a given item as it passes through the books
 Pre-numbered Documents – Sequentially numbered instruments should be used whenever possible
 Accounting Manual - User guides should ensure that all like transactions are handled uniformly

Question 13

What are the basic elements of an internal control system? Protection of Assets

Answer 13

Protection of Assets
 Cash Control - Tellers should have their own funds to which they have sole access
 Joint Custody - Two or more equally accountable for the physical protection of certain items or records
 Dual Control - Dual Control- the work of one person is verified or approved by another.
 Employee Hiring Procedures - Credit and previous employment should be checked by management
 Emergency Preparedness - Written plans and off-premise storage of backup files should be maintained.
 Reporting Shortages - Procedures for prompt reporting of shortages should be developed.

Question 14

What are the basic elements of an internal control system? Audit Program

Answer 14

Audit Program - Internal Audit
 Structure
 Management, Staffing and Audit Quality
 Scope
 Communication
 Contingency Planning

Question 15

What should the examiner focus on when evaluating internal controls?

Answer 15

Detection, Exposure, and Correction of weaknesses in the
• Banks records,
• Operating systems
• Auditing procedures

Question 16

What are some methods that holding companies may use to put pressure on its subsidiary banks?

Answer 16

1. Payment of excessive dividends
2. Pressure subsidiary banks to invest in high-risk assets
3. Purchase/trade high risk assets for lower risk assets
4. Purchase unnecessary services from affiliates
5. Payment of excessive management or other fees

Question 17

What is the principal benefit of bank holding companies?

Answer 17

The tax benefit from issuing debt at the parent company level and concurrently creating equity at the bank level. The Federal Reserve also permits treatment of Trust Preferred Stock as Tier 1 Capital for regulatory purposes.

Question 18

What is a chain banking group?

Answer 18

Two or more banks or savings and loan associations and their holding companies which are directly or indirectly controlled by an individual or a company acting alone or in concert with any other individual or company. Mutually shared risks include: poor loan participation purchases, common deficiencies in lending/investment policies, domineering or absentee ownership, and insider abuse or other self serving practices.

Question 19

What are types of blanket bond liability?

Answer 19

1. Claims Made/Loss Sustained – insurance company is liable only to the extent of coverage for losses sustained during the period the bond was in force.
2. Discovery Basis – insurance company liable up to full amount of the policy for losses covered by terms of the bond discovered while the bond is in force, regardless of the date on which the loss was actually sustained.

Question 20

Within what time period should losses be reporting to the bonding company?

Answer 20

Within 30 days of discovery.

Question 21

What are some other clauses within the blanket bond?

Answer 21

A. Fidelity - Insures against dishonest or fraudulent acts by officers and employees, attorneys, and nonemployee data processors. If bank refuses to get coverage, FDIC can force place and add cost to deposit insurance coverage.
B. On Premises - Loss of property from robbery, misplacement, mysterious disappearance, etc.
C. In Transit - property is covered in transit if in the custody of a person acting as messenger of the bank
D. Forgery/Alteration (optional) – includes checks, drafts, acceptances, and other negotiable instruments
E. Securities (optional) – if the insured, in good faith, acquired, sold delivered, or extended credit on the faith of the security
F. Counterfeit Currency – receipt of any counterfeit money in US, Canada, or any foreign country where bank has a branch

Question 22

If the legal lending limit of the bank is $200M, and the bank has three notes for $101M each, is only the last note a violation?

Answer 22

Yes. Until paid in full by the borrower, the last note may be a legal liability of the approving directors. Citation of excess loan violations is to be restricted to those lines currently in excess of the banks legal loan limit.

Question 23

What are some UFIRS considerations for management?

Answer 23

• Level and quality of oversight by the BOD and management
• The ability of the BOD and management to plan for risks from new activities or changing business conditions
• The adequacies of internal policies and controls
• The accuracy, timeliness and effectiveness of management information and risk monitoring systems’
• The adequacy of audits
• Compliance with laws and regulations
• Responsiveness to recommendations from auditors and supervisory authorities
• Management depth and succession
• The extent the Board is affected by/susceptible to dominant influence
• Reasonableness of compensation policies
• Willingness to serve the legitimate banking needs of the community
• Overall performance and risk profile of the institution