Must Know 4.3 4.5 23A&B Flashcards
(24 cards)
What is an affilliate?
For purposes of this Act the term “affiliate” means any company that controls, is controlled by, or is under common control with another company. (BHC act) Section 3(u) of the FDI Act defines “institution affiliated parties” to include the controlling stockholder of an insured depository institution, or any shareholder or person who participates in the conduct of the affairs of an insured depository institution, or any independent contractor who participates in certain acts which cause significant adverse affect on an insured depository institution. (Manual)
The definition of a Bank Holding Company (BHC Act)
“bank holding company” means any company which has control over any bank or over any company that is or becomes a bank holding company by virtue of this Act. 2) Any company has control over a bank or over any company if—
(A) the company directly or indirectly or acting through one or more other persons owns, controls, or has power to vote 25 per centum or more of any class of voting securities of the bank or company;
(B) the company controls in any manner the election of a majority of the directors or trustees of the bank or company; or
(C) the Board determines, after notice and opportunity for hearing, that the company directly or indirectly exercises a controlling influence over the management or policies of the bank or company.
(3) For the purposes of any proceeding under paragraph (2)(C) of this subsection, there is a presumption that any company which directly or indirectly owns, controls, or has power to vote less than 5 per centum of any class of voting securities of a given bank or company does not have control over that bank or company.
Definition of conclusive control under the Bank Holding Company Act
o Directly or indirectly owns, controls, or has power to vote 25% or more of any class of voting securities
o Controls, in any manner, the election of a majority of directors
o FRB determines that company exercises a controlling influence over management or policies
Definition of presumptive control under the Bank Holding Company Act
o Owns, controls, or has power to vote more than 5% of voting securities of the bank or holding company IF one or more of the company’s directors, trustees, partners, or officers or employees with policy-making functions, serves in any of these capacities with the bank or holding company, AND no other person owns, controls, or has power to vote 5% or more of voting securities of the bank or holding company
o Owns, controls, or has power to vote more than 5% of voting securities of the bank or holding company IF additional voting securities are owned, controlled, or held with power to vote by individuals who control 25% or more of any voting securities, who are directors, officers, trustees, or partners of the company, or members of their immediate families (spouse, children, grandchildren, parents, step-relatives) such that the total of the individual’s and company’s holdings are 25% or more
Company A owns 6% of Bank A; director of Company A owns 10% of Bank A, and director’s grandchild owns 10% of Bank A; Company A has presumptive control of Bank A
o Company enters into agreement or understanding with bank or bank holding company pursuant to which company or any of its subs exercises significant influence over general management or overall operations of the bank or holding company
Ownership, control, or power to vote less than 5% of voting securities of bank or company is evidence of presumption of non-control
TRUE
The ways holding companies can place undue pressure on subsidiary banks:
o Payment of excessive dividends
o Pressure to invest in high risk assets to increase asset yields
o Pressure to purchase low quality assets from the holding company, or trade high quality assets for lower quality assets
o Purchase unnecessary services from affiliates
o Paying excessive management fees or other fees to the holding company
Fees paid by banks to holding companies should have direct relationship to value of actual goods/services received consistent with current market values; should not be based on resources, deposits, or earnings of the bank
TRUE
Holding excessive debt at the holding company level may result in pressure on the subsidiary bank or banks to upstream additional dividends
TRUE
The double leverage ratio
Equity of the subsidiary (or combined equity of all subsidiaries if more than one) divided by equity of the holding company
The fixed charge coverage ratio
Holding company operating income, less operating expenses (backing out interest and tax expenses), divided by holding company’s interest expense
Cash flow match
Operating income plus/minus tax credit/expense, divided by operating expenses (including interest) plus shareholder dividends plus CPLTD
Requirements for oversight of “dual” employees
. A formal written employee sharing agreement should be established to define the employment relationship between the banking entity and affiliate. The following factors should be addressed:
.The agreement needs to be independently reviewed by the bank’s board of directors to ensure that it is fair and in the best interest of the insured bank.
• Compensation arrangements need to be clearly delineated to ensure they are equitable for both the bank and affiliated entity.
• The location where the dual employee is to perform duties needs to be established and detailed, along with reporting and authority.
• The agreement should require dual employees to avoid conflicts of interest. Additionally, the agreement should state that dual employees or officers must act in the best interest of the bank while performing any activities on behalf of the bank.
• Sanctions for noncompliance should be contained in the bank’s agreement.
• The agreement should provide for a periodic determination concerning the status of a dual-employee and the factors to be considered for terminating the dual-employee relationship in favor of either full-time bank or affiliated entity employment.
• Authority for managing the dual-employee relationships should be clearly assigned.
• Lines of authority for dual employees should be established. While dual employees may have other responsibilities, they must also report through appropriate lines of authority within the banking institution. The dual employee’s bank responsibilities and decision-making should take precedence over any affiliate responsibilities. All activities conducted on behalf of the bank must be subject to appropriate review and authorization by bank officers,
The principal benefit of establishing a bank holding company
the tax benefit derived from issuing debt at the HC level while simultaneously creating equity at the bank level
Anti-tying provisions
a bank cannot condition the availability or price of any products or services upon the customer obtaining from or providing to the bank or an affiliate a product or service; also, cannot tie it to requirement that customer does NOT obtain good or service from a competitor
o Does not preclude bank from conditioning availability or price of a product/service on the customer obtaining a traditional bank product from the bank or an affiliate, where traditional bank product is defined as loan, discount, deposit, and trust service.
Definition of a chain banking organization
A chain banking organization is defined as a group (two or more) of banks or savings and loan associations and/or their holding companies which are controlled directly or indirectly by an individual or a company acting alone or through or in concert with any other individual or company. Control is defined as: ownership, control or power to vote 25 percent or more of an organization’s voting securities; the power to control in any manner of the election of a majority of the directors of an organization; or the power to exercise a controlling influence over the management or policies of an organization.
Single-bank holding companies or several banks owned by a single holding company are NOT considered chain banking organizations
TRUE
The four basic causes of violations, and which of the four is considered the most serious
Although the possible causes of violations of laws and regulations may be many and diverse, infractions most often result from management’s unfamiliarity with governing statues or regulations, negligence, misinterpretation of statutory or regulatory requirements or prohibitions, and/or willful noncompliance. Willful noncompliance is the most serious of all the possible causes of violations and needs to be thoroughly investigated by examiners.
Why all violations should be termed “apparent” in the ROE
In the Violations of Laws and Regulations schedule, examiners report and document situations which appear to be contraventions of law or regulation. However, since examiners are not final adjudicators, findings must be qualified by using the expression “apparent violation” to describe the situation, regardless of the certainty upon which the judgment is founded.
What information needs to go into an apparent violation citation:
o Names of director who approved apparently legal transactions and dates of approval
o Names of dissenting directors
o Apparent cause of violation
o Management’s comments/commitments as to corrective action
o If violation was corrected during exam, this should be indicated
When citing legal lending limit violations, only the note(s) which created the excess constitute the illegal extension
True. Example: bank’s legal lending limit is $500M. Bank extends LOC to customer in amount of $250M, then later extends another for $200M, then another for $100M; only the final $100M note is considered illegal
An illegally held or acquired asset is still illegal at its original amount whether or not it is fully or partially charged-off of the bank’s books
True
What types of violations are NOT cited in the S&S ROE?
federal criminal code violations, compliance regulation violations
Contraventions of policy statements should be included on the Violations page if the EIC believes there is a legitimate S&S concern
TRUE
The number and severity of violations should be reflected in the Management component rating
TRUE
