Must Knows - 4.1 and 4.4, 337, 348, and 359 Flashcards
(40 cards)
Quality of management is the single most important element in the successful operation of a bank (T or F)
True
The general responsibilities of the Board
formulating policies and objectives, effective supervision, ensuring general welfare versus executive management implementation of Board policies and objective in day-to-day operations
The qualifications/characteristics a director should bring to the office
the most important qualification is personal integrity. Aside from the legal qualifications, each director should bring to the position particular skills and experience which will contribute to the composite judgment of the group. Directors should have ideas of their own and the courage to express them, sufficient time available to fulfill their responsibilities, and be free of financial difficulties which might tend to embarrass the bank.
The 9 powers/duties/responsibilities of directors as described in the Manual, including what each entail
- Regulating the manner in which all business of the bank is conducted – A clear framework of objectives and policies within which executive officers operate and administer the bank’s affairs.
- Corporate planning – planning, organizing, and controlling are the fundamental dimensions of management that set the future direction of the bank.
- Appointing, dismissing at pleasure, and defining the duties of officers – select and appoint executive officers who are qualified to administer the bank’s affairs effectively and soundly, and to dispense of officers who cannot.
- Honestly and diligently administering the affairs of the bank – conducting the affairs of the bank.
- Observance of applicable laws – ensure management is aware of laws and rags and develop a system to monitor for compliance, and correct and issues quickly.
- Avoid self-dealing practices – must place their Board duties above personal concerns.
- Paying dividends – payment can take place when the bank is adequately capitalized.
- Appropriate internal control and adequate auditing – develop a sound framework of internal controls and a reliable and objective audit function.
- Personnel administration – recruiting, training, and personnel activities
How the Board should conduct its meetings
In a businesslike and orderly manner with regular attendance
The 5 legal liabilities of directors (Board Meetings are no FUN)
- a breach of trust;
- negligence which is the proximate cause of loss to the bank;
- ultra vires acts, or acts in excess of their powers;
- fraud;
- and misappropriation or conversion of the bank’s assets.
Examples of actions/inactions that have been found to constitute director negligence
An attitude of general indifference to the affairs of the bank, such as failing to hold meetings as required by the bylaws, obtain a statement of the financial condition of the bank, or examine and audit the books and records of the bank to determine its condition.
• Failure to heed warnings of mismanagement or defalcations by officers and employees and take appropriate action.
• Failure to adopt practices and follow procedures generally expected of bank directors.
• Turning over virtually unsupervised control of the bank to officers and employees relying upon their supposed fidelity and skill.
• Failure to acquaint themselves with examination reports showing the financial condition of a company to which excessive loans had been made.
• Assenting to loans in excess of applicable statutory limitations.
• Permitting large overdrafts in violation of the bank’s internal policies or permitting overdrafts to insiders in violation of law.
• Representing certain assets as good in a Report of Condition when such assets were called to the directors’ attention as Loss by the primary regulator and directions were given for their immediate collection or removal from the bank.
directors with classified loans should be required to strengthen the loan to a Pass or resign from the Board
True
That loans to Executive Officers or Principal Shareholders which are classified should receive special oversight by the Board or a Board committee with a view toward limiting further exposure and moving aggressively to secure/collect any exposed balances
True
The seven actions bank’s must take when allowing nonbanking activities to take place on bank premises
- bank’s directors and shareholders should be fully informed regarding the nonbanking activity conducted on bank premises.
- The operation should be approved by the bank’s shareholders, and expenses incurred by the bank in connection with these operations formally approved by the board of directors annually
- The bank should be adequately compensated for any expenses it incurs in furnishing personnel, equipment, space, etc. to this activity.
- It is recommended that bank management disclose completely to its bonding company any such nonbanking activity conducted on its premises. Management would also be well advised to obtain acknowledgement from the bonding company that such activities do not impair coverage under the fidelity bond.
- Finally, the conduct of nonbanking activity must be in conformance with applicable State statutes and regulations.
How “One Man Banks” arise and the two potential dangers of such banks
“One Man Bank” wherein the institution’s principal officer and stockholder dominates virtually all phases of the bank’s policies and operations. Often this situation stems from the personality make-up of the principal officer or ownership control, and it is usually abetted by an apathetic board of directors. Many bank directors when first elected have little or no technical knowledge of banking and feel dependent upon others more knowledgeable in banking matters.
- incapacitation of the dominant officer may deprive the bank of competent management, and because of the immediate need to fill the managerial void, may render the bank vulnerable to dishonest or incompetent replacement leadership.
- problem situations resulting from mismanagement are more difficult to solve through normal supervisory efforts because the bank’s problems are often attributed to the one individual that dominates the bank.
Considerations when reviewing the control environment of “One Man Banks” (manual lists 15)
- An appropriate segregation of duties and responsibilities is achieved or alternative actions are taken to mitigate the level of control exercised by the one individual.
- Director involvement in the oversight of policies and objectives of the bank is at an appropriate level.
- A diverse board membership provides the bank with an assortment of knowledge and expertise, including, but not limited to, banking, accounting, and the major lending areas of the bank’s target markets.
- There are a sufficient number of outside and independent directors.
- Committees of major risk areas exert a proper level of function, responsibility, and influence, and the value of the committees is exhibited in the decision-making process.
- A proper level of independence has been achieved for board committees of major risk areas, including, but not limited to, audit committees.
- An adequate audit committee has been established with only, or at least a majority of, outside directors.
- A need exists for the performance of annual financial audits by an independent certified public accounting firm.
- A qualified, experienced, and independent internal auditor is in place at the bank.
- A proper segregation of the internal audit function is achieved from operational activities.
- An appropriate rationale was established regarding changing a bank’s external auditors, independent of oral discussions with bank management, including, but not limited to, a review of the audit committee minutes or a review of auditor notifications.
- An adequate written code of conduct and ethics and conflicts of interest policies have been established.
- A need exists for the bank’s board to perform and report on an annual conflicts of interest and ethics review.
- A need exists for a bank to engage outside consultants to conduct an external loan review.
- A proper segregation of the internal loan review process is established.
Characteristics of advisory directors
the honorary director attends board meetings as desired and offers advice on a limited participation basis, but has no formal voice or vote in proceedings, nor the responsibilities or liabilities of the office, except where there may be a continuing connection with a previous breach of duty as an official director.
The characteristics of Pure Risk versus Speculative Risk
pure risks that are characterized by chance occurrence and may only result in a financial loss, as opposed to a speculative risk which affords the opportunity for financial gain or loss.
The 3 major categories of Pure Risk
Such pure risks are separated into three major exposure categories: liability, property, and personnel.
The 3 stages in the risk management process and characteristics of each
There are three stages in the risk management process: risk identification and analysis, risk control, and risk treatment. Identification and analysis requires a review of all aspects of the bank’s present and prospective operations to determine where the bank is exposed to loss, including consultation with a reliable insurance professional. Risk control is primarily dependent upon the strength of the bank’s internal controls, policies and procedures. Risk treatment refers to choosing the appropriate steps or methods to deal with a particular risk.
Risks which carry the potential for catastrophic or significant loss should not be retained, if avoidable
True
That the FDIC has the right to purchase Fidelity Insurance for institutions that do not have it and to add the cost to their deposit insurance assessments
True
Alternative arrangements in lieu of the usual Fidelity Insurance bond are not acceptable
Generally True
Examination reports should not be provided to insurance carriers (T or F)
TRUE, but the bank can submit an application requesting permission.
The differences between External and Internal Hazards and the general methods of protecting against each
External hazard includes the possibility of dishonest, fraudulent, or criminal acts committed against the bank and its employees by the general public. Robbery, burglary, and forgery are the predominate acts. Banks endeavor to guard against losses from these sources by maintaining vaults and safes, reliable alarm systems, and other security devices (criteria are outlined in Part 326) Internal hazard, which poses a far greater risk, deals with the possibility of defalcations by the bank’s own personnel. Banks should try to protect themselves against this hazard by maintaining clear records and effective systems of internal routine and controls.
The difference between single loss limit of liability and aggregate loss limits of liability
The single loss limit applies to individual claims, whereas the aggregate limit applies to the total of all loss recoverable under the bond.
The six main clauses of a standard blanket bond (A through F), what they cover, and which are optional
- Clause (A) – Fidelity - Covers losses as a result of dishonest or fraudulent acts by officers and employees, attorneys retained by the bank, and non-employee data processors while performing services for the insured.
- Clause (B) - On Premises - Loss of property (as defined in the bond) resulting directly from (a) robbery, burglary, misplacement, mysterious unexplainable disappearance and damage thereto or destruction thereof, or (b) theft, false pretenses, common law or statutory larceny, committed by a person present in an office or on the premises of the insured, while the property is lodged or deposited within offices or premises located anywhere.
- Clause (C) - In Transit - Identical coverage as that provided in Clause (B), except that the property is covered while in transit.
- Clause (D) - Forgery or Alteration - Optional coverage for loss through forgery or alteration of, on, or in checks, drafts, acceptances, and other negotiable instruments, as specified, which are received by the bank either over-the-counter or through clearings. Items received as a transmission through an electronic funds transfer system are not covered.
- Clause (E) – Securities - Optional coverage for loss resulting from the insured having, in good faith, for its own account or for the account of others, acquired, sold or delivered, or given value, extended credit or assumed liability, on the faith of any original security, title document or agreement (as delineated in the bond).
- Clause (F) - Counterfeit Currency - Covers loss resulting from the receipt by the insured in good faith, of any counterfeit or altered money of the United States or Canada or any foreign country in which the insured maintains a branch office.
Loss caused by a director is generally excluded from coverage under Clause A
Unless the director is also a salaried employee of the bank.
