Commercial Bank Management Test 1
Assets held by medium banks
11%
Assets held by small banks
2%
Assets held by large banks
87%
Bank Holding Companies
A Corporation Chartered for the Purpose of Holding the Stock of One or More Banks Control of a bank is Assumed When 25% or More of the Stock is Owned Must Get Approval from Federal Reserve Board to Control a Bank One-Bank Holding Companies vs. Multibank Holding Companies
Federal Funds and Reverse Repurchase Agreements
A Type of Loan Account Generally Overnight Loans Federal Funds Sold - Funds Come from the Deposits at the Federal Reserve Reverse Repurchase Agreements - Bank Takes Temporary Title to Securities Owned by Borrower
Memorandum of Understanding
A statement developed between two parties, stating mutual commitments and expectations
Cash Assets
Account is Called Cash and Deposits Due from Bank Includes: Vault Cash Deposits with Other Banks (Correspondent Deposits) Cash Items in Process of Collection Reserve Account with the Federal Reserve Sometimes Called Primary Reserves
FDIC Act of 1935
Addressed the issues left out of the Glass-Steagall Act Gave the FDIC the Power to Examine Banks and Take Necessary action
Competitive Equality in Banking Act (CEBA) 1987
Allowed Creation of Special Bridge Banks for Failed Institutions Bridge Banks Are Special National Banks Operated by the FDIC Bridge Banks Created When Bank is Essential to the Community
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
Allows BHCs to Acquire Banks Anywhere in the U.S. Allows BHCs to Convert Banks to Branches - June 1997 States Can 'Opt Out' and Not Allow BHCs to Convert to Branches States Can 'Opt In' Early Limits Deposits of One BHC to 10% Nationwide and 30% Within One State
Uniform Bank Performance Report
An analytical tool create for bank supervisory examination and management.
Report of Condition
Balance SheetThe Balance Sheet of a Bank Showing its Assets, Liabilities and Net Worth at a given point in time May be viewed as a list of financial inputs (sources of funds) and outputs (uses of funds)
Social Responsibility Act of 1987 and 1991
Banks Must Disclose Full Terms on Deposit and Savings Accounts
Organizations in the Federal Reserve
Board of Governors Federal Open Market Committee 12 Federal Reserve Banks Member Banks
Pros of a National Charter
Brings Added Prestige Due to Stricter Standards Which May Bring Larger Deposits In Times of Trouble, Technical Assistance May Be Better Federal Rules Can Preempt State Laws National Banks Join the Fed - Regulated by OCC
Open Market Operation
Buying & selling government securities to change the supply of money
Social Responsibility Act of 1974
Cannot be denied a loan based on age, sex, race, national origin or religion
Social Responsibility Act of 1977
Cannot discriminate based on the neighborhood in which borrower resides
CAMELS
Capital Asset Quality Management Quality Earnings Quality Liquidity Sensitivity to Market Risk
Services offered by banks
Carrying out currency exchange discounting commercial notes and making business loans offering saving deposits safekeeping of valuables supporting government activities with credit offering checking accounts offering trust services
European Central Bank
Central Policy is to Maintain Price Stability Structure is Similar to the Federal Reserve Eleven Member Nations
Specialization of Credit Unions
Common bond requirement and exempt from federal taxation
Fundamental Functions of Federal Reserve
Conduct monetary policy Provide and maintain the payments system Supervise and regulate banking operations
Garn-St. Germain Act of 1982
Continued the Deregulation of DIDMCA Created Money Market Deposit Account FDIC Could Arrange Mergers Across State Lines if Needed Loan Limits were Liberalized Banks in Need of Capital Could Get It From the FDIC
Economies of Scope
Cost savings from leveraging core competencies or sharing related activities among businesses in a corporation
Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) 1989
Created in Response to Large Number of Bank and S&L Failures Combined FDIC and FSLIC into the FDIC and Dismantled S&L Regulatory Body Created the RTC to Take on the Assets of Failed S&Ls $50 Billion Authorized to Handle Failed Institutions (Later Increased) Allowed Bank Holding Companies to Purchase Savings Banks
The Sarbanes-Oxley Accounting Standards Act 2002
Creates Panel to Promote Accurate and Objective Audits of Public Companies Top Corporate Officers Must Vouch for the Accuracy of their Companies' Financial Statements
Impact on Banks and Banking Enviroment
Declining real estate values concentrated in the ares that experience the largest run-up in real estate values, large banks greatly hurt smaller banks unhurt
General Reserve
Determined by Management But Influenced by Taxes and Government Regulation Loans to Lesser Developed Countries Require Allocated Transfer Reserves
Pros of Interstate Banking
Efficient Use of Scarce Resources Lower Prices for Services Geographic Diversification Efficient Flow of Credit in the System
ROE Depends on
Equity Multiplier=Total assets/Total equity capital Leverage or Financing Policies: the choice of sources of funds (debt or equity) Net Profit Margin=Net income/Total operating revenue Effectiveness of Expense Management (cost control) Asset Utilization=Total operating revenue/Total assets Portfolio Management Policies (the mix and yield on assets)
Reasons for Growth of Branching
Exodus of Population to Suburban Communities Increased Bank Failures in Recent Years Business Growth
Value of a Bank's Stock Rises When:
Expected Dividends Increase Risk of the Bank Falls Market Interest Rates Decrease Combination of Expected Dividend Increase and Risk Decline
Government Response to Credit Crisis
Fannie Mae and Freddie Mac placed Loaned AIG over $150 billion Insured money market mutual funds Dodd-Frank WS Reform is permanent Established TARP Established Term Asset - Backed Securities Invested 125 million in nine large US banks
Principal Regulatory Agencies
Federal Reserve System Comptroller of the Currency Federal Deposit Insurance Corporation Department of Justice Securities and Exchange Commission State Banking Boards or Commissions
Fees earned from Fiduciary Activities
Fees for Managing Protecting a Customer's Property Fees for Record Keeping for Corporate Security Transactions and Dispensing Interest and Dividend Payments Fees for Managing Corporate and Individual Pension and Retirement Plans
Reasons for Oversight of Characters
Financial Institutions Hold the Public's Savings Financial Institutions are the Heart of the Payment System Financial Institutions Create Money
Federal Deposit Insurance Reform Act 2005
First Significant Increase FDIC Coverage in 25 years Raises FDIC Insurance Limits from $100,000 to $250,000 for Retirement Accounts Federal Regulators are Empowered to Periodically Adjust Deposit Insurance Limits for Inflation Merges Bank Insurance Fund (BIF) and Savings Association Insurance Funds (SIF) into Single Deposit Insurance Fund (DIF)
Depository Institution Deregulation and Monetary Control Act (DIDMCA) 1980
First of Deregulation Acts Phased Out Interest Rate Ceilings Allowed Interest to be Paid on Checking Accounts (NOW Accounts) Term Transaction Account Created - All Institutions with These Accounts Subject to Reserve Requirements
Federal Deposit Insurance
Full coverage until 12/31/2013, current coverage is $250,000 per depositor on inters0bearing accounts
Social Responsibility Act 1968
Full information on terms and loans must be given
Money Center or Wholesale Banks
Generally Multi-Billion Dollar Company Organizational Chart is Much More Complex Serve Many Different Markets with Many Different Services so are Better Diversified Geographically and by Product Able to Raise Large Amounts of Capital at Relatively Low Costs
Reasons for the Growth of BHCs
Geographic Diversification Product Line Diversification Tax Sheltering Double Leveraging Source of Strength A Way Around Regulatory Restrictions
How do banks differ
Global Banks -offer a wide array of products and services globally Super-regional banks - similar to global banks but smaller in size and market penetration Community banks - smaller trade area with total assets under $1 billion
Desirable sites for New Branches
Heavy Traffic Count Large Number of Retail Shops and Stores Above Average Age of Local Populations Area Contains Substantial Number of Managers, Business Owners and Professionals Steady or Declining Number of Service Facilities Operated by Competitors Above Average Population Growth Above Average Population Density Relatively High Target Population per Branch Above Average Levels of Household Income
Report of Income
Income StatementThe Statement of Revenues, Expenses and Profits for a Bank Over a Period of Time Shows how much it has cost to acquire funds and to generate revenues from the uses of funds in Report of Conditions Shows the revenues (cash flow) generated by selling services to the public Shows net earnings after all costs are deducted from the sum of all revenues
Cons of Interstate Banking
Increased Bank Concentration Less Competition Higher Prices for Services Drain Resources from Community
Electronic Branches
Internet Banking Services Automated Teller Machines (ATMs) Point of Sale (POS) Terminals
Riegle-Neal Act of 1994
Interstate Banking and Branching Efficiency Act repealed provisions of the McFadden Act of 1927 Bank Holding Company Can Acquire Banks Nationwide Consolidation of Interstate BHCs into Branches
Goals and Functions of Bank Regulations
Laws Limiting Bank Lending and Risk Laws Restricting and Expanding Services Banks and Other Depository Institutions Can Offer Laws Prohibiting Discrimination in Offering Services Laws Mandating Increased Information Transparency and More Accurate Financial Reporting Laws Regulating Branch Banking Laws Assisting Federal Agencies in Dealing with Failing Depository Institutions
Credit Crisis of 2007-2009
Lenders made sub-prime mortgages negative amortization Multiple mortgage banks fail
Advantages of In store branches
Lest Costly to Build and Maintain Experience More Traffic Flow than Normal Branches Deposit Volume May be Heavier Because they Attract Store's Own Deposits
External Factors that Affect decision for new charter
Level of Economic Activity Growth of Local Economic Activity The Need for a New Bank The Strength and Character of Local Competition in Supplying Financial Services
Pros of a State Charter
May Be Easier and Less Costly to Obtain Bank Does Not Need to Join the Federal Reserve System State May Allow Bank to Lend More of its Capital to a Single Borrower and Offer Other Services
Disadvantages of In Store Branches
May Need More Aggressive Marketing Many Financial Transactions Need More Financial Expertise No Drive-in Window
FDIC Improvement Act of 1991
Move Towards Re-regulating the Industry Requires Regulators to Take Prompt Corrective Action (PCA) When a Bank has Problems Prompt Corrective Action Based on the Capital Position of the Bank Requires Regulators to Develop New Standards for the Banks They Regulate
Reasons for Full-Service Interstate Banking
Need to Bring New Capital to Revive Struggling Local Economies The Expansion by Non Bank Financial Institutions with Fewer Restrictions A Strong Desire by Large Banks to Expand Geographically Belief Among Regulators that Large Banks are More Efficient and Less Prone to Failure Advances in Technology
Unit Banks
Offer All Services From One Office One of the Oldest Kinds of Banks New Banks are Generally Unit Banks Until Can Grow and Attract More Resources
Branch Banks
Offer Full Range of Services from Several Locations Senior Management at the Home Office Each Branch has its Own Management Team with Limited Decision Making Ability Some Functions are Highly Centralized, While Others are Decentralized
Securities
Often Called Secondary Reserves Include: Short Term Government Securities Privately Issued Money Market Securities Interest Bearing Time Deposits Commercial Paper
Problems with Book-Value Accounting
Original (historical, book-value) cost Amortized cost Market-value Held-to-maturity and available-for-sale securities
Federal Reserve Act of 1913
Passed After a Series of Financial Panics at the Beginning of the Century Created the Federal Reserve System Gave the Fed the Authority to Act as the Lender of Last Resort Created to Provide a Number of Services to Member Banks Today the Fed Controls the Money Supply
National Banking Act 1863-64
Passed During the Civil War to Help Fund the War Created A New Division of the Treasury, the Comptroller of the Currency Created National Banks with a Federal Charter
Glass-Steagall Act of 1933
Passed During the Great Depression Separated Investment and Commercial Banking Created the FDIC Fed Given the Power to Set Margin Requirements Prohibited Interest to be Paid on Checking Accounts
Emergency Economic Stabilization Act of 2008
Passed in Response to Home Mortgage and Financial System Problems Temporarily Increases FDIC Deposit Insurance Coverage from $100,000 to $250,000 for All Deposits until Year-end 2009, now permanently due to the Dodd-Frank Act Allows the US Treasury to Add Capital to Banks to Enhance Lending
Fair and Accurate Credit Transactions (FACT) Act 2003
Passed in Response to Increased Problem of Identity Theft Federal Trade Commission Must Make it Easier for Consumers Victimized to File Theft Report Individuals and Families are Entitled to One Free Credit Report Each Year
Gramm-Leach-Bliley Act 1999
Permits Banking-Insurance-Securities Affiliations (with regulator's approval and are well capitalized) Consumer Protections for Consumers Purchasing Insurance Through a Bank Must Disclose Policies Regarding the Sharing of Customers' Private Information Customers are Allowed to 'Opt Out' of Private Information Sharing Fees for ATM Use Must be Clearly Disclosed Identity Theft is Made a Federal Crime
Limited-Service Facilities
Point of Sale (POS)Terminals Automated Teller Machines (ATMs) Home and Office Banking Telephone Banking and Call Centers Internet-Banking
Strategic Risk
Potential losses (variation) from poor business decision
Reasons for the Regulation of Banks
Protection of the Safety of the Public's Savings Control of the supply of Money and Credit Ensure Equal Opportunity and Fairness in Access to Credit Promote Public Confidence in the Financial System Avoid Concentration of Power Help for special segments of the economy
Virtual Banks
Provide their Services Exclusively Through the Web Can Generate Cost Savings Over Traditional Brick-and-Mortar Banks Have Not Yet Demonstrated They Can Be Consistently Profitable
Internal Factors that Affect Decision for New Bank
Qualifications and Contacts of Organizers Management Quality Capital Pledged
Federal Deposit Insurance Corportation
Receiver of failed institutions liquidate sell too big to fail policy
Check 21 2004
Reduces the Need for Banks to Transport Paper Checks Can Provide a Customer with 'Substitute' Check Which Contains Image of Front and Back of Original Check Allows for Electronic Transmission of 'Substitute' Checks for Clearing of Checks
Geographic Diversification
Reducing a Bank's Overall Risk Exposure to its Total Return By Establishing Service Facilities in Different Market Areas Whose Individual Returns are Not Highly Correlated with the Returns from a Bank's Existing Market Locations
The USA Patriot Act 2001
Requires Banks and Financial Service Providers to Establish the Identity of their Customers Requires Banks and Financial Service Providers to Check the Customer's ID Against Government-Supplied Lists of Possible Terrorists and Terrorist Organizations Report Suspicious Activity (SARs) in Customer's Account to the US Treasury
Legal and Compliance Risk
Risk of Earnings Resulting from Actions Taken by the Legal System. This can Include Unenforceable Contracts, Lawsuits or Adverse Judgments. Compliance Risk Includes Violations of Rules and Regulations
Operational Risk
Risk that a transaction is altered or delayed due to an unintentional error.
The Changing Role of Financial Service Branch Offices
Sales Oriented Offer Cross-Selling Opportunities In-Store Branching Offices Set Up Inside Retail Stores or in Malls in Order to Reduce Construction Costs
Specific Reserve
Set Aside to Cover a Particular Loan Designate a Portion of ALL or Add More Reserves to ALL
Bank Subsidiaries
Special Type of Holding Company Offers the Broadest Range of Services List of Activities Offered May Expand as Regulators Decide What Services are 'Compatible' with Banking Each Affiliated Financial Firm has its Own Capital and Management and its Own Profit or Loss
Financial Holding Companies: GLB Act of 1999
Special Type of Holding Company Offers the Broadest Range of Services List of Activities Offered May Expand as Regulators Decide What Services are 'Compatible' with Banking Each Affiliated Financial Firm has its Own Capital and Management and its Own Profit or Loss
National Charters seekers must:
Submit a Detailed Business Plan to OCC Description of the Proposed Bank Market demand, customer base, economic and competitive conditions, and risks Marketing Plan Management Plan Financial Plan
Expected Rate of Return
The Decision of Whether to Establish a Branch Office is a Capital Budgeting Decision. The Present Value of the Net Future Cash Flows Should Be Larger Than the Initial Outlay
Loan Accounts
The Major Asset Gross Loans - Sum of All Loans Allowance for Possible Loan Losses Contra Asset Account For Potential Future Loan Losses Net Loans Unearned Discount Income Nonperforming Loans
Off-balance-sheet Risk
The Volatility in Income and Market Value of Bank Equity that May Arise from Unanticipated Losses due to OBS Activities (activities that do not have a balance sheet reporting impact until a transaction is affected)
Discount Rate
The interest rate on the loans that the Fed makes to banks
Investment Securities
These are the Income Generating Portion of Securities Taxable Securities U.S. Government Notes Government Agency Securities Corporate Bonds Tax-Exempt Securities Municipal Bonds
Reputation Risk
This is Risk Due to Negative Publicity that can Dissuade Customers from Using the Services of the Financial Firm. It is the Risk Associated with Public Opinion.
Community Banks or Retail Banks
Typical' Size is $300 Million Organizational Chart is Not Complicated Significantly Affected by Health of Local Economy Generally Know their Customers Well - Relationship Lending
Economies of Scale
factors that cause a producer's average cost per unit to fall as output rises
Specialization of Savings Instition
real este loans stockholder vs. mutual ownership unitary thrift holding company
Reserve Requirements
regulations on the minimum amount of reserves that banks must hold against deposits
Trends affecting banks
rising competition government deregulation increase interest rate sensitivity e banking and e commerce
Market Risk
risk that affects all companies in the stock market
Cease and Desist Order
ruling requiring a company to stop an unfair business practice that reduces or limits competition
Specialization of Commercial Banks
short-term business credit
Liquidity Risk
the possibility that a bank may not be able to meet its cash needs by selling assets or raising funds at a reasonable cost
Interest Rate Risk
the risk that a change in market interest rates will affect the value of the bond
Credit Risk
the risk that borrowers might default on their loans
