Bank Management Notes

Bank Management Final

MULTIPLE CHOICE

MBS

• Mortgage Backed Securities
• Asset backed security that’s secured by a mortgage or collection of mortgages
• IO = Interest only

• Claims against only the promised interest payments

• CDO = Collateralized Debt Obligation

• Pools together cash flow-generating assets and packages them to sell to investors

Recent Financial Crisis

Financial Institution Regulation

• Establishes market confidence
• SEC, FDIC, Fed, OCC are the biggest
• Basel

Mortgage Lending

Primary Mortgage Market

• The market where borrowers and mortgage originators come together to develop a mortgage
• Mortgage brokers, banks, credit unions all a part

Wholesale interest rates

• Wholesale money is funds borrowed by corporations in large amounts
• These loans are issued by large financial institutions and have lower than average interest rates
• LIBOR

• London Interbank Offered Rate
• Benchmark rate that banks charge each other for short-term loans
• Benchmark for bonds, mortgages, and other financial products

Foreclosure

• The process of taking possession of a mortgaged property due to the mortgagor not being able to keep up with mortgage payments
• Goes under the banks OREO

Mortgage Risks

Personal Loans

• Residential mortgage loans: credit to finance the purchase of a home or home improvements
• Installment loans: short to medium term loans repayable in 2+ consecutive loans
• Non-installment loans: short term loans for immediate cash repayable in a lump sum
• Credit Card Loans: offer convenience and revolving line of credit available when needed

Business Loans

• Self-liquidating inventory loans: cash loans used to purchase inventory
• Working capital loans: provide businesses with short-run credit, lasting from days to a year
• Construction loans: used to support the construction of homes and permanent structures

Contracts vs. promissory notes

• Contract: an agreement between parties enforceable in court
• Promissory note: specifies the principal amount of the loan

• Negotiable

Amortization

• The paying off of debt with a fixed repayment schedule in regular installments over time

• Very common with things like a mortgage or a car loan

• Financial supplier and consumer agree upon an interest rate and an amount of time that the balance will be paid off

Elizabeth Warren & bank regulation

• Warren wants to break up big banks
• Says regulators (Fed & SEC) need to be tougher on big banks

Volcker Rule

• US bankers face restrictions on betting no more than 3% of their capital in hedge and private equity funds
• Attempts to prevents banks from making speculative investments that contributed to the 2008 crisis

Debt Rating Agencies

• S&Ps, Moodys, Fitch Group

• Under intense scruitiny after the recent crisis

• Had favorable pre-crisis rating of insolvent financial institutions

T-Bills

• Short term investment
• Debt obligation of the US government that must mature within one year of date of issue

Bank Risk

• Credit Risk: risk of customers not coming true on their loans
• Liquidity Risk: the danger of running out of cash when cash is needed to cover withdrawals and meet credit requests from good customers
• Interest Rate Risk: danger that interest rate will rise, squeezing the profit gap
• Operational risk: risk due to weather, natural disasters, etc.
• Exchange risk: risk from their dealings internationally
• Crime risk: risk with fraud, embezzlement, etc.

SHORT ANSWER

Subprime mortgage debacle

• Fell for the “okie doke”
• Mortgages were being sold to consumers with low credit standards
• Mortgages were scrutinized and sold in secondary market

• Overrated in the secondary market

CAMELS

• Components that banks are assessed on

• Capital adequacy
• Asset quality
• Management quality
• Earnings record
• Liquidity position
• Sensitivity to market risk

• The lower the CAMELS rating, the more risky and the more often they are examined

6 Cs for credit worthiness

• Character: customer must have good reason for loan and serious intent to repay
• Capacity: legal authority to sign contract
• Cash: ability to generate cash to repay the loan
• Collateral: Adequate assets to support the loan
• Conditions: must be aware of the economic conditions they are in
• Control: does the loan meet policy and can it be affected by changing laws

Construction Loan Process

• Not paid out all at once

• Paid in increments
• As the construction company finishes a portion of it, they go get the next draw
• Financial institution will have an overseer of the construction project

Contingent Claims

• A derivative with a payout that is dependent on the realization of an uncertain future event
• One party have the right, not obligation to bell/sell an underlying
• Regulation is still catching up to complex derivatives
• Payoff is contingent on the security reaching a target price

Lending for LBO (Leveraged Buy out)

• Way to buy a company with borrowed funds
• Use the assets of the company to be acquired to help as collateral
• Large acquisitions with not a lot of capital