MANAGEMENT SUPERVISION, ADMINISTRATION AND CONTROL
"1" is indicative of management that is fully effective with respect to almost all factors and exhibits a responsiveness and ability to cope successfully with existing and foreseeable problems that may arise in the conduct of the bank's affairs.
"2" reflects some deficiencies but generally indicates a satisfactory record of performance in light of the bank's particular circumstances.
"3" reflects performance that is lacking in some measure of competence desirable to meet responsibilities of the situation in which management is found. Either it is characterized by modest talent when above-average abilities are called for, or is distinctly below average for the type and size of the bank within which it operates. Its responsiveness or ability to correct less than satisfactory conditions may be lacking.
"4" is indicative of management that is generally inferior in ability compared to the responsibilities with which it is charged.
"5" is applicable in those instances where incompetence has been demonstrated. In these cases, problems resulting from management weakness are of such severity that management must be strengthened or replaced before sound conditions can be brought about.
Corporate planning.
Set the future direction of the bank. Adequacy of banks planning process judged by: formality, who involved in process, realistic assumptions, monitoring actual performance, and consideration of alternatives.
Directors may be held personally liable for: 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 banks assets.
Differentiate between fraud, negligence, breach of trust, and conversion (see 4.1-5)?
Fraud - Scheme to illegally obtain bank assets
Negligence - Failure to exercise degree of care that a prudent person would or violation of law
Breach of Trust - Not acting on fiduciary best interests
Conversion - Misappropriation or theft of assets
Actions and inactions found to constitute negligence.
Attitude of general indifference, failure to heed warnings of mismanagement, failure to adopt practices and follow procedures generally expected of bank directors, turning over virtually unsupervised control of bank to officers and employees, failure to acquaint selves with examination reports, assenting to loans in excess of applicable statutory limitations, permitting large overdrafts (in violation of law or banks by-laws), and/or representing certain assets as good in Call Reports that were classified IV by primary regulator.
Powers, duties, responsibilities of directors. (4.1-2)
· Regulating the manner in which all business of the bank is conducted.
· Appointing, dismissing at pleasure, and defining the duties of officers.
· Honestly and diligently administering the affairs of the bank.
· Observance of laws to which the bank is subject.
· Paying such dividends as may properly be paid.
· Appropriate internal control system and adequate auditing program.
· Management Information System (MIS).
What Laws and Regulations pertain to directors? (4.1-7)
Management is unable to attend a board meeting, when is a meeting with a committee acceptable in lieu of a board meeting?
A meeting with a board committee (in lieu of the entire Board) in conjunction with an examination is permissible only when the committee is:
* contains reasonable outside director representation
* reports regularly to the Board
Type of meeting necessary when bank was given "3" composite rating and has not had Board meeting in last 24 months? board
When should a meeting with the BOD be held? (4.1-13)
Banks likely to be assigned a "4" or "5" rating should meet with board of directors with member of RO present.
Bank likely to be assigned a "3" rating, EIC should meet with board, RO representative at RO discretion.
If likely "1" or "2" rating, meeting with board or board committee is required when:
36 months since last meeting
management rating is 3, 4, or 5
any other CAMEL is rated 4 or 5
any two CAMEL ratings are 3, 4, or 5.
RO representation at RO discretion.
Other considerations:
recent changes in control ownership and/or top management
economic conditions
request by management for a meeting
any unique conditions or trends pertinent to the institution
What is a Management 4 rating? (4.1-13)
This rating is indicative of management that is generally inferior in ability compared to the responsibilities with which it is charged.
Management is unable to attend a Board meeting. When is a meeting with a Board Committee allowed? All of the following except:
A quorum is not necessary.
As an EIC, you just rated a bank 2-2-2-4-2 and there was a Board meeting 20 months ago.
You are EIC at a "2" rated bank examination. Management cannot hold a board meeting, but has offered for you to meet with the loan committee. Loan committee must meet the following conditions:
A 2 rated bank had a Board Meeting 20 months ago, do we need to have one at this time? (4.1)
a. Have a meeting with the Board
b. Have a meeting with an Executive Committee
d. Make sure a member of the RO is present
Bank is going to be rated 2-2-2-4-2/2. Last Board meeting was 19 months ago. Which of the following are true? (4.1)
( I) Board meeting must be held because last meeting was over 18 months ago.
( II) Board meeting must be held because of earnings rating
(III) Meeting with committee may be substituted
( IV) Board meeting need not be held.
(a) IV only
(b) II only
(c) II and III *
(d) I, II, and III
Scenario: The bank has 6 directors. One of the directors has only attended only 41% of the board meetings. The President indicated that this was because the man was retired and has a second home elsewhere. All of the other directors were knowledgeable about the bank's affairs and regularly attended the Board meetings. The bank is sound and well managed. What should the EIC do about this situation? (4.1)
a. Do nothing. It is up to the Board to determine if the director is meeting the requirements
b. Discuss the problem at the Board meeting and include it in the Report.
c. Demand that the director attend the meetings or resign.
d. Cite CMPs.
Scenario involving director and potentially negligent act. Determine whether director can be held liable.
(4.1-5)
A director's liability for negligent acts is premised on common law for failure to exercise the degree of care prudent individuals would exercise under similar circumstances, and/or noncompliance with applicable statutory law, either or both of which proximately cause loss or injury to the bank.
If there is no loss to the bank, there's no liability. Negligence must be the proximate cause for loss.
Board approves loan to president's related interest, the loan later defaults. Was Board negligent? What are insider interests (responsibilities) (See 4.1-9)?
Depends, if it was a good loan at origination within Reg O requirements & bank policy, then not
negligent. But if it had a more-than-normal credit risk, then Reg O, then possibly negligent.
If troubled, the Board should be encouraged to require the insider to strengthen the credit or resign as insider.
What the BOD cannot delegate
· terminate insurance that's contested
· capital directive
Directors vote to declare dividend. Capital ratio drops from 5% to 4.05%. One director has pledged stock for loan at another bank that he is delinquent on. Director uses dividend money to pay down the loan. What does this indicate?
· Directors are paying dividends correctly.
· Lack of corporate planning
Answer may or may not include "directors are guilty of self-dealing"
The Board of Directors of a bank declared cash dividends which resulted in a reduction in the Tier 1 Leverage ratio from 4.50% to 3.89%. The Director who pushed to get approval for this distribution used his share to bring current a delinquent loan at another institution. Which of the following are the BOD (or any particular member of the BOD) guilty of? (4.1)
( II) Lack of corporate planning
( IV) Embezzlement
(a) I, II, and III
(b) I and III
(c) III only
(d) All of the above
Director leases premises to bank at three times market rate. What is this?
T or FThe reason problems within the bank are discussed with management before leaving the institution is to allow management to clarify their position. False
FASB 66: Sale-Leaseback - A director built the bank then leased it to the bank under certain conditions, particularly at triple net rent of $12 (market rent at $10) - What factors are apparent?
Is this a violation of Reg O?
1) Self-dealing 2) Overlending 3) Conflict of Interest 4) ?
Not Reg O since it does not involve a loan to an executive officer/insider.
A bank's board-approved Ethics Policy should include:
Part 349 (Reports of Indebtedness)
Reg O (Part 215 of FRB Regs)
SOP regarding the bank bribery act
What is the purpose of the management interlock act? (4.1-8)
To FOSTER COMPETITION by prohibiting a management official of one institution from also serving as a management official of another institution if they are not affiliated and are located in the same area or if the two organizations are not affiliated and are very large.
Identify major components of Part 348
Prohibits a mgmt official, employee or officer w/mgmt functions including a branch manager, a director, and an advisory or honorary director (except in the case of a bank with TA of less than 100MM), a trustee of a business organization under the control of trustees (i.e. a mutual savings bank), or any person who has a representative or nominee serving in any such capacity from serving as a mgmt official at:
Also, disregarding location, a mgmt official of a bank with TA of over $1 billion or a mgmt official of any affiliate of the over $1 Billion bank may not serve as mgmt official at the same time at a nonaffiliated bank with TA exceeding $500 million or any affiliate w/TA of greater than $500 million.
List of permitted interlocking relationships is included also.
Grandfather clause for prohibitions - if began prior to 11-10-78.
What are the permitted by agency order exemptions to part 348? (RR2868)
1) Organization in low income, minority or women's organization
2) Newly chartered
3) Conditions endangering safety and soundness
4) Organization sponsoring credit union
5) Loss of mgmt. officials due to change in circumstance.
6) Emergency acquisition of savings association
7) Diversified savings & loan holding company
A director of a state non-member (Bank A) is the president of a national bank (Bank B). The banks are both over 100MM and located in a rural area 8 miles apart. The EIC should?
1) Ignore due to the size of the banks
2) Ignore due to the different charters
4) Call a violation of Part 322
(3) Call a violation of Part 348. At least one bank has TA of 20MM and the banks are less than 10 miles apart. He serves as a management official at both.
Individual owns 70% of Bank A and 55% of Bank B. The banks are 8 miles apart. President of Bank A is a Director of Bank B. Is this a violation of Part 348?
· No, because the banks are affiliated
Interlocking management - EO at one bank is Director of another, each bank has $50MM, rural area - What is the proper citation? (4.1-8)
1) Violation of Part 348
2) Not a Violation of Part 348 because not the same or similar position at each bank
3) Not a Violation because assets of each bank exceeds $20MM
4) Not a Violation because neither bank is in a SMSA
1) This is Violation of Part 348. It covers any bank chartered in the U.S.A. If one bank exceeds 20MM. If within 10 miles of city limits in rural areas. Management official is EO, Director, or Trustee.
Part 348 - A director is also on the Board of a local non-affiliated bank and refuses to resign from one of the Boards. If removed through Part 348 or Section 8(e)
What covers management interlocks?
Section 18 of the act
Part 308
Individual owns 70% Bank A and 55% Bank B which are 8 miles apart. President of Bank A is also a director of Bank B. Violation of Part 348?
No, because the banks are affiliated.
EO at one bank is a director at another. Each bank has assets of $50,000M in a rural area.
b. not a violation because not the same position at each bank
c. not a violation because assets of each bank exceeds $20MM
d. not a violation because neither bank is in the same MSA
Scenario: A Director is also on the Board of a local non-affiliate bank and refuses to get off one Board. What would be the proper exam procedures?
a. Removal through Part 348
c. CMPs
Page 4.1-7 Under section 8(e) of the FDI Act, the FDIC may serve written notice of intention to remove a director or officer from office whenever in its opinion, such director or officer of an insured bank has violated the management interlocks act.
Management official is to be removed. What reg applies?
· Part 333
Management interlocks - Scenario in which you must pick up on the fact that the two banks in question were affiliates. All of the other criteria indicated the regulation applied.
Executive officer at Bank A also serves as a Director of Bank B, an affiliated institution. Banks A and B are located 8 road miles from each other. Bank A has TA of $25MM and Bank B has TA of $15MM. Which of the following are true?
I) No violation of management interlocks because the individual serves in different capacities at Bank A and Bank B
II) No violation because banks are affiliated
III) No violation because both banks do not have TA over $20MM.
IV) Violation of management official interlocks
(a) I, II, and III
(b) II and III
(d) IV only
When is a management interlock permitted? (RR2868)
A) Chartered within 2 years
B) If it would endanger the safety and soundness of the institution
C) Credit union
D) Minority or women's organizations
E) Loss of management due to change in circumstance
EO at one bank is Director of another, each bank has assets of $50MM, rural area.
Prohibitions of Part 348 (Management Interlocks) state an individual cannot hold managerial positions in two non-affiliated financial institutions which are:
1) in same community/town/city or adjacent town/city
2) in the same relevant MSA and each bank has > $20MM TA, or
3) bank (regardless of location) of TA >$1B, person not on non-affiliated bank TA >$500M.
PART 349: REPORTS AND PUBLIC DISCLOSURE OF INDEBTEDNESS OF EXECUTIVE OFFICERS AND PRINCIPAL SHAREHOLDERS TO A STATE NONMEMBER BANK AND ITS CORRESPONDENT BANKS
Director has loan at bank and correspondent, required to disclose per Part 349?
No, not apply to directors, only officers and shareholders. Part 349 requires that if during any calendar year an executive officer, principal shareholder or their related interest has outstanding an extension of credit from a correspondent bank of the bank, the EO or PS shall, on or before Jan 31 of the following year, make a written report to the Board of the subject bank. The report shall contain the max amount of indebtedness during the previous calendar year. (Indebtedness means extension of credit but does not include: commercial paper, bonds or consumer credit of $5M or less provided that terms are not "more favorable".)
Director has a loan at the bank and a corresponding bank - Does Part 349 apply (know limits and who is covered)
What is the purpose of part 349? (RR2895)
1) Prohibits preferential loans to executive officers, directors and principal shareholders of correspondent banks.
2) Prohibits the opening of a correspondent relationship with a bank if preferential loans to EO, Dir., or Prin. share exists.
However, disclosure is only needed for exec. officer, prin. shareholder and related interests. It DOES NOT say directors.
Part 349 Know limits and who is covered.
Per part 349, how much indebtedness is required before reporting to the public? (RR2897)
5% of capital or $500,000 whichever is less but in NO event shall disclosures be less than $25M
A director has a loan at the bank and a correspondent bank. Does Part 349 apply? (Know limits and who is covered)
Part 349 only applies to executive officers and principal shareholders. If the above mentioned director is either an EO or PS then it would apply. Part 349 applies as to preferential terms. Part 349 does NOT apply in relation to reporting.
Should an executive officer or principal shareholder loan be disclosed per part 349 if it is less than $25,000? (RR2897)
No. Disclosure is required when extensions exceed the lessor of 5% of equity capital or $500M, but in no event shall disclosure be required if extensions are less than $25M
Doesn't involve Director, Exec. Officer, or Prin. Shareholder