Can you special mention a contingent liability? (3.7-2)
Yes - If the chance of the contingency becoming an actual liability is a least reasonably possible and the potential acquired asset is worthy of special mention.
What is a RUF (Revolving Underwriting Facility)? (3.7-5)
aka NIF (Note Issuance Facility) commitment by a group of banks to purchase at a fixed spread over some interest rate index, the short-term notes which the issuer is unable to sell in the Euromarket at or below this predetermined rate. The purchaser bears the risk of any default on the part of the borrower. Evaluate the same as loan commitment. Unfunded RUF's outstanding will be reflected in the contingent liabilities schedule and any anticipated funding included in liquidity position. Notes usually have a maturity date of 90 days to 1 year.
Scenario: The bank cannot provide maturity dates for SBLC originated over the last year. What should the EIC do? (3.7)
a. comment in Report only
b. Orally discuss with management only
d. cite a violation of Part 350
Section 337.2(d) requires the maintenance of adequate controls and subsidiary records of SBLCs comparable to records maintained on direct loans so that a bank's total liability may be determined at all times. Also s/b covered in Loan Policy, included in legal lending limit, and can be adversely classified with deterioration in the financial condition of the account party.
Types of off-balance sheet lending. (3.7)
Includes: SBLC, loan commitments, RUFs, bankers acceptances and loans sold without recourse.
Why engage in off-balance sheet activity?
If the funded portion of a loan is adversely classified, what about the unfunded portion? (3.7- 2)
Depends on the probability of the contingency becoming an actual liability.
Spec Ment - Reasonable chance of becoming a liability & potential assets are considered SM.
The undrawn portion on a poorly supervised AR line where the drawn portion is SM.
Sub - Reasonable chance of becoming a liability & potential assets are Sub. Undisbursed loan
funds in a speculative RE venture where the disbursed funds are Sub and the probability
of the bank acquiring the underlying property is high.
Doubt - Probable chance of becoming a liability & potential assets are Doubt. Undisbursed loan
funds on an incomplete construction project wherein cost overruns or diversion of funds
will likely result in Loss upon disposition of property.
Loss - Probable chance of becoming a liability & asset is not bankable. A letter of credit on
which the bank will probably be forced to honor drafts that are considered uncollectible
(a balance sheet liability - specific reserve - should be established)
Identify risks related to SLBC (3.7-3)
· Credit Risk - The possibility of default by or deterioration of the account party
· Funding Risk -The potential inability of the bank to fund from normal sources a large draw, such as a draw under a commercial paper backup facility.
A SBLC is an irrevocable commitment on the part of the bank issuing the SBLC to make payment to a designated beneficiary if the bank's customer, the account party, defaults on an obligation. The element of risk could be significant under an SBLC given its irrevocable nature, especially if the SBLC is written for an extended period of time.
What are the risks of a SBLC? (3.7)
b. credit risk of beneficiary
c. interest rate risk
d. deterioration in the financial condition of account holder
a/d/e - To note: selling or participation of SBLC does not diminish risk. The name of the originating bank is on the actual letter and it must be on all drafts whether or not the participants are willing or able to disburse their pro rata shares.
Syndications, on the other hand, represent legal apportionments of liability.