Credit Risk Management in Banks Quiz
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Questions and Answers

What is the purpose of CAMELS ratings in the context of the text?

  • To evaluate a bank's overall condition based on six factors (correct)
  • To determine the marketing strategy of a bank
  • To calculate a bank's operational costs
  • To assess the compliance of banks with international trade regulations

    • What was the trigger for the establishment of the Basel Committee of Banking Supervision?

  • The establishment of collaboration among bank supervisors
  • The liquidation of Herstatt Bank in 1974 (correct)
  • The formation of the Bank of International Settlements
  • The improvement of capital adequacy requirements

    • Who is responsible for investigating and implementing necessary rulings to comply with the law according to the text?

  • CAMELS ratings committee
  • Basel Committee of Banking Supervision (BCBS)
  • Bank of International Settlements
  • Comptroller General and Securities and Exchange Commission (SEC) (correct)

    • What is the significance of SAS 70 in the context of service organizations?

    <p>It sets standards for auditing service organizations</p> Signup and view all the answers

    How many factors or components are banks assessed on under the CAMELS rating system according to the text?

    <p>Six</p> Signup and view all the answers

    What is NOT one of the factors that banks are assessed on under the CAMELS rating system?

    <p>Technology Integration</p> Signup and view all the answers

    What does Basel Committee of Banking Supervision seek to improve according to the text?

    <p>Collaboration among bank supervisors</p> Signup and view all the answers

    Why was it necessary to establish specific regulations after Herstatt Bank's liquidation according to the text?

    <p>To protect creditors in case of bank failure</p> Signup and view all the answers

    What issue primarily led to the establishment of the Basel Committee of Banking Supervision?

    <p>Addressing bank safety and soundness</p> Signup and view all the answers

    Who conducts investigations related to compliance with laws according to the Act mentioned in the text?

    <p>Comptroller General and Securities and Exchange Commission (SEC)</p> Signup and view all the answers

    Study Notes

    Right of Set Off

    • A bank cannot set off a credit balance of a company account against money due from one or more of its partners/ directors on their individual accounts, unless they are sole proprietors.
    • The bank can exercise the right of set off after borrower's death, insolvency, company dissolution, or after receipt of garnishee/attachment orders from regulatory/administrative body.
    • The customer is provided with a formal notice about the bank's intention to exercise the right of set off.
    • The right of set off can only be exercised for debts owed and not for future or contingent debts.

    Right of Appropriation

    • When a customer has more than one debt and makes a payment, the bank must apply the payment according to the customer's direction.
    • If the customer omits to intimate any specific appropriation, the bank has discretion to apply the money to any lawful debt actually due from the customer.
    • The bank needs to declare its intentions in express terms.

    Trust Accounts

    • The bank should examine the trust deed concerning instructions regarding opening and operating the account.
    • No trustee can delegate their power to another trustee or to an outsider.
    • The bank should suspend all account operations upon receipt of death or retirement notice of a trustee.
    • The funds in the trust account cannot be credited to the trustee's individual account or used to liquidate the trustee's personal debts.
    • If the trustees are authorized to borrow, the bank must get specific assets of the trust as security.

    Risk and Controls

    • Banks are exposed to various kinds of risks, including credit, interest rate, foreign exchange rate, liquidity, legal, regulatory, reputational, and operational risks.
    • Internal factors contributing to risk include deficiencies in loan policies, absence of prudential credit concentration limits, and inadequate risk pricing.

    Management of Credit Risk

    • Banks need a well-defined credit risk management policy approved by its board and a Credit Policy Committee.
    • The credit risk management processes include:
      • Measuring risk through credit rating
      • Quantifying risk through expected loan losses estimate
      • Risk pricing on a scientific basis
      • Risk control through effective loan review mechanism and portfolio management

    Management of Market Risk

    • Banks' Boards should have clear articulated market risk management policies, prudential risk limits, review mechanisms, reporting and auditing systems.
    • The Asset-Liability Management Committee (ALCO) should function as the top operational unit for managing the balance sheet.
    • The banks should set up an independent unit to track the magnitude of market risk on a real-time basis.

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    Description

    Test your knowledge on internal factors affecting credit risk in banks and the management of credit risk. Explore topics such as deficiencies in loan policies, credit concentration limits, risk pricing, and post sanction monitoring.

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