Questions and Answers
What do risk ratings measure?
What is a pass loan?
What characterizes criticized loans?
Special mention loans are considered what?
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What types of loans are classified as classified loans?
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What are doubtful loans known for?
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What defines non-accrual loans?
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What does the CAMELS rating system evaluate?
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What is the purpose of a written loan policy?
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What is the importance of site visits?
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What does collateral provide?
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What are events of default?
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What are loan workouts?
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What is the term sheet?
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Study Notes
Risk Management in Banking
- Risk Ratings: Indicators of potential noncollectable loans; critical for effective credit-risk management.
- Pass Loans: Secure loans with low default risk; regarded as credit in good standing.
Loan Classifications
- Criticized Loans: Includes Special Mention loans that perform well but show minor weaknesses due to documentation or policy issues.
- Special Mention Loans: Considered potentially weak; lack proper supervision or documentation.
Classified Loan Types
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Classified Loans: Carry imminent risk of nonpayment; includes three categories:
- Substandard: Inadequate protection due to collateral or repayment issues.
- Doubtful: Strong probability of loss for the lender.
- Loss: Noncollectable and not suitable as an asset.
Loan Performance Metrics
- Non-Accrual Loans: Nonperforming loans not generating expected interest due to borrower nonpayment, especially if delinquent by 90 days or more.
- CAMELS Rating System: Evaluates bank health through six criteria: Capital adequacy, Asset condition, Management quality, Earnings, Liquidity, Market sensitivity.
Loan Management Practices
- Written Loan Policy: Provides guidelines for loan officers to shape loan portfolio decisions.
- Site Visits: Critical for assessing customer and property condition while facilitating direct interaction.
Repayment Sources
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Repayment Sources:
- Primary: Operating cash flow.
- Secondary: Collateral.
- Tertiary: Additional sources; reliance on one is risky.
Financial Evaluation
- Strengths and Weaknesses: Assesses financial conditions of borrowers and strategies to mitigate weaknesses.
- Term Sheet: Non-binding credit extension offer summarizing key deal points.
Risk Assessment and Management
- RMA Studies: Provides benchmark figures from the financial statements of member institutions' clients.
- Loan Commitment Agreement: Legal document binding both lender and borrower on terms.
Loan Collateral and Agreements
- Collateral: Assets pledged by borrowers to secure loans; can be liquidated if needed.
- Restrictive Covenants: Borrower restrictions including affirmative (actions to take) and negative (prohibitions).
Borrower's Obligations
- Warranties: Guarantees of truthfulness in loan application information.
- Events of Default: Specifies violations leading to lender recovery actions.
Internal Loan Oversight
- Loan Review: Internal assessments to ensure compliance with credit agreements and bank policies.
- Problem Loans: Loans that present issues needing attention and resolution.
Loan Recovery Strategies
- Loan Workouts: Strategies aimed at addressing delinquent loans to recover funds effectively.
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Description
Test your knowledge of key terms from Chapter 16 of FIN 3632. This quiz covers important concepts related to risk ratings, pass loans, and criticized loans, essential for understanding credit risk management in banking. Perfect for students preparing for exams or needing a refresher on these terms.
