FIN 3632 - Chapter 16 Flashcards
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Questions and Answers

What do risk ratings measure?

  • The amount of loans issued
  • The interest rate of loans
  • The profitability of loans
  • The likelihood of loans becoming noncollectable (correct)

    • What is a pass loan?

  • A loan that has minor weaknesses
  • A loan with inadequate collateral
  • A noncollectable loan
  • A loan that is well secured and unlikely to default (correct)

    • What characterizes criticized loans?

  • Loans that are deemed uncollectable
  • Loans that are adequately secured
  • Loans that show minor weaknesses (correct)
  • Loans that are in good standing

    • Special mention loans are considered what?

    <p>Potentially weak loans</p> Signup and view all the answers

    What types of loans are classified as classified loans?

    <p>Substandard, doubtful, loss</p> Signup and view all the answers

    What are doubtful loans known for?

    <p>Strong probability of loss</p> Signup and view all the answers

    What defines non-accrual loans?

    <p>Nonperforming loans not generating expected interest</p> Signup and view all the answers

    What does the CAMELS rating system evaluate?

    <p>Financial institutions' overall condition</p> Signup and view all the answers

    What is the purpose of a written loan policy?

    <p>To give loan officers guidelines for decision-making</p> Signup and view all the answers

    What is the importance of site visits?

    <p>To assess property condition and customer interaction</p> Signup and view all the answers

    What does collateral provide?

    <p>Assurance of loan repayment</p> Signup and view all the answers

    What are events of default?

    <p>Conditions representing violations of the loan agreement</p> Signup and view all the answers

    What are loan workouts?

    <p>Activities focused on resolving delinquent loans</p> Signup and view all the answers

    What is the term sheet?

    <p>An offer to extend credit</p> Signup and view all the answers

    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

    • 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

    • 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.

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