Financial Institution Operations & Management Flashcards

A financial institution implements a 'stress test' on its loan portfolio. The PRIMARY purpose of this test is to:

Answer: Estimate potential losses under adverse economic scenarios to assess capital adequacy

Stress testing projects portfolio losses under hypothetical adverse conditions (e.g., sharp rise in unemployment) to determine whether capital buffers are sufficient.

The 'fiduciary duty of loyalty' requires a financial institution's director to:

Answer: Place the institution's interests above their own personal financial interests

The duty of loyalty requires directors to act in the best interest of the institution and its stakeholders, avoiding self-dealing and conflicts of interest.

Under the Equal Credit Opportunity Act (ECOA), a lender who denies credit MUST provide the applicant with a notice of adverse action:

Answer: Within 30 days of receiving the completed application

ECOA requires creditors to notify applicants of adverse action within 30 days of receiving a completed application, informing them of specific reasons for denial.

An institution with a high loan-to-deposit (LTD) ratio is MOST exposed to which risk?

Answer: Liquidity risk if deposit outflows accelerate

A high LTD ratio means the institution relies heavily on deposits to fund loans; if deposit outflows increase, the institution may struggle to fund its loan book.

A financial institution's board formally delegates day-to-day operational authority to management through which governance mechanism?

Answer: A written delegation of authority policy or board resolution

Boards document the scope of management's delegated authority in formal policies or board resolutions, retaining oversight while allowing executives to manage operations.

Which of the following is an example of a 'compensating control' in a financial institution's internal control environment?

Answer: Requiring dual signatures on checks over a specified threshold when full segregation of duties is not feasible

Compensating controls substitute for ideal controls when full implementation is impractical; dual signatures compensate for the inability to fully segregate transaction duties.

When examiners review a financial institution's allowance for credit losses (ACL), they are PRIMARILY assessing whether:

Answer: The reserve is adequate to absorb expected lifetime credit losses in the loan portfolio

Under CECL, examiners evaluate whether the ACL is reasonably estimated to cover expected lifetime losses given current portfolio quality and economic forecasts.