Maximum Amount of Credit for Bank Insiders
Question
The maximum amount of credit that a bank may extend to all of its insiders is known as the ______________and is equal to 100 percent of its unimpaired capital and surplus.
Answers
Explanations
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A. B. C. D.A
The correct answer is A. Aggregate lending limit.
The aggregate lending limit is a regulatory limit that restricts the amount of credit that a bank can extend to its insiders, which include executive officers, directors, principal shareholders, and their related interests. The purpose of the limit is to prevent insiders from using their position to obtain preferential treatment or unfair advantage in borrowing from the bank, which could jeopardize the safety and soundness of the institution and harm its shareholders.
The aggregate lending limit is calculated as a percentage of the bank's unimpaired capital and surplus, which represents the amount of funds available to absorb losses and support the bank's operations. The limit varies depending on the size and complexity of the bank, but generally ranges from 15% to 100% of unimpaired capital and surplus.
For example, if a bank has unimpaired capital and surplus of $100 million and the aggregate lending limit is set at 100%, the maximum amount of credit that can be extended to all insiders combined is $100 million. However, if the limit is set at 25%, the maximum amount of credit that can be extended to insiders is $25 million.
The aggregate lending limit is a critical component of the bank's overall risk management framework and is subject to regulatory oversight and enforcement. Banks are required to monitor and report their insider lending activities to ensure compliance with the limit and avoid potential legal and reputational risks. Violations of the aggregate lending limit can result in regulatory sanctions, fines, and other penalties.
The other answer choices provided in the question are not relevant to the concept of the aggregate lending limit. Loan flipping refers to the practice of repeatedly refinancing or renewing a loan to generate additional fees and interest for the lender, often at the expense of the borrower. Equity stripping refers to the practice of removing assets or value from a company to prevent creditors from seizing them in the event of bankruptcy. Tangible economic benefit refers to the direct and measurable financial gain or benefit that a party receives from a transaction or agreement.
