First National Bank made a loan to a nonbank affiliate of its holding company that is secured by stocks, bonds, and debentures. At the outset of the loan, First National had collateral with a market value equal to 150 percent of the loan amount. Over time, some of the collateral has been retired and amortized. Some has dropped in value. What is the responsibility of the bank regarding the collateral?

Question

Quizplus · Accepted Answer

The bank must check values when the collateral is retired or amortized to make sure the collateral is replaced with securities that will bring the loan into compliance with the percentages required in the law. This is necessary to ensure that the bank is not exposed to excessive credit risk and to comply with regulatory requirements. Checking the values every month or annually is not necessary unless there is a significant change in the value of the collateral or if it is required by regulatory agencies.

First National Bank Made a Loan to a Nonbank Affiliate