Collateral Responsibility

C

Under the federal banking regulations, banks are prohibited from making loans to their non-bank affiliates that are not secured by marketable securities or other eligible collateral. To comply with this requirement, banks often require collateral for such loans, and they must ensure that the value of the collateral remains sufficient to cover the loan amount throughout the loan term.

In this case, First National Bank made a loan to a nonbank affiliate of its holding company that is secured by stocks, bonds, and debentures. The bank initially had collateral with a market value equal to 150 percent of the loan amount. However, over time, some of the collateral has been retired and amortized, and some has dropped in value.

The bank's responsibility regarding the collateral depends on the applicable regulatory requirements and the terms of the loan agreement. However, generally, banks are required to monitor the value of the collateral throughout the loan term to ensure that it remains sufficient to cover the loan amount. If the value of the collateral falls below the required level, the bank may be required to take corrective action, such as requiring additional collateral or calling the loan.

Option A, stating that the bank has no responsibility once the loan is made provided the percentages were correct at the loan's inception, is incorrect. Banks are generally required to monitor the value of the collateral throughout the loan term.

Option B, stating that the bank must check values every month to ensure that the percentages are correct at all times, is too prescriptive. The frequency of monitoring will depend on the terms of the loan agreement and the bank's risk management policies.

Option C, stating that 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, is partially correct. The bank must ensure that the value of the collateral remains sufficient to cover the loan amount throughout the loan term, and if the value falls below the required level, the bank may need to take corrective action.

Option D, stating that the bank must annually check the value of the collateral to ensure that the percentage of value is maintained, is also partially correct. While the frequency of monitoring may vary depending on the terms of the loan agreement and the bank's risk management policies, banks are generally required to monitor the value of the collateral throughout the loan term.

In conclusion, the bank's responsibility regarding the collateral depends on the applicable regulatory requirements and the terms of the loan agreement. However, banks are generally required to monitor the value of the collateral throughout the loan term to ensure that it remains sufficient to cover the loan amount.