Pacific Bank provides loans to businesses in the community through its Commercial Lending Department. Small loans (less than $100,000) may be approved by an individual loan officer, while larger loans (greater than $100,000) must be approved by a board of loan officers. Once a loan is approved, the funds are made available to the loan applicant under agreed-upon terms. Pacific Bank has instituted a policy whereby its president has the individual authority to approve loans up to $5,000,000. The president believes that this policy will allow flexibility to approve loans to valued clients much quicker than under the previous policy.

Question

Answer the following True or False questions related to the scenario.

All loans have the same element of risk, so it doesn't matter if the loan is large or small.

Allowing the bank president to have sole authority to grant large loans is fine since he or she is president.

Large loans present greater risk in the event of default, therefore you should have more than one person involved in making the decision to grant a large loan.

Having one person grant loans is good internal control.

Answer 1

Here are the answers to the True or False questions based on the provided scenario:

1. All loans have the same element of risk, so it doesn't matter if the loan is large or small.
   False - Generally, larger loans present a greater risk, especially in case of default, due to the higher amounts involved.

2. Allowing the bank president to have sole authority to grant large loans is fine since he or she is president.
   False - While the president may have authority, having sole decision-making power for large loans can pose significant risks and conflicts of interest. It's generally advisable to have multiple individuals involved in such decisions.

3. Large loans present greater risk in the event of default, therefore you should have more than one person involved in making the decision to grant a large loan.
   True - Involving more than one person in the decision-making process helps mitigate risk and brings diverse perspectives to the evaluation of the loan.

4. Having one person grant loans is good internal control.
   False - Good internal control typically involves checks and balances, which would be compromised if one person has unchecked authority to grant loans, especially large ones.