Chapter 25

Which of the following is NOT true of loan assignments?

Contract terms are unrestrictive from the seller's perspective.

Which of the following is NOT a contractual mechanism used by FIs to control credit risks?

Diversifying across different types of risky borrowers.

An FI that sells a loan with recourse retains ownership of the loan.

False

Highly leveraged transaction (HLT) loans are typically unsecured, short-term and have fixed rates.

False

Loan sales by an FI are another tool to manage credit risk of the FI.

False

The growth of the commercial paper market as well as the increased ability of banks to underwrite commercial paper has reduced the importance of short-term segment of the loan sales market.

False

When an FI sells a loan without recourse, the credit risk of the loan is completely eliminated from the FIs balance sheet.

False

HLT loans typically have all of the following characteristics except which of the following?

They have a short maturity of less than three months.

A distinction between distressed and non-distressed is usually made when selling highly leveraged transactions loans (HLTs).

True

In the sale of a loan to an investor/buyer, there are fewer agency costs associated with loan participation contracts than with loan assignment contracts.

True

The loan sales market in which an FI originates and sells a short-term loan of a corporation can be considered a close substitute to the issuance of commercial paper.

True

Loan participations

are riskier than loan assignments.

Besides reducing credit risks, an FI has an incentive to sell loans it originates for all of the following reasons EXCEPT to

decrease core deposits

If an FI embraces the concept of good bank/bad bank,

the bad bank is a special purpose vehicle (SPV) that is organized to liquidate non-performing loans.