FINM 3404 In-tute Quiz

*Which of the following is not a qualitative factor in credit risk analysis?* a) Leverage position of the borrower b) The level of interest rates c) Collateral available d) All of the above e) None of the above

E) None of the above

*The ratio of net loans to total assets is considered to be a measure of what form of risk in banking?* a) Credit risk b) Liquidity risk c) Market risk d) Interest-rate risk e) None of the above

a) Credit risk

*Estimating liquidity needs involves:* a) Forecasting the level of future loan commitments and deposits b) Establishing a liquidity budget c) Forecasting interest rate levels d) a and c e) a, b, and c

a) Forecasting the level of future loan commitments and deposits

*The major strength of the structure-of-deposits method is?* a) It centres management attention on one of the most likely causes of liquidity pressures. b) It ignores other liquidity demands c) It categorizes loan demands according to stability d) It assigns a probability of withdrawal to each non-deposit source of funds

a) It centres management attention on one of the most likely causes of liquidity pressures.

*The Reserve Bank of Australia (RBA) board is accountable to?* a) The Australian Federal Parliament b) The Governor and the Federal Treasurer c) The Australian Prudential Regulation Authority (APRA) d) The Bank of International Settlements (BIS) e) All of the above f) None of the above

a) The Australian Federal Parliament

*What does a high ratio of loans to deposits indicate?* a. Bank relies heavily on the short-term money market to fund loans. b. Bank has large amounts of asset-side liquidity. c. Liquidity concerns are at a bare minimum for the bank. d. a and b only e. None of the above

a. Bank relies heavily on the short-term money market to fund loans.

Forrest Fennell is thinking about investing in Capital City Bank. He is examining certain ratios of the bank including the ratio of non-performing loans to total loans and leases and the provision for loan losses to total loans and leases. *What type of risk is Forrest attempting to measure with these ratios?* a. Credit risk b. Liquidity risk c. Market risk d. Interest rate risk e. Operational risk

a. Credit risk

*A disadvantage of using asset management to manage a bank's liquidity risk is:* a. the resulting shrinkage of the bank's balance sheet. b. the high cost of purchased liabilities. c. the accessibility of international money markets. d. loss of flexibility as a result of dependence upon purchased liabilities. e. None of the above.

a. the resulting shrinkage of the bank's balance sheet.

*Which of the following statements does not reflect a borrower-specific factor often used in qualitative default risk models?* a. Reputation is an implicit contract regarding borrowing and repayment that extends beyond the formal explicit legal contract. b. A borrower's leverage ratio is positively related to the probability of default over all levels of debt. c. Firms with high earnings variance are less attractive credit risks than those firms that have a history of stable earnings. d. Loans can be collateralized or uncollateralized. e. None of the above.

b) A borrower's leverage ratio is positively related to the probability of default over all levels of debt.

*Gerald Wilkens is thinking about investing in Tallahassee State Bank. He is examining certain ratios of the bank including the ratio of cash assets and government securities to total assets and purchased funds to total assets. What type of risk is Gerald attempting to measure with these ratios?* a) Credit risk b) Liquidity risk c) Market risk d) Interest-rate risk e) Operational risk

b) Liquidity risk

*Which of the following is NOT a criterion for evaluating bank liquidity used by regulators?* a) Availability of assets readily converted into cash b) The diversity of the bank's money market assets c) The bank's formal and informal commitments for future lending or investments. d) Structure and volatility of deposits e) Reliance on interest sensitive funds.

b) The diversity of the bank's money market assets

*Which of the following is a condition for a bank to be growing?* a. Net positive drain on deposits. b. Average deposit drain such that new deposit funds more than offset deposit withdrawals. c. The liability side of its balance sheet is decreasing. d. Unused loan commitments is increasing. e. None of the above

b. Average deposit drain such that new deposit funds more than offset deposit withdrawals.

*Which of the following is NOT a component of liquidity planning?* a) Establishing internal limits on subsidiary and branch borrowings b) Detailed list of funds providers who have seasonal patterns of funds usage. c) A calculation of the value of assets at fire-sale prices relative to the fair market value of those assets. d) a detailed itemization of managerial responsibilities e) A summary of the size of potential net deposit drains over various time horizons.

c) A calculation of the value of assets at fire-sale prices relative to the fair market value of those assets.

*The Reserve Bank of Australia (RBA) manages the liquidity of the financial system by?* a) Borrowing from the Bank for International Settlements (BIS) b) Borrowing from the government c) By buying and selling government securities and other financial instruments from/to financial institutions. d) All of the above e) None of the above

c) By buying and selling government securities and other financial instruments from/to financial institutions.

*Which of the following is a strength of the cost-plus loan pricing method?* a) It considers the competition from other lenders b) It allows the bank to compete more aggressively with the commercial paper market c) It considers the cost of loanable funds and the operating costs of running the bank d) It takes the whole customer relationship into account e) None of the above

c) It considers the cost of loanable funds and the operating costs of running the bank

*Which of the following is a responsibility of ASIC?* a) Oversight of the payment system b) Supervision of banks c) Oversight of market participants and brokers d) Promotion of cooperation among central banks e) All of the above f) None of the above

c) Oversight of market participants and brokers

*Which of the following observations concerning the Fed's discount window is true?* a) The facility is provided to meet DIs' permanent liquidity needs. b) four lending programs are offered through the Fed's discount window. c) Primary credit is available to sound depository institutions on a very short-term basis. d) secondary credit is available only to depository institutions that are eligible for primary credit. e) Eligible institutions for seasonal credit are big banks located in urban areas.

c) Primary credit is available to sound depository institutions on a very short-term basis.

*A weakness of RAROC is?* a) Reduces agency costs b) Can be used to evaluate management performance c) Use on product lines with shared input costs d) Use on product lines with positive profit rates

c) Use on product lines with shared input costs

*What is the essential idea behind RAROC?* a. Evaluating the actual or contractually promised annual ROA on a loan. b. Analyzing historic or past default risk experience. c. Balancing expected interest and fee income less the cost of funds against the loan's expected risk. d. Extracting expected default rates from the current term structure of interest rates. e. Dividing net interest and fees by the amount lent.

c. Balancing expected interest and fee income less the cost of funds against the loan's expected risk.

*Which of the following refers to the term "maturity intermediation"?* a. Creation of a secondary market mature enough to withstand volatility. b. Overcoming constraints to buying assets imposed by large minimum denomination size. c. Mismatching the maturities of assets and liabilities. d. Reducing information costs or imperfections between households and corporations. e. The transfer of wealth from one generation to the next.

c. Mismatching the maturities of assets and liabilities.

*When banks use stored liquidity management, they* a. must pay interest on the funds that are stored. b. necessarily increase the asset side of the balance sheet. c. may shrink the balance sheet if cash is used as the liquidity adjustment mechanism. d. threaten the capital position of the institution. e. None of the above

c. may shrink the balance sheet if cash is used as the liquidity adjustment mechanism.

*If purchased liquidity is used by a bank to fund an exercised loan commitment:* a. the balance sheet will decrease by the amount of the new loan. b. only the asset side of the balance sheet will increase. c. the balance sheet will increase by the amount of the new loan. d. only the liability side of the balance sheet will increase. e. there will be no effect on the balance sheet.

c. the balance sheet will increase by the amount of the new loan.

*A bank's stock price will tend to rise if the?* a) Value of the stream of future stockholder dividends is expected to increase b) the banking organization's perceived level of risk has fallen c) Expected dividends increase, while perceived level of risk declines d) All of the above e) None of the above

d) All of the above

*ROE for a bank reflects:* a) How well the assets of the bank are managed b) The bank's use of leverage c) How well the bank controls expenses d) All of the above e) None of the above

d) All of the above

*The risk that many depositors withdrawal their funds at once is?* a) Credit risk b) Sovereign risk c) Currency risk d) Liquidity risk e) Interest rate risk

d) Liquidity risk - Liquidity risk is the risk that a company or bank may be unable to meet short term financial demands.

*In making credit decisions, the following item is considered a market-specific factor.* a) Whether the reputation of the borrower enhances the credit application. b) Whether the current debt-equity ratio is sufficiently low to not impact the probability of repayment. c) Whether the debt can be secured by specific property. d) Whether the position of the economy in the business cycle phase would affect the probability of borrower default. e) Whether the volatility of earnings could present a period where the periodic payment of interest and principal would be at risk.

d) Whether the position of the economy in the business cycle phase would affect the probability of borrower default.

*Australian Prudential Regulation Authority (APRA) is responsible for prudential regulation and other specific functions including:* a. The development and implementation of prudential regulation b. Monitoring regulated entities to ensure that they are complying with the relevant legislation and prudential policies. c. Advise Government on the development of regulation and legislation affecting regulated institutions and the financial markets in which they operate. d. All of the above

d. All of the above

*Give explanations for a bank having a lower ratio of interest expenses to total assets than its peers?* a. Bank has more of its assets funded with noninterest bearing sources of funds such as demand deposits and equity; b. Bank has a mix of interest bearing sources that is heavily weighted toward cheaper sources, such as core deposits; c. For each interest bearing source the bank pays a lower rate, perhaps because it is less risky, or it may simply have less need for funds. d. All of the above

d. All of the above

*The RBA is charged with the responsibility to use monetary policy to best achieve:* a. the stability of the currency of Australia; b. the maintenance of full employment in Australia; and c. the economic prosperity and welfare of the people of Australia. d. All of the above

d. All of the above

*The primary functions of the RBA are:* a. The determination and implementation of monetary policy b. Overseeing the payments system and facilitating its operation c. Acting as the government's banker and issuing securities on its behalf d. All of the above

d. All of the above

*Which following statement(s) is true?* a. A critical step in applying RAROC is determining the capital at risk. b. EVA is a measure of the value added in any given period by a bank's operations in excess of the cost of capital used in those operations. c. A higher EVA can be achieved by boosting adjusted earnings, lowering the cost of equity, or by lowering the equity allocated to the investment. d. All of the above e. None of the above

d. All of the above

*Which of the following statement (s) is true?* a. A liquidity plan for a bank should provide a detailed list of fund providers who are most likely to withdraw in the case of a liquidity crisis. b. Liquidity planning should identify the size of potential deposit withdrawals over various time horizons in the future. c. Liquidity planning primarily is designed to assist management in dealing with relatively predictable events. d. All of the above e. None of the above

d. All of the above

*RBA's open market operations may involve:* a. RBA to increase supply of ESA funds in order to decrease the cash rate. b. RBA decides what supply adjustment is necessary to maintain the cash rate at the targeted level. c. RBA announces whether it intends to buy or sell securities. d. All of the above.

d. All of the above.

*Why do households prefer to use banks as intermediaries to invest their surplus funds?* a. Transaction costs are low to the household since banks are more efficient in monitoring and gathering investment information. b. To receive the benefits of diversification that households may not be able to achieve on their own. c. The bank can benefit from combining funds, negotiating lower asset prices and transactions costs. d. All of the above. e. None of the above.

d. All of the above.

*Why do the managers of financial firms often pay close attention today to the net interest margin, non-interest margin and earnings spread?* a. A declining NIM is undesirable because the bank's interest spread is being squeezed. b. Bank manager will usually attempt to expand fee income, while controlling closely the growth of non-interest expenses in order to make a negative non-interest margin less negative. c. The earnings spread measures the effectiveness of the bank's intermediation function of borrowing and lending money. d. All of the above.

d. All of the above.

*A bank that has a high asset utilization (AU) ratio most likely:* a. Is doing a poor job of controlling expenses b. Has a small amount of financial leverage c. Has a small amount of liquidity risk d. Is allocating assets to the most productive investments e. None of the above

d. Is allocating assets to the most productive investments

*In evaluating external bank performance, which following statement(s) is FALSE?* a. A high P/E ratio indicates that investors are confident about the future growth and profitability of the bank. b. Public confidence is necessary to maintain bank solvency. c. Banks generally must seek to maximize profits subject to meeting regulatory requirements. d. Job enrichment programs, training, compensation are all tools to maintain and increase employee motivation and job satisfaction. e. None of the above

d. Job enrichment programs, training, compensation are all tools to maintain and increase employee motivation and job satisfaction.

*Which of the following is NOT a primary source of liquidity?* a. Excess cash reserves over and above regulatory reserve requirements. b. Borrowings in the money market. c. Borrowings in the purchased funds market. d. Long-term financing alternatives. e. Cash-type assets that can be sold with little price risk and low transaction costs.

d. Long-term financing alternatives.

*Which of the following statement is TRUE with regard to below-prime market pricing ?* a. It is a short term loan rate below the posted prime rate. b. It works well for large well-known corporations. c. This pricing method fails to cover risk exposure and profit margin. d. a & b only e. None of the above

d. a & b only

*Which of the following statement(s) is FALSE?* a. Cost-plus loan pricing method considers that lenders today are multiproduct businesses that often have difficulty in allocating operating costs among many different services they offer. b. LIBOR offers a common pricing standard for all banks, both foreign and domestic. c. Cost-plus loan pricing method takes into consideration that competition impacts a lender's desired profit margin. d. a & c only e. None of the above.

d. a & c only

*Bank planning:* a. ultimate objective of the bank is the maximization of owners' equity. Other bank objectives facilitate this result. b. Once the objectives of the bank are developed, they can be translated into specific, uantifiable goals. c. Budgets and strategic planning are key tools in overall bank planning d. a, b & c e. None of the above

d. a, b & c

*In order to reach its cash rate target, the Reserve Bank of Australian (RBA)?* a) Influences the supply of ESF. b) Imposes the interest rate on interbank overnight loans. c) Influences the demand of ESF. d) Assists the government in its issuance of securities. e) A and C f) All of the above g) None of the above

e) A and C

*Which of the following statements is FALSE?* a) A financial intermediary specializes in the production of information. b) A financial intermediary reduces its risk exposure by pooling its assets. c) A financial intermediary benefits society by providing a mechanism for payments. d) A financial intermediary may act as a broker to bring together funds deficit and funds surplus units. e) A financial intermediary acts as a lender of last resort.

e) A financial intermediary acts as a lender of last resort.

*The asset transformation function potentially exposes the financial institution to?* a) Foreign exchange risk b) Technology risk c) Operational risk d) Trading risk e) Interest rate risk

e) Interest rate risk

*Which of the following is part of M1?* a) Bank current accounts held by the private nonbank sector b) loans made by banks to the private nonbank sector c) bank term deposits held by the private nonbank sector d) All of the above e) None of the above

e) None of the above

*Factors that can affect profit margin adversely:* a. Competitive pressures facing banks to reduce loan pricing b. A decrease in whole sale rates. c. Change in the mix of liabilities. d. Change in the mix of assets, where there is strong growth in lower margin products. e. All of the above

e. All of the above

*Which of the following statement (s) is true?* a. If growth in assets is not matched in earnings, EPS will fall. b. Increased growth can also lead to increased risk and a subsequent loss of shareholder value. c. Latest technology to the public is to improve the competitiveness of the bank. d. Failure to comply will prompt some form of supervisory action. e. All of the above

e. All of the above

*In its role as a delegated monitor, a bank:* a. keeps track of required interest and principal payments on loans it originates. b. works with financially distressed borrowers in danger of defaulting on their loans. c. holds portfolios of loans that they continue to service. d. maintains contact with borrowers to ensure that loan proceeds are utilized for intended purposes. e. All of the above.

e. All of the above.

*The reason financial institutions can offer highly liquid, low price-risk contracts to savers while investing in relatively illiquid and higher risk assets is:* a. because diversification allows a bank to predict more accurately the expected returns on its asset portfolio. b. significant amounts of portfolio risk are diversified away by investing in assets that have correlations between returns that are less than perfectly positive. c. because individual savers cannot benefit from risk diversification. d. because FIs have a cost advantage in monitoring their portfolios. e. All of the above.

e. All of the above.

*NIM and bank size varies inversely because:* a. Larger banks use greater amounts deposits compared to smaller banks. b. Larger banks tend to have more fixed-rate loans compared to smaller banks. c. Funds are more expensive in international whole sale market where large banks are inactive. d. There are no differences in volumes, mixes and pricing between small and large banks. e. None of the above

e. None of the above

*Which statement (s) is FALSE?* a. Like RAROC, EVA is beneficial is assessing managerial performance and developing incentive compensation schemes compatible with shareholder wealth goals. b. short-term opportunities can be accepted with RAROC even though this rate of return is below the long-term cost of capital c. Investment opportunities must earn returns that exceed the cost of capital in the long-term as suggested by EVA. d. All of the above e. None of the above

e. None of the above

*Which of the following statement(s) is true?* a. Regulators are interested in making sure that banks carry an adequate quantity of liquidity, as opposed to the least cost amount. b. APRA supervises bank liquidity. c. Crisis liquidity is the ability of the bank to sustain itself when under financial distress due to abnormal losses on loans . d. If the ratio of liquid assets and liabilities in period t divided by estimated liquidity needs in period t is between zero and 1, there will not be a problem with bank liquidity. e. a, b and c only.

e. a, b and c only.