Deck 2: Commercial Banks

Question 1

Which of the following about a bank's activities is incorrect?

A) A bank's loans are its assets.
B) Off-balance-sheet business items are contingent liabilities.
C) Liability management is the management of a bank's loans.
D) Banks typically have high credit ratings.

Answer 1

C

Question 2

Each of the following balance sheet portfolio items are sources of funds for a bank,except:

A) term deposits.
B) bill acceptance facilities.
C) certificates of deposit.
D) overdrafts.

Answer 2

D

Question 3

Off-balance-sheet business for a bank refers to:

A) a bank's income.
B) a bank's contingent liabilities.
C) assets that will appear on the forthcoming balance sheet.
D) transactions recorded on the previous balance sheet.

Answer 3

B

Question 4

The liabilities on a bank's balance sheet are:

A) the sources of funds.
B) the uses of funds.
C) the different types of loans the bank offers.
D) equal to the assets of the banks.

Question 5

Which of the following features is a role of a bank?

A) Attracting funds from the capital markets to facilitate borrowing by the household sector
B) Facilitating the flow of funds from borrowers to lenders
C) Facilitating the flow of funds from savers to borrowers
D) Managing the level of interest rates

Question 6

Which of the following statements concerning banks is incorrect?

A) In Australia, banks currently account for the largest share of assets of all financial institutions.
B) Bank loans and commitments must be supported by a minimum specified amount of capital.
C) At least 50% of the capital requirement must be in the form of Tier 1 capital.
D) The Australian Reserve Bank monitors capital adequacy requirements for banks.

Question 7

Which of the following is a bank liability?

A) Consumer loans
B) Lease finance
C) Bills receivable
D) Certificates of deposit

Question 8

The changes to the regulations for the banking industry under deregulation in the mid 1980s have resulted in _______ the growth of bank sector.

A) decreasing
B) increasing
C) not altering
D) dramatically decreasing

Question 9

Banks have gradually moved to liability management in the management of their balance sheets.Which statement best describes liability management?

A) The loan portfolio is tailored to match the available deposit base.
B) The deposit base and other funding sources are managed in order to fund loan and other commitments.
C) The ratio of debt to equity is managed to meet capital adequacy requirements.
D) The liability to assets ratio is maintained within central bank standards.

Question 10

For banks,asset management refers to:

A) managing the assets of the banks; that is, their deposits.
B) managing the real assets, the bank buildings.
C) managing the loans portfolio.
D) protecting the deposits by using derivatives.

Question 11

When a bank raises funds in the international markets to fund new lending growth,it is involved in:

A) asset management.
B) off-balance-sheet business.
C) liability management.
D) derivative management.

Question 12

Deregulation of the banking sector throughout the late 1970s and the 1980s sought to:

A) reduce the reliance of major Australian companies on international capital markets.
B) reduce the excess profits of banks.
C) reduce the discrimination against banks owing to direct controls on them only.
D) provide reduced control on the money supply.

Question 13

Each of the following balance sheet portfolio items are liabilities of a bank,except:

A) term deposits.
B) bill acceptance facilities.
C) certificates of deposit.
D) overdrafts.

Question 14

Which of the following statements about deposits is correct?

A) Call accounts represent a fluctuating source of funds for banks.
B) Term deposits are funds lodged with a bank for longer than two weeks.
C) As current accounts are highly liquid, they form an unstable source of funds for a bank.
D) A cheque account may pay interest.

Question 15

The level of banks' share of assets of all Australian financial institutions from the 1950s onwards first _______,then in the 1980s _______ and recently has _______ owing to banks forming consolidated corporate entities.

A) increased; decreased; increased
B) increased; decreased; remained stable
C) decreased; increased; decreased
D) decreased; increased; remained stable

Question 16

The market structure of the banking sector has changed since deregulation of the financial system during the 1980s.Which statement most closely reflects the current structure of the banking sector in Australia?

A) Foreign banks dominate in number and share of total assets.
B) Major Australian banks no longer hold the largest share of total assets.
C) Total assets are fairly evenly distributed between the major, regional and foreign banks.
D) Major banks maintain the highest percentage of branches and share of total assets.

Question 17

Which of the following statements about banks' current accounts is incorrect?

A) Current accounts today generally pay interest.
B) Current accounts are a relatively stable source of bank funds.
C) Deregulation had a major impact on current accounts.
D) Current accounts form an increasingly important type of asset for banks.

Question 18

Unlike most other businesses,a bank's balance sheet is made up mainly of:

A) real assets and financial liabilities.
B) real liabilities and financial liabilities.
C) real assets and real liabilities.
D) financial assets and liabilities.

Question 19

For banks,liability management refers to:

A) managing the liabilities of the banks; that is, the loans.
B) banks ensuring they have sufficient funds by managing their deposit base.
C) managing the real assets, the bank buildings.
D) protecting the loans and other commitments by using derivatives.

Question 20

The assets on a bank's balance sheet are:

A) the sources of funds.
B) the uses of funds.
C) the different types of deposits the bank offers.
D) equal to the liabilities of the banks.

Question 21

If a bank required more short-term funding,it would issue:

A) a certificate of deposit.
B) a debenture.
C) an unsecured note.
D) preference shares.

Question 22

With regard to bank bills,the actual role of the acceptor is to:

A) provide the initial funding.
B) act as mediator between the borrower and bank.
C) issue the bank bill.
D) pay the face value of the funds to the holder at maturity.

Question 23

Which of the following is generally a highly liquid instrument?

A) A bank bill
B) A certificate of deposit
C) Neither a bank bill nor a certificate of deposit
D) Both bank bills and certificates of deposit are liquid instruments

Question 24

For a bank,an advantage of bill financing is:

A) the bank earns income from accepting bills.
B) the bank doesn't necessarily have to use its own funds.
C) interest rates on bill funding can be adjusted rapidly.
D) all of the given answers.

Question 25

The advantage of a CD to a bank is/are:

A) its rate of interest may be adjusted quickly.
B) it can be sold quickly in the money market for cash.
C) it is a negotiable instrument.
D) all of the given choices.

Question 26

Which of the following is incorrect in relation to bill financing?

A) The drawer is the party seeking the funds.
B) If a bank accepts the bill this enhances its credit quality.
C) An issuer will seek to sell the bill in the market at the highest yield.
D) Bills are sold at a discount to face value.

Question 27

A major difference between a bank's term deposit and a certificate of deposit is:

A) a term deposit represents an asset for a bank, while a certificate of deposit is a liability.
B) a certificate of deposit does not pay interest until maturity.
C) a certificate of deposit is illiquid when compared with a term deposit.
D) a certificate of deposit is a high-credit-risk instrument when compared with a term deposit.

Question 28

Which of the following statements about bill acceptance facilities is incorrect?

A) When a bank discounts a bill for the issuer, it buys it.
B) When a bank that holds a bill rediscounts it the bank onsells it.
C) When a bank acts as an acceptor it will pay the face value of the bill to the holder at maturity.
D) If interest rates change before a bank bill matures, the bank can change the interest rate on it.

Question 29

As a depositor shifts funds from current deposits to term deposits in a bank,generally the depositor's:

A) liquidity increases and credit risk increases.
B) liquidity decreases and interest income increases.
C) liquidity decreases and interest income decreases.
D) implicit interest increases and explicit interest decreases.

Question 30

Foreign currency liabilities have increased in importance as a source of funds for Australian banks.Which of the following statements is NOT a major reason?
I)deregulation of the foreign exchange market
Ii)diversification of funding sources
Iii)demand from multinational corporate clients
Iv)internationalisation of global financial markets
V)avoidance of the non-callable deposit prudential requirement
Vi)expansion of banks' asset-base denominated in foreign currencies

A) v
B) ii
C) i
D) All of the given answers are correct.

Question 31

With regard to bank bills,the expression 'the issuer sells the bill at the best discount' means the issuer:

A) is providing the funding.
B) is acting as mediator between the borrower and the bank.
C) is selling the bill into the market at the lowest yield.
D) pays the lowest face value of the funds to the holder at maturity.

Question 32

Which of the following regarding certificates of deposit (CDs)is correct?

A) CDs pay daily interest instead of monthly as for ordinary deposits.
B) CDs generally pay higher interest because they are not liquid.
C) The rate of interest on a CD can be adjusted quickly.
D) CDs with a face value of more than $100 000 are non-negotiable.

Question 33

Which of the following statements is NOT true of term deposits?

A) They are less liquid than a current deposit.
B) They usually offer a higher return than a current deposit.
C) They are attractive to investors who expect interest rates to fall.
D) They are generally negotiable instruments.

Question 34

Commercial banks take part in the money markets as:

A) lenders of funds only.
B) borrowers of funds only.
C) both lenders and borrowers of funds.
D) underwriters only.

Question 35

A short-term discount security issued by a drawer at a discount,with the promise to repay the face value at maturity,is called:

A) a commercial paper.
B) a commercial bill.
C) a certificate of deposit.
D) all of the given answers.

Question 36

With regard to bank bills,the bill is sold at a discount:

A) because the bank needs to find a buyer.
B) to encourage buyers.
C) because the difference between the initial price and the final sale price is the return to the holder.
D) because the bank pays the face value of the funds to the borrower at maturity.

Question 37

The following balance sheet portfolio items are all assets of a bank,except:

A) overdrafts.
B) lease finance.
C) certificates of deposit.
D) credit card draw-downs.

Question 38

Alternatives to the usual source of long-term bank funds that have the characteristics of both debt and equity are called:

A) secured debentures.
B) transferable certificates of deposit.
C) promissory notes.
D) subordinated notes.

Question 39

The term 'negotiable' in relation to a security means:

A) its price can be bargained for when sold.
B) it can be sold easily.
C) its buyer can negotiate its price when buying.
D) it is reasonably illiquid and will drop in price when sold.

Question 40

Which of the following about CDs is incorrect?

A) CDs are issued directly into the money markets.
B) CDs don't include interest until maturity.
C) CDs are called discount securities.
D) CDs are issued by large, creditworthy companies.

Question 41

Banks invest in government securities because:

A) they offer high yield owing to their risk.
B) they offer a low yield owing to their illiquidity.
C) all government bonds offer protection against inflation risk.
D) they can be used as security against banks' borrowing.

Question 42

Which of the following statements about commercial lending is incorrect?

A) The term loan is the main type of lending provided by banks to firms.
B) Typically, term loans are for maturities ranging from 5 to 15 years.
C) To extend commercial bill financing a bank may provide the firm with a rollover facility.
D) Banks can provide flexible funding called an overdraft to firms.

Question 43

Which of the following statements is true for off-balance-sheet business for banks?

A) Off-balance-sheet business is a small part of a bank's income.
B) Off-balance-sheet business is recorded on a bank's statement of income and expense.
C) Off-balance-sheet business represents fee-based income.
D) Off-balance-sheet business records deposits that do not fit on the balance sheet.

Question 44

Which of the following statements regarding the foreign currency liabilities of a bank is incorrect?

A) The large international markets are important sources of funds for commercial banks.
B) Australian banks occasionally issue debt securities into the international markets to raise sums ranging from $20 million to $50 million.
C) Foreign currency liabilities issued into the euromarkets are typically denominated in US dollars.
D) After deregulation commercial banks were able to expand their international funding sources.

Question 45

Which of the following statements about market-rate-related items such as forward-rate agreements is incorrect?

A) They are generally called off-balance-sheet items.
B) They are liabilities that may require an outflow of funds for a bank.
C) They are included in the BIS capital-adequacy guidelines.
D) They form a small part of banks' OBS business.

Question 46

Off-balance-sheet business is usually divided into four major categories:

A) Direct credit substitutes, trade and performance-related items, commitments and trade guarantees.
B) Direct credit substitutes, trade and performance-related items, commitments and market-related transactions.
C) Direct credit substitutes, trade and performance-related items, commitments and underwriting facilities.
D) Direct credit substitutes, 'standby letters of credit', commitments and market-related transactions.

Question 47

All of the following financial securities are considered 'uses of funds' by banks except:

A) commercial bills.
B) credit cards.
C) certificates of deposit.
D) overdrafts.

Question 48

A 'commitment' by a bank is:

A) a form of swap.
B) a promise by a large depositor to provide extra funds to the bank.
C) the unused balance on a bank credit card.
D) an undertaking to advance funds or to acquire an asset in the future.

Question 49

An example of an 'off-sheet business' transaction that banks are generally involved in is:

A) providing a 'standby letter of credit'.
B) providing a note issuance facility.
C) providing a short-term, self-liquidating trade contingency.
D) all of the given answers.

Question 50

Off-balance-sheet business for a bank refers to:

A) deposits and loans longer than one year.
B) transactions that are currently only a contingent liability.
C) call deposits that may be withdrawn on demand.
D) consumer loans that are in default.

Question 51

Which of the following is NOT an argument for some form of government regulation of the banking system?

A) The money-creation role of banks
B) A major source of funds to the banks comes from households who need their savings protected
C) The excess return on assets that banks have been making in recent years
D) Maintaining confidence in the financial system

Question 52

Which of the following statements about direct credit substitutes provided by a commercial bank is incorrect?

A) They are provided to support a client's financial obligations.
B) An example of a direct credit substitute is a bank guarantee.
C) The bank provides funding to a third party instead of the client providing the funding.
D) With a direct credit substitute a bank's client can raise funds directly from the financial markets.

Question 53

Which of the following categories represents the most significant proportion of total off-balance-sheet business of the banks?

A) Direct credit substitutes
B) Trade and performance-related items
C) Commitments
D) Market-rate-related transactions

Question 54

Which of the following categories represents the most significant proportion of total market-rate-related off-balance-sheet business of the banks?

A) Currency swap agreements
B) Foreign exchange contracts
C) Interest rate swaps
D) Interest rate futures

Question 55

All of the following are off-balance-sheet transactions of a bank except:

A) documentary letters of credit.
B) performance guarantees.
C) underwriting facilities.
D) bills receivable.

Question 56

Which of the following is not a commitment by a bank?

A) Outright forward purchase agreement
B) Underwriting facilities
C) Credit card limit approvals unused by cardholder
D) Currency swap

Question 57

Which of the following about bank lending to government is incorrect?

A) Securities issued by governments are usually regarded as low risk.
B) Banks invest in government securities because they are a source of liquidity.
C) Banks invest in T-notes because they provide short-term income streams.
D) Government securities enable a bank to manage the maturity structure of its balance sheet.

Question 58

In recent times,there had been a substantial expansion in fee-related income for banks.What is the principal reason for this?

A) Increased confidence in banks by individual investors
B) Increased off-sheet business (OBS) for banks
C) Reduced guidelines by Australian bank supervisor APRA
D) Increased deposits in banks

Question 59

The interest rate BBSW refers to:

A) the reference rate for medium-term funding.
B) a rate calculated each day from the offer rate of the last daily sale in the bank bill market.
C) the average mid-point of the bid and offer rates in the bank bill market.
D) the bank bill security rate.

Question 60

If you take out a mortgage from a bank,the mortgage is a/an:

A) liability to the bank and an asset to you.
B) liability to you and an asset to the bank.
C) liability to both you and the bank.
D) asset to both you and the bank.

Question 61

A large commercial bank operating in the international markets will generally apply to the banks' supervisor to use the _____ to credit risk.

A) advanced internal ratings-based approach
B) foundation external ratings-based approach
C) standardised approach
D) standardised approach with external ratings

Question 62

Which of the following institutions are supervised by APRA?

A) Building societies
B) Commercial banks
C) Credit unions
D) All of the given answers

Question 63

The Australian institution APRA is responsible for the regulatory supervision of financial institutions such as banks and credit unions.APRA stands for:

A) Australian Practice and Regulatory Association.
B) Australian Prudential Regulation Authority.
C) Australian Prudential Rule Authority.
D) Australian Practice and Regulatory Authority.

Question 64

Which of the following does NOT apply to Tier 1 capital?

A) Tier 1 capital is described as 'core capital'.
B) Tier 1 capital must constitute at least 50% of a bank's capital base.
C) Paid-up ordinary shares can be included in Tier 1 capital.
D) Cumulative irredeemable APRA-approved preference shares can be included in Tier 1 capital.

Question 65

The requirement and observation of standards designed to ensure the stability and soundness of a financial system is called:

A) fiscal policy.
B) monetary policy.
C) prudential supervision.
D) the Basel accord.

Question 66

A bank provides documentary letters of credit for a company that has a credit rating of A+.The face value of contracts outstanding is $2 million.Calculate the dollar value of capital required under the capital adequacy requirements to support these facilities,given that the bank supervisor's credit conversion factor is 20%.

A) $6 400
B) $16 000
C) $160 000
D) $240 000

Question 67

Which of the following is NOT associated with the purpose of regulating financial institutions?

A) Providing stability of the money supply
B) Directing flow of funds to priority areas
C) Maintaining the soundness and stability of the financial system
D) Lowering the cost of funds

Question 68

Which of the following statements regarding capital adequacy requirements is incorrect?

A) Existing credit-risk guidelines are extended to include market risk arising from a bank's trading activities.
B) Regulators focus on credit risk, market risks, operational risk and type of capital held.
C) Eligible Tier 1 capital must constitute at least 70% of a bank's capital base.
D) Tier 2 capital is divided into upper and lower Tier 2 parts.

Question 69

The Pillar 1 approach of Basel II capital adequacy incorporates the following three risk components:

A) credit risk, interest-rate risk and market risk.
B) default risk, interest-rate risk and operational risk.
C) credit risk, market risk and operational risk.
D) default risk, foreign exchange risk and operational risk.

Question 70

According to the textbook,the Basel II approach to capital adequacy for banks involves ____ main elements.

A) three
B) four
C) five
D) six

Question 71

In the Basel II standardised approach to external rating grades,the asset counterparty weights for capital adequacy guidelines are:

A) 10%, 20%, 50% and 100%.
B) 10%, 50%, 100% and 150%.
C) 20%, 50%, 100% and 150%.
D) 20%, 50%, 100% and 200%.

Question 72

Under Pillar 1 of the Basel II framework,the risk weight for a residential housing loan is determined by the:

A) amount borrowed.
B) level of mortgage insurance.
C) house valuation.
D) all of the given answers.

Question 73

Some of the elements in assessing capital adequacy requirements for banks under the Basel II capital accord are:

A) credit risk, liquidity risk and interest rate risk.
B) credit risk, market risk and type of capital held.
C) default risk, interest rate risk and market risk.
D) default risk, liquidity risk and type of capital held.

Question 74

Under the capital adequacy requirement for banks,in order to fund a $100 000 loan for a multinational corporate client with a Standard & Poor's rating of AA,a bank will:

A) assign a risk-weighting of 20% for the balance.
B) allocate Tier 1 and Tier 2 capital to the loan according to the riskiness of the company.
C) seek funding in the euromarkets to minimise the capital adequacy requirements.
D) apply a risk weighting of 50% to the loan to determine the total capital requirement.

Question 75

Within the context of the Corporations Law in Australia,the supervision of financial market integrity and consumer protection is done by:

A) APRA.
B) ASIC.
C) RBA.
D) ACCC.

Question 76

The Basel capital adequacy requirements apply to:

A) all financial institutions.
B) banks, investment banks and merchant banks only.
C) all financial institutions supervised by ASIC.
D) all banks registered with APRA and some other financial institutions.

Question 77

Which of the following statements about regulatory capital is false?

A) Tier 1 capital includes paid-up ordinary shares, retained earnings, non-cumulative irredeemable preference shares and general reserves.
B) Tier 2 capital includes general provision for doubtful debts, revaluation reserves of premises, mandatory convertible notes and approved perpetual subordinated debt.
C) Tier 1 capital is core capital, including paid-up ordinary shares, non-cumulative irredeemable preference shares and general reserves.
D) Tier 2 capital includes general reserves for doubtful debts, asset revaluation reserves of premises, other preference shares, mandatory convertible notes, cumulative redeemable preference shares and perpetual subordinated debt.

Question 78

Under Basel II prudential standards,an institution is required to maintain a risk-based capital ratio of _____ of total-risk-weighted assets.

A) 2.00 percent
B) 4.00 percent
C) 8.00 percent
D) 10.00 percent

Question 79

A bank provides a loan of $1 million to a company that has an A rating.Calculate the dollar value of capital required under the capital adequacy requirements to support the facility.

A) $16 000
B) $40 000
C) $80 000
D) $120 000

Question 80

The Basel II risk weighting factor for a bank loan to an Australian company with a Moody's Investors Service rating of C is:

A) 20%.
B) 50%.
C) 100%.
D) 150%.