Deck 14: Commercial Bank Operations

Question 1

Securities in the trusts managed by banks are not included in the banks' assets.

Answer 1

True

Question 2

Loan capital refers to long-term,subordinated notes and debentures,some of which may be convertible into ordinary shares.

Answer 2

True

Question 3

Securitisation of loans reduces banks' capital requirements.

Answer 3

True

Question 4

Trading and investment securities are the main use of funds for banks.

Question 5

Minimum capital requirements are enforced in order to increase banks' liquidity.

Question 6

In order to decrease the credit risk of a portfolio of loans,banks need to make loans with default rates that are less than perfectly correlated.

Question 7

A line of credit is an agreement between a bank and a customer under which the bank guarantees the customer a fixed dollar amount of loan.

Question 8

The shareholders' equity of a bank can be calculated by subtracting liabilities owed to creditors from the total assets owned by the bank.

Question 9

Short-term securities are a better form of secondary reserves than long-term securities due to their higher marketability.

Question 10

The Australian government ban on mergers and takeovers among the four major banks
aims at preventing one bank to control a too large share of the banking sector,which would be detrimental to competition.

Question 11

The reduction in bank branches took place because Australian banks wanted to generate cost reductions.

Question 12

The minimum amount of capital that a bank must carry is an imposed percentage of its risk-weighted liabilities.

Question 13

The Australian banking sector is dominated by:

A)one bank.
B)two banks.
C)three banks
D)four banks.

Question 14

Concentration ratio is a tool used by banks to assess the credit risk of an individual loan.

Question 15

Provisions for loan losses are made at the time when a problem loan is written off.

Question 16

ATM surcharge and credit cards fees are examples of growing non-interest income for banks.

Question 17

Interests on loans are banks' interest income whereas fees earned for the management of trusts are banks' interest expense.

Question 18

Banks can increase their liquidity (mainly currency and balances on deposits at the RBA)exclusively by selling other forms of assets.

Question 19

Banks issue commercial paper for raising funds for long periods.

Question 20

The principal source of funds for banks is through the issue of debt securities.

Question 21

Which of the following statements is NOT correct?

A)A manufacturing company purchasing new production equipment could finance it through a bank long-term asset loan.
B)The feature that allows a transaction account to go into a negative balance is called a line of credit facility.
C)Mortgage loans are secured by the real estate they finance.
D)Individuals who want to purchase a car or a computer could finance them with a personal loan.

Question 22

Which of the following is NOT a bank debt security?

A)Term deposits
B)Commercial paper
C)Bonds
D)Eurobonds

Question 23

Banks' major use of funds is:

A)investments and trading securities.
B)cash and liquid assets.
C)property,plant and equipment.
D)loans,advances and other receivables.

Question 24

Which of the following is NOT a component of bank shareholders' equity?

A)Share capital
B)Loan capital
C)Retained profits
D)Reserve accounts

Question 25

Which of the following statements is NOT correct? The four pillars policy

A)prevents the four major banks from merging with smaller banks.
B)prevents the four major banks from merging among themselves.
C)aims at maintaining enough competition in the banking sector.
D)aims at maintaining four major players of similar size.

Question 26

Banks became increasingly involved in the securitisation of loans in the 1980s and 1990s because securitisation:

A)allows banks to reduce the amount of risky assets,and therefore to reduce capital requirements.
B)provides a use of funds that pays more interests than others.
C)allows banks to generate interests from the securitisation process.
D)allows banks to buy some loans from other banks.

Question 27

Which of the following is NOT an off-balance sheet activity of banks?

A)Financial advice
B)Standby letters of credit
C)Line of credit
D)Financial guarantees

Question 28

Transactions accounts:

A)pay high interest rates.
B)have a maturity date.
C)are the deposit accounts that can be used directly for payment.
D)can only be withdrawn before maturity with a penalty.

Question 29

The return on average assets (ROAA)is:

A)the net income generated during the period under review divided by the total assets at the end of the period considered.
B)the net income generated during the period under review divided by the total assets at the beginning of the period considered.
C)the average net income generated during the period under review divided by the total assets at the end of the period considered.
D)the net income generated during the period under review divided by the average total assets over the period considered.

Question 30

Which of the following features make a negotiable CD different from a term deposit?

A)It has a maturity date.
B)It can be transferred to a third party before the maturity date.
C)The bank pays a fixed interest rate on it.
D)The interests are paid at the maturity date.

Question 31

Which of the following is NOT a bank liability?

A)Transaction accounts offered by the bank
B)Funds borrowed by the bank
C)Investment securities owned by the bank
D)Time deposits offered by the bank

Question 32

In order to survive,banks have to balance the demand of:

A)shareholders,depositors and bank regulators.
B)depositors and bank regulators.
C)shareholders and depositors.
D)shareholders and bank regulators.

Question 33

Which of the following is NOT one of the six Cs in credit analysis?

A)Conditions
B)Capital
C)Crisis
D)Collateral

Question 34

Which of the following is NOT a bank asset?

A)Loans made by the bank
B)Trading securities owned by the bank
C)Debt issues
D)Cash

Question 35

Which of the following are NOT part of bank interest income?

A)Interest on loans made by the bank
B)Interest on term deposits offered by the bank
C)Interest on investment securities held by the bank
D)Interests on balances of deposits held at the RBA

Question 36

Which of the following is NOT a bank liability?

A)Term deposits offered by the bank
B)Transaction accounts offered by the bank
C)Negotiable CD issued by the bank
D)Deposits at the RBA

Question 37

The gradual reduction of bank branches has been motivated by:

A)activity diversification.
B)geographical spread.
C)cost reduction.
D)safety.

Question 38

In a standby letter of credit (SLOC)the bank:

A)receives interest income.
B)raises some funds.
C)acquires a contingent liability.
D)acquires a contingent asset.

Question 39

Which of the following is NOT taken into account in the calculation of banks' net interest income?

A)Interest on loans made
B)Interest on saving accounts offered
C)Interest on government bonds held
D)Fees from management of trusts

Question 40

Which of the following is NOT a form of bank loan?

A)Overdraft facility
B)Line of credit
C)Government securities
D)Lease

Question 41

Credit derivatives are instruments that banks can use:

A)to increase their profit.
B)to increase their capital.
C)to minimise their credit risk exposure.
D)to increase their liquidity.

Question 42

Which of the following statements is NOT correct? Banks can get liquidity by

A)selling securities from their portfolio.
B)issuing securities.
C)attracting new depositors.
D)buying securities.

Question 43

In Basel III Accord the ratio of:

A)common equity to risk-weighted assets must be at least 4%.
B)total capital to risk-weighted assets must be at least 4%.
C)tier 1 capital to risk-weighted assets must be at least 6%.
D)tier 2 capital to risk-weighted assets must be at least 8%.

Question 44

The liquidity gained through liability management is useful to a bank because:

A)it can be used to counteract deposit outflows.
B)it can be used to meet increases in loan demand by the bank's customers.
C)it allows banks to engage in more off-balance-sheet activities.
D)all of the above.

Question 45

A high concentration of loans to the same industry in a portfolio:

A)increases the credit risk of the portfolio.
B)increases the interest rate risk of the portfolio.
C)increases the market risk of the portfolio.
D)all of the above.

Question 46

Value at risk is a statistical probability model used to assess:

A)risk in financial firms' trading accounts and overall riskiness for banks.
B)bank's overall liquidity risk.
C)bank's overall credit risk.
D)bank's overall operational risk.

Question 47

Which of the following statements is NOT correct? Credit swaps bought by a bank

A)are credit derivatives.
B)are off- bank balance sheet activities.
C)help the bank protect itself against interest rate risk.
D)require a regular payment to the seller in order to have the seller paying the bank if the borrower on a loan defaults.

Question 48

Which of the following statements is NOT correct?

A)If RSA is greater than RSL,the maturity gap is positive.
B)If RSA is less than RSL,the maturity gap is negative.
C)If RSA equals RSL,the maturity gap is zero.
D)If RSA equals 0 and RSL is positive,the maturity gap cannot be calculated.

Question 49

Capital is important to a bank because:

A)it absorbs asset losses preventing bankruptcy.
B)it helps maintain public confidence in the soundness and safety of individual banks and the banking system.
C)it provides funds that do not need to be paid back.
D)all of the above.

Question 50

Which of the following is NOT part of Tier 1?

A)Retained earnings
B)Ordinary shares
C)Other disclosed reserves
D)General reserve for credit losses

Question 51

If the duration gap is 0 and interest rates increase:

A)the market value of assets increases more than the market value of liabilities.
B)the market value of assets decreases more than the market value of liabilities.
C)the market value of assets decreases by the same amount as the market value of liabilities.
D)the market value of assets increases by the same amount as the market value of liabilities.

Question 52

The Basel III Accord incorporates _________ into capital standards.

A)credit,market and operational risks
B)credit,market and liquidity risks
C)credit,capital and operational risks
D)credit,liquidity and operational risks

Question 53

The most common way of assessing the overall credit risk of a loan portfolio is by using:

A)internal credit risk rating of the borrower.
B)concentration ratio by geographical area,loan type and business type.
C)credit analysis of the 6 Cs.
D)credit scoring.

Question 54

Maturity gap is:

A)a measure of the difference between the duration of a bank's assets and the duration of its liabilities.
B)a measure of the difference between the value of assets that will either mature or be repriced within a given time interval and the value of liabilities that will either mature or be repriced during the same time period.
C)a measure of the difference between the duration of a bank's liabilities and the duration of its assets.
D)a measure of the difference between the value of liabilities that will either mature or be repriced within a given time interval and the value of assets that will either mature or be repriced during the same time period.

Question 55

If we are at the bottom of a business cycle and interest rates are low and expected to rise,bank management would want _________ for the horizon where the interest rates are expected to rise.

A)a large positive gap
B)a large negative gap
C)a zero gap
D)a small negative gap

Question 56

Which of the following is NOT a situation where a bank needs liquidity?

A)Customers' payments with their deposit accounts balances.
B)Withdrawal by customers at the bank's ATMs.
C)Loan request by credit worthy customers.
D)Sale of securities from the bank portfolio.

Question 57

Matched funding by banks:

A)is a form of Macro hedging.
B)requires using instruments of risk management,such as financial futures,options on financial futures and interest rate swaps to reduce the interest rate risk of the firm's entire balance sheet.
C)happens if for instance fixed-rate loans are funded with fixed rate deposits or fixed rate borrowed funds of the same maturity.
D)is achieved when banks borrows short and lend long.

Question 58

A bank expecting interest rates to rise in the future would prefer to:

A)issue short-term fixed-rate bonds.
B)make long-term,fixed rate loans.
C)issue long term floating-rate bonds with rate adjusted frequently.
D)make floating-rate loans with rate adjusted frequently.