Deck 14: International Banking

Question 1

U.S. bank regulators allow U.S. banks overseas to engage in all banking activities allowed by the host country.

Answer 1

False

Question 2

Correspondent banks can nprovide full banking services in foreign country.

Answer 2

False

Question 3

Representative offices are usually established to coordinate business between domestic and foreign banks.

Answer 3

False

Question 4

U.S. banks have been permitted to engage in a wider range of business activities in foreign countries than at home in order to be competitive with foreign banks.

Question 5

The Edge Act of 1919 permitted U.S. banks to create international banking facilities.

Question 6

Expropriation and nationalization are two methods of guaranteeing payment of U.S. bank loans to developing countries.

Question 7

Pooling and third-party guarantees are two methods of reducing international currency risk.

Question 8

IBFs may be established by a U. S.-chartered depository institution, a U.S. branch or agency of a foreign bank, or a U. S. office of an Edge Act Corporation.

Question 9

Shell branches are developed for international money market transactions without contact with the public of the host country.

Question 10

Until the passage of the International Bank Act of 1978, foreign banks enjoyed substantial operating advantages over domestic banks in the U.S.

Question 11

Edge Act corporations can engage in some types of equity investments.

Question 12

Representative offices can accept deposits and make loans in the host country.

Question 13

IBFs collect small domestic deposits and make foreign loans.

Question 14

Participating in a syndicated loan helps banks reduce their credit risk.

Question 15

Pooling risk entails lending by several banks to a foreign borrower.

Question 16

Troubled sovereign loans to less developed countries are usually rescheduled rather than foreclosed.

Question 17

International banking facilities (IBFs) operate as subsidiaries of bank holding companies.

Question 18

Foreign branches of U.S. banks evolved in the 1960s as a reaction to capital flow regulations in the U.S.

Question 19

Shell branches pay no local taxes and usually operate in stable political environment.

Question 20

Foreign branches of U.S. banks are subject to both the host nation's regulations and the regulations in the U.S.

Question 21

An international lender's concern about the changing tax rate on interest income from an international loan is an example of

A) credit risk.
B) country risk.
C) foreign exchange risk.
D) reinvestment risk.

Question 22

Which of the following laws is NOT associated with U.S. regulation of international banking?

A) Federal Reserve Act of 1913
B) Edge Act of 1919
C) National Banking Act of 1863
D) International Banking Act of 1978

Question 23

Which of the following forms of international banking organization was intended to bring offshore, shell banking back to the U. S.?

A) Edge Act banks
B) correspondent bank
C) international banking facility
D) foreign subsidiary bank

Question 24

A loan syndication is similar to

A) loan securitization.
B) investment banking underwriting syndicates.
C) defaulting on a loan.
D) having a mortgage on specific asset to support the loan.
E) credit insurance.

Question 25

While country central banks have pursued their own country interests, recently under the framework of the Bank for International Settlements, central banks from leading economies have agreed to

A) allow international banks to branch throughout every country involved.
B) stabilize interest rates.
C) establish minimum capital ratios for international banks.
D) maintain fixed exchange rates.

Question 26

Under U.S. regulations Edge Act subsidiaries must devote at least 50 percent of their business to assisting customers with export-import trade and international credit.

Question 27

Most large international loans are funded in the Eurocurrency market.

Question 28

International bank lending is characterized by all of the following except that loans

A) are unsecured.
B) have floating rates.
C) are made for relatively small amounts.
D) are priced relative to the LIBOR.

Question 29

Most of the largest banks in the world are based in

A) Europe
B) the United States
C) Japan
D) China
E) Latin America

Question 30

Which of the following forms of international banking organization is a separate federal corporate charter to operate international banking business including equity investments?

A) international banking facility
B) foreign branch
C) correspondent bank
D) Edge Act bank

Question 31

International lending based on LIBOR with a rollover-pricing feature protects the bank from

A) liquidity risk.
B) interest rate risk.
C) default risk.
D) solvency risk.

Question 32

Unlike the United States, many countries grant their banks the authority for

A) full merchant banking.
B) deposit banking.
C) forming bank holding companies.
D) lending to foreign companies and countries.
E) borrowing from foreign markets

Question 33

Which of the following forms of international banking organization is an extension of a domestic bank but is located in a foreign country?

A) foreign branch
B) shell branch
C) representative office
D) international banking facility
E) correspondent bank

Question 34

Which of the following is NOT a reason for the rapid expansion of U.S. banks overseas between 1980 and 2000 ?

A) the establishment of the Edge Act
B) overall expansion of U.S. world trade
C) the growth of multinational corporations
D) restrictions on outflow of funds from the U.S.
E) the International Bank Act of 1978

Question 35

Which of the following forms of international banking organization is associated with providing a complete range of international banking services associated with foreign trade to domestic banks?

A) international banking facility
B) shell branch
C) correspondent bank
D) Edge Act bank

Question 36

Most shell branches of U.S. banks operate in

A) Japan.
B) United Kingdom.
C) Bahamas and British West Indies.
D) Canada.

Question 37

The major period for the US banks to grow internationally is after 2000 due to the deregulation of banking industry.

Question 38

Which of the following is not an example of country or sovereign risk in international lending?

A) profit controls
B) loan default by borrower
C) nationalization of borrower
D) a new political party now controls the government

Question 39

Which of the following forms of international banking organization is associated with interbank money market transactions?

A) representative office
B) shell branch
C) Edge Act corporation
D) international banking facility

Question 40

Which of the following forms of international banking organization is a separately incorporated bank owned entirely or in part by a U.S. bank or bank holding company?

A) foreign subsidiary bank
B) international banking facility
C) Edge Act bank
D) shell branch

Question 41

Unlike banks based in the U.S., European-based banks are allowed to

A) make floating-rate loans
B) pay competitive rates on deposits
C) make loans to borrowers with subprime credit ratings
D) take equity stakes in non-financial companies
E) make overnight interbank loans

Question 42

The purpose of the International Banking Act of 1978 was to

A) return the competitive edge to U.S. banks.
B) return competitive equality between domestic and foreign banks.
C) slow down the competitiveness of foreign banks.
D) none of the above

Question 43

All of the following are techniques reducing credit risk in international lending except

A) foreign government guarantees of loans to private corporations.
B) pooling risk through syndication with other banks.
C) making floating-rate loans as opposed to fixed-rate loans.
D) diversification.

Question 44

The LIBOR is

A) an interbank lending rate.
B) an index rate used to price many international loans.
C) the highest yield available on time deposits in international banks.
D) the informal currency exchange in London.
E) both a and b

Question 45

A loan made by a U.S. bank to a foreign private corporation guaranteed by the host government and payable in dollars has what risks associated with it?

A) bank risk
B) country risk
C) foreign exchange risk
D) both a and c
E) all of the above

Question 46

Which of the following factors is an important consideration in international lending?

A) credit risk
B) country risk
C) currency risk
D) all of the above

Question 47

A foreign branch office of a U.S. bank is regulated by

A) U.S. bank regulations
B) the host country bank regulation.
C) the FDIC.
D) the SEC.
E) both a and b

Question 48

A U.S. bank loan to a Mexican manufacturer payable in pesos accepts which risks?

A) country risk
B) credit risk
C) currency risk
D) both a and c
E) all of the above

Question 49

Which of the following is NOT true about International Banking Facilities (IBFs)?

A) IBFs may be established by a U.S.-chartered depository institution, a U.S. branch or agency of a foreign bank, or a U.S. office of an Edge Act Corporation.
B) An IBFs is a set of asset and liability accounts segregated on the books of the establishing institution.
C) IBFs can accept deposits over $100,000 from non-U.S. residents or other IBFs.
D) Deposits generated can be used to make domestic loans only.
E) All of the above is true.

Question 50

The 1978 International Bank Act

A) prohibited foreign banks from establishing any new U.S. banking operations.
B) allowed U.S. banks to engage in a wider range of non-banking activities overseas.
C) allowed U.S. banks to take equity positions in overseas business ventures.
D) reduced the competitive advantage of foreign banks over U.S. banks.

Question 51

Which of the following is not related to rescheduling activities of a troubled sovereign loan?

A) Shortening the repayment schedule.
B) The consolidation of several loans into one.
C) The extension of governmental guarantees to private business debt.
D) The granting of a grace period, during which no payment is expected.

Question 52

The development of foreign banking activities in the 1960s was prompted by all of the following U.S. regulations that restricted U.S. capital flows abroad except:

A) Foreign Direct Investment Program (FDIP)
B) Agricultural Export Restraint Program (AERP)
C) Interest Equalization Tax (IET)
D) Voluntary Foreign Credit Restraint program (VFCR)

Question 53

International floating-rate bank loans are funded by

A) relatively long-term time deposits because the loans have long maturities.
B) syndicated demand deposits.
C) short-term time deposits.
D) cash flows from loan interest and principal.

Question 54

Which of the following is associated with the currency risk of international lending by a U.S. bank?

A) The Spanish borrower is slow to pay the U.S. bank.
B) The U.S. bank is paid dollars by its foreign borrowers.
C) A U.S. bank receives an interest payment from a French borrower paid in Euros.
D) A U.S. bank holds a mortgage on property in a country in the middle of a civil war.

Question 55

Most U.S. foreign bank operations have been limited by regulation to lending and not controlling equity investments because of a concern for

A) bank safety.
B) promoting competition.
C) keeping banking and other business activity separate.
D) protecting bank depositors.

Question 56

The rescheduling of troubled international loans involves all of the following except

A) the separation of larger loans into several more, smaller loans that are easier to repay.
B) the extension of governmental guarantees to private sector debts.
C) the granting of grace periods, which defers payment for a time.
D) the extension of the payment date.

Question 57

Which of the following statements is true?

A) In general, U.S. banks are permitted to engage in a wider range of business activities in the U.S. than in foreign countries.
B) In general, U.S. banks are permitted to engage in a wider range of business activities in foreign countries than in the U.S.
C) In general, U.S. banks are permitted to engage in a wider range of business activities in the U.S. than foreign banks.
D) In general, foreign banks are permitted to engage in a wider range of business activities in the U.S. than in their home countries.
E) Both a and d are true statements.

Question 58

An Edge Act bank may

A) be located in the United States outside a parent's own state.
B) own foreign banking subsidiaries.
C) engage only in international banking activities.
D) all of the above

Question 59

A representative office

A) can assist the parent bank's customer only in that country and cannot accept deposits or make loans.
B) can only accept deposits and cannot make loans.
C) can both accept deposits and make loans.
D) can engage only in money market transactions.

Question 60

An initial foothold entry into international banking is a(n)

A) representative office.
B) branch bank.
C) Edge Act corporation.
D) IBF.

Question 61

Which of the following is not true about shell branches set by U.S. banks?

A) They conduct limited interbank money market transactions rather than retail public operations.
B) They do foreign exchange transactions and limited loan participation in Eurocurrency markets.
C) They pay local taxes.
D) All of the above are true

Question 62

A U.S. bank is owed $10 million in interest from the Mexican government organization in 90 days. If the Mexican manager thought that the value of the peso would fall in the next 90 days, which of the following would he choose to hedge the foreign exchange risk?

A) Buy U.S. dollars in a forward contract.
B) Wait 90 days and buy U.S. dollars in the spot market.
C) Buy a U.S. dollar T-bill now.
D) Either b or c would work.

Question 63

Which of the following is NOT directly related to the level of a loan rate charged on an international loan?

A) The cost of gathering information about the borrower.
B) The level of country risk.
C) The size of the borrowing business.
D) The credit risk of the borrower.

Question 64

A U.S. bank with a loan to a Japanese manufacturer can reduce its currency risk associated with the loan by

A) requiring that the payments be made in yen.
B) speculating in yen futures.
C) having the borrower seek third-party assistance.
D) hedging the risk in yen futures.

Question 65

The Foreign Credit Insurance Association (FCIA) is an organization of U.S. insurance companies which

A) insures the foreign lending risk (trade credit) of exporters.
B) insures the foreign lending risk (trade credit) of importers.
C) insures bank loans made to developing nations.
D) assures that foreign exporters will pay their trade credit.

Question 66

Default or credit risk on international receivables is reduced when the receivables are guaranteed by an organization of insurance companies called the

A) Overseas Private Investment Corporation.
B) World Bank.
C) Foreign Credit Insurance Association.
D) Receivables Assurance Association.

Question 67

A multinational firm can borrow 5 million Canadian dollars from a Canadian bank at 9 percent for one year and the same in U.S. dollars at a Detroit bank at 8 percent. If the C$/U.S.$ one-year forward rate contract was priced at 1.344, which loan was more favorable to the borrower?

A) The cost of the loan from the U.S. bank is lower.
B) The cost of the loan from the Canadian bank is lower.
C) The borrower is indifferent between the two at the forward rate of 1.344.
D) The solution cannot be calculated from the information above.

Question 68

International participation loans is a method of reducing the _______ risk of an international lender.

A) credit
B) currency
C) interest rate
D) liquidity
E) country

Question 69

A bank's international loan diversification is enhanced if the historic realized rates of return on loans from loan applicant, Country A, have

A) a high positive correlation with prior loans from Country A.
B) a high positive correlation with the loan returns on the bank's international loan portfolio.
C) a negative correlation with the loan returns on the bank's international loan portfolio.
D) a very low negative correlation with the returns on U.S. Treasury bonds.

Question 70

A multinational firm can borrow 5 million Canadian dollars from a Canadian bank at 9 percent for one year and the same in U.S. dollars at a Detroit bank at 8 percent. With a current C$/$ exchange rate of $1.345, what one-year forward contract rate would make the borrower indifferent between the two loans?

A) 1.345
B) 1.324
C) 1.357
D) 1.362

Question 71

Which of the following does not cause country risk to increase?

A) expropriation
B) nationalization
C) elimination of currency controls.
D) change of government

Question 72

Which institution created the Basel Accords for banking capital requirements?

A) World Bank
B) Bank for International Settlements
C) European Central Bank
D) Federal Reserve Board
E) United Nations Financial Supervision Committee

Question 73

Risk evaluation in international lending involves which of the following?

A) an analysis of the borrower
B) an analysis of the country's political and economic risks
C) an analysis of domestic economy
D) both a and b
E) all of the above

Question 74

A U.S. bank has just extended a U.S. $10 million loan to a Canadian firm at the rate of U.S. prime plus 2 percent, payable in U.S. dollars, one year from now. The current Canadian dollar/U.S. dollar exchange rate is 1.367. With a prime rate of 7 percent, what is the amount of interest paid in a year?

A) C$ 1,230,300
B) $900,000
C) $700,000
D) C$658,376

Question 75

Which of the following is related to currency risk in an international lending situation?

A) late interest payments on a loan by a foreign borrower
B) increased exchange controls limiting the payment of interest on a loan.
C) the government guarantee of the borrower's debt
D) LIBOR is increasing, therefore increasing the odds that the borrower will be unable to meet their obligations

Question 76

A U.S. bank is owed $10 million in interest from the Mexican government organization in 90 days. What is the more likely action taken by a currency risk manager?

A) The Mexican manager will sell U.S. dollars in a 90-day forward contract.
B) The U.S. bank will buy peso in a 90-day forward contract.
C) The Mexican manager will buy U.S. dollars in a 90-day forward contract.
D) The Mexican manager will buy a peso 90-day forward contract.

Question 77

U.S. banks reduce their risk in foreign operations by

A) seeking guarantees from borrowers.
B) FDIC insurance.
C) portfolio diversification.
D) insurance through the International Monetary Fund
E) both a and c

Question 78

Which statement regarding risk evaluation of international loan is NOT correct?

A) An analysis of both the borrower and borrower's country is done by the bank's foreign lending and economic departments.
B) Evaluation involves a statistical analysis of the country's political and economic risks.
C) Since the accounting standards in different countries vary, a financial analysis of the borrower is not needed.
D) If the cost of doing the analysis internally is too high, bank can use outside information sources. However, they should not be treated as reliable as the internal sources.
E) The higher the cost of gathering information, the higher the loan rate, reflecting the increased risk due to unreliable information or lack of information.

Question 79

To reduce the risk exposure in international lending, what actions banks can take?

A) Use the guarantees by governments, their central banks, and other agencies
B) Pooling risk by participating syndicate loans among banks to spread risk.
C) Diversification of foreign loan portfolio in different geographical regions and industry
D) Selling nonperforming loans in the secondary market with a discount.
E) All above.

Question 80

Which of the combination of country and its central bank is NOT correct?

A) Japan - Bank of Japan
B) European Union - European Central Bank
C) China - Central Bank of China
D) The U.S. - Federal Reserve System
E) Canada - Bank of Canada
ESSAY QUESTIONS