Deck 4: Major Risks Faced by Banks

Question 1

A tail risk is:

A)risk that arises at the tail end of a recession
B)a risk that arises with a very low probability
C)a risk that should be largely ignored
D)a risk that is always upper most in people's minds in risk management

Answer 1

B

Question 2

The sources) of default risk is are)

A)theft
B)cash flow variations beyond the borrower's control
C)moral hazard
D)both b and c
E)a, b, and c

Answer 2

D

Question 3

Liquidity risk can manifest in

A)an inability to sell an asset at any price
B)an inability to borrow from the bank regardless to what the price a borrower is willing to offer
C)an inability to hedge against fluctuations in the deposit interest rates
D)both a and b
E)both b and c

Answer 3

D

Question 4

The organizational triad of ERM consists of __________________________.

Question 5

To control default risk, the bank can

A)buy or sell futures contracts to hedge
B)screen the borrowers
C)write covenants in the loan contract
D)all of the above
E)both b and c

Question 6

In banking, liquidity risk is...

A)the risk faced by a borrower that the lender may not renew a loan that the borrower wishes to renew
B)the risk faced by a bank that the depositors would unexpectedly withdraw their deposits and it has less than sufficient amount to meet the withdrawals
C)the risk that the bank cannot raise more deposits or equity to meet withdrawals made by the depositors
D)both a and b
E)both b and c

Question 7

The communication triad of ERM consists of __________________________.

Question 8

Default/credit risk for a bank is

A)the risk that the bank fails to make a contractual payment to the depositors
B)the risk that the depositors fail to make a deposit to the bank
C)the risk that the bank's borrowers fail to fulfill their repayment obligations on a timely basis
D)the risk of bank failure that can cause the government to bail it out
E)none of the above

Question 9

One way to control interest rate risk is

A)to have the FDIC insurance
B)to engage in a hedging strategy
C)to have a private arrangement with an insurance company
D)to finance loans with equity
E)all of the above

Question 10

The behavioral biases that typically impede effective risk management are pick all the right ones):

A)forgetfulness
B)anchoring
C)overconfidence
D)diffidence
E)groupthink

Question 11

For a given change in the market interest rates, a portfolio consisting of a __________ proportion of long-term assets will have a _____________ price fluctuations.

A)greater, smaller
B)smaller, greater
C)greater, greater
D)smaller, smaller
E)both c and d

Question 12

Interest rate risk is

A)the risk that arises from lending to a borrower below the market interest rate
B)the risk that arises from the movement of general interest rates which cause the bank's publicly traded assets and liabilities to be revalued by the market.
C)the risk that the depositors get a smaller amount when they withdraw their deposits
D)both a and b
E)both b and c

Question 13

ERM stands for:

A)excellent risk management
B)enterprise risk management
C)economic rate management

Question 14

When interest rate goes up,

A)the bank may lose money as some borrowers will refinance their loans
B)the bank may make a profit as some borrowers will refinance their loans
C)if the borrowers have an option to prepay, the borrowers are less likely to refinance their loans
D)the bank will charge lower borrowing rate to attract new borrowers
E)both b and d