Deck 13: Bank Risk Management Performance

Question 1

Duration analysis is sometimes done to understand the sensitivity of a bank's position to changes in risk. This is most often done by calculating the duration gap, which is

A)Asset duration − Liability duration (Liability/Asset).
B)Asset duration − Liability duration.
C)Asset duration − Liability duration (Asset/Liability)
D)Asset duration − Liability duration (Asset ×  Liability)

Answer 1

A

Question 2

If a bank has an interest rate gap of − $5 million dollars and interest rates decline by 100 basis points, then income will

A)decrease by $50,000.
B)increase by $50,000.
C)decrease by $5 million.
D)increase by $5 million.

Answer 2

B

Question 3

Adele is looking to get a bank loan for some new appliances. Her net monthly income is $2,000, and she has the following monthly expenses: $500 rent, $100 car payment, $100 student loan payment, $50 car insurance payment, $100 credit card payment, $400 food, $50 gasoline, $100 phone service, $100 Internet service, and $500 retirement fund contribution. Adele's fixed payments as a percentage of her net monthly income are

A)42.5%.
B)62.5%.
C)65.0%.
D)75.0%.

Answer 3

A

Question 4

A bank has a customer who deposits $10,000 into a 12-month CD that pays 2.5% interest, and at the end of the 12 months, the customer rolls the funds over into another 12-month CD. This continues for five or six years. Next, suppose the bank uses these funds to grant a five-year auto loan on which the bank charges 4% interest. After a couple of years, the interest rate the bank must pay on CDs rises to 3%. This is an example of what phenomenon?

A)Inflation
B)Interest rate risk
C)CD risk
D)Credit risk

Question 5

Which two of these terms are part of the "five Cs" that are useful in determining the level of risk that may be inherent with a potential borrower?

A)Capital and confidence
B)Character and confirmation
C)Collateral and character
D)Confidence and capacity

Question 6

The risk that a bank faces from the possibility of a foreign terrorist hacking into its computer network is known as __________ risk.

A)liquidity
B)country
C)market
D)operational

Question 7

Which of these are two approaches a bank can use to evaluate a customer's current capacity to handle more debt?

A)Fixed payments-to-income ratio; payments-on-debt
B)Fixed payments; debt-to-income ratio
C)Variable payments; debt-to-income ratio
D)Fixed payments; debt-to-wealth ratio

Question 8

For banks, Treasury bills, federal government agency debt, and commercial paper are

A)primary reserves.
B)secondary reserves.
C)bank loans.
D)securities.

Question 9

Consider a bank that has a customer who deposits $10,000 into a 12-month CD that pays 2.5% interest and at the end of the 12 months the customer rolls the funds over into another 12-month CD and continues the rolling every 12 months. Further, suppose the bank uses these funds to make an auto loan for which the bank charges 4% interest. In this situation, the interest rate spread is

A)0.5%.
B)1.0%.
C)1.5%.
D)2.0%.

Question 10

What is the term for the most liquid assets that a bank holds?

A)Liquid reserves
B)Primary reserves
C)Primary loans
D)Liquid securities

Question 11

Which of the following bank assets is most liquid?

A)Treasury bonds
B)Mortgage loans
C)Treasury bills
D)Deposits at the Federal Reserve

Question 12

A measure that can be used to determine whether banks have sufficient liquidity is the liquidity coverage ratio. A bank is considered to have sufficient liquidity when this ratio is

A)greater than 1.
B)equal to 1.
C)less than 1.
D)equal to 0.

Question 13

Market risk was a major problem during the financial crisis that began in 2008. As a result, Congress passed the Wall Street Reform and Consumer Protection Act in 2010. Which of the following is specified by the Volcker Rule, which is included in that act?

A)Banks may not hold assets for speculation to increase their profitability.
B)Banks may not hold assets for speculation to benefit their customers.
C)Banks must submit to more frequent auditing by outside sources.
D)Banks may not hold highly speculative assets for any purpose.

Question 14

Ivy has a debt-to-income ratio of 5%; her only debt is her student loan. She would like to take on a car payment. This will be a good idea as long as the new debt does not push her debt-to-income ratio up past what percentage?

A)8%
B)10%
C)15%
D)20%

Question 15

What is the meaning of credit risk from the point of view of the bank?

A)The risk that a borrower has poor credit
B)The risk that a borrower will not repay as promised
C)The risk that the bank will be denied a loan from the Federal Reserve
D)The risk that the bank will be denied loans

Question 16

ABC Bank has made several big loans to a mining equipment manufacturer that sells its equipment to the copper mining industry in Chile. Political unrest in Chile is a source of what kind of risk for ABC Bank?

A)Operational risk
B)Country risk
C)Market risk
D)Liquidity risk

Question 17

The net stable funding ratio requires banks to do what?

A)Compare their easy-to-sell liquid assets to their total assets
B)Maintain stable funding over the next thirty calendar days
C)Maintain stable funding over the next twelve months
D)Report their liquidity coverage ratio to the Fed

Question 18

If a bank has a positive interest rate gap and interest rates decline, then the bank will experience a(n)

A)increase in revenue.
B)decline in revenue.
C)increase in deposits.
D)decrease in deposits.

Question 19

The formula for a bank's interest rate spread is

A)IR_spread = IR_deposits − IR_loans.
B)IR_spread = IR_deposits − IR_loans −  Rate of inflation.
C)IR_spread = IR_loans − IR_deposits −  Rate of inflation.
D)IR_spread = IR_loans − IR_deposits.

Question 20

Banks can move to decrease their liquidity risk by having which of these combinations, to the extent it is manageable?

A)More long-term liabilities; fewer long-term assets
B)Fewer short-term liabilities; more frequent borrowing from the Fed
C)Fewer short-term liabilities; higher primary reserves
D)More short-term assets; higher primary reserves

Question 21

Midtown Bank has net income of $50 million, total assets of $1 billion, and equity capital of $500 million. Midtown's ROE is

A)2.5%.
B)5.0%.
C)7.5%.
D)10.0%.

Question 22

ABC Bank acquires XYZ Bank through a merger but subsequently fails due to some unforeseen incompatibilities resulting from their widely different cultures. This is an example of __________ risk.

A)operational
B)liquidity
C)country
D)market

Question 23

Name the 5 Cs of credit risk, and explain what they are used for. Explain when the debt-to-income ratio would be used.

Question 24

ABC Bank's biggest customers do a lot of business in Country X. This exposes ABC Bank to a high level of risk of what type?

A)Operational risk
B)Market risk
C)Country risk
D)Liquidity risk

Question 25

Explain what is meant by interest rate risk.

Question 26

What is the biggest gross interest expense for banks?

A)Interest paid on federal funds purchased
B)Interest paid on deposits
C)Interest paid on subordinated debt
D)Interest paid on other borrowings

Question 27

Which of the following would be classified as country risk?

A)The effect of a major natural disaster on the financial system
B)The impact of an increase in interest rates on a bank's financial position
C)The downfall of a foreign government where a bank's biggest customers do significant business
D)The impact of a recession on a bank's financial position

Question 28

A bank's pretax net income = Net interest income + Noninterest income.

Question 29

Which of these is the best way to get an idea of how a bank is performing?

A)Look at the bank's net income on its income statement for the period.
B)Compare the different components of a bank's income statement to those of all other banks.
C)Assess the amount of risk the bank is taking from elements on its liability statement.
D)Compare the different components of a bank's income statement to those of similar banks.

Question 30

The income generated from federal funds sold is counted on a bank's income statement as

A)gross interest expense.
B)noninterest income.
C)gross interest income.
D)noninterest expense.

Question 31

How might a bank deal with a shortage of liquidity?

Question 32

One thing a bank can do if it faces a liquidity crisis is to borrow funds from a bank with excess liquidity.

Question 33

Midtown Bank has net income of $50 million, total assets of $1 billion, and equity capital of $500 million. Midtown's ROA is

A)2.5%.
B)5.0%.
C)7.5%.
D)10.0%.

Question 34

A FICO credit score of higher than 700 is considered good.

Question 35

The risk of bank losses due to the impact of a natural disaster is known as a country risk.