Course Introduction
Banking Operations
Final Test Solutions
Banking Operations explores the fundamental processes and procedures that underpin the functioning of modern banks. The course covers topics such as account management, transaction processing, cash management, payment systems, loan servicing, and risk control measures. Students will gain insights into the regulatory environment, the use of technology in banking, compliance requirements, and customer service standards. Emphasis is placed on both back-office and front-office operations, providing a comprehensive understanding of how banking institutions maintain efficiency, security, and reliability in delivering financial services.
Recommended Textbook
Financial Institutions Management 4th Edition by SAUNDERS
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18 Chapters
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Page 2
Chapter 1: Why Are Financial Institutions Special
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Sample Questions
Q1) Which of the following statements is true regarding the percentage share of assets of financial institutions in Australia as of end June 2013?
A)The largest percentage of assets is held by money market corporations.
B)The largest percentage of assets is held by credit unions.
C)The largest percentage of assets is held by permanent building societies.
D)The largest percentage of assets is held by banks.
Answer: D
Q2) Which of the following statements is true?
A)Agency costs arise whenever economic agents enter into a contract in a world of incomplete information.
B)Monitoring costs are part of overall agency costs.
C)The more difficult and costly it is to collect information, the more likely it is that contracts will be broken.
D)Agency costs arise whenever economic agents enter into a contract in a world of incomplete information, monitoring costs are part of overall agency costs and the more difficult and costly it is to collect information, the more likely it is that contracts will be broken.
Answer: D
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Chapter 2: The Financial Service Industry: Depository
Institutions
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Sample Questions
Q1) The collapse of Lehman Brothers in 2008 and the impact of the global financial crisis made it difficult for Australian banks to obtain off-shore funding.As a consequence banks pursued more stable sources of funds.These strategies include:
A)increased use of wholesale long-term funding
B)decreased use of wholesale long-term funding
C)decreased holdings of liquid assets
D)decreased use of wholesale long-term funding and increased holdings of liquid assets
Answer: D
Q2) Australia's big four banks include:
A)National Australia Bank, Commonwealth Bank of Australia, Westpac, Bendigo Bank.
B)National Australia Bank, Commonwealth Bank of Australia, Westpac, and Australia and New Zealand Banking Group.
C)National Australia Bank, Commonwealth Bank of Australia, Macquarie Bank, and Australia and New Zealand Banking Group.
D)None of the listed options are correct.
Answer: B
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Chapter 3: The Financial Service Industry: Other Financial Institutions
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Sample Questions
Q1) The primary function of insurance companies is to:
A)generate fees for the banks that sell insurance products
B)sell a variety of consumer investment products
C)protect policyholders from adverse events
D)assist in the transfer of wealth into the future
Answer: C
Q2) Which of the following statements is true in the context of SOARS?
A)Oversight entities are subject to routine information gathering from statistical returns and onsite visits.
B)Mandated improvement entities are not at material risk of failure.
C)Normal entities lie outside APRA's tolerable risk range, but are unlikely to fail.
D)Restructure entities have lost APRA's confidence.
Answer: D
Q3) Which of the following are basic life insurance contract types?
A)terminating insurance
B)whole-of-life
C)bundled life insurance
D)terminating insurance and whole-of-life
Answer: B
Page 5
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Chapter 4: Risks of Financial Institutions
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Sample Questions
Q1) Which of the following situations pose a refinancing risk for an FI?
A)An FI issues $10 million of liabilities of one-year maturity to finance the purchase of $10 million of assets with a two-year maturity.
B)An FI issues $10 million of liabilities of two-year maturity to finance the purchase of $10 million of assets with a two-year maturity.
C)An FI issues $10 million of liabilities of three-year maturity to finance the purchase of $10 million of assets with a two-year maturity.
D)An FI matches the maturity of its assets and liabilities.
Q2) A decrease in interest rates means that the discount rate on cash flows is:
A)decreased and thus the market value of an FI's assets and liabilities decreases.
B)increased and thus the market value of an FI's assets and liabilities decreases.
C)increased and thus the market value of an FI's assets and liabilities increases.
D)decreased and thus the market value of an FI's assets and liabilities increases.
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Chapter 5: Interest Rate Risk Measurement: The Repricing Model
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Sample Questions
Q1) Which of the following statements is false?
A)A major reason for cheque accounts to be included in an FI's interest-sensitive liabilities is that the majority of these accounts are core deposits.
B)Cheque accounts should be treated as interest-sensitive liabilities because if interest rates rise, deposits might be withdrawn and thus will need to be replaced by higher-yielding deposits.
C)The final decision whether or not to include cheque accounts as rate-sensitive liabilities must be made after an analysis of the actual deposit history.
D)None of the listed options are correct.
Q2) Which of the following statements is true?
A)The size of the range over which bucket gaps are calculated does not matter as the repricing gap will always lead to exact results.
B)The shorter the range over which bucket gaps are calculated, the greater the potential error.
C)The shorter the range over which bucket gaps are calculated, the smaller the potential error.
D)None of the listed options are correct.
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Page 7
Chapter 6: Interest Rate Risk Measurement: the Duration
Model
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Sample Questions
Q1) Which of the following statements is true?
A)Convexity is desirable because the larger the convexity the greater the interest rate protection against interest rate decreases and the greater the potential gains following increasing interest rates.
B)Convexity is desirable because the larger the convexity the greater the interest rate protection against interest rate rises and the greater the potential gains following decreasing interest rates.
C)Convexity is undesirable because the larger the convexity the lower the interest rate protection against interest rate rises and the smaller the potential gains following decreasing interest rates.
D)Convexity is undesirable because the larger the convexity the lower the interest rate protection against interest rate decreases and the smaller the potential gains following increasing interest rates.
Q2) In simple words, duration measures the average life of an asset or liability.
A)True
B)False
Q3) Would you consider convexity of a fixed-income security to be desirable or undesirable for an FI? Explain your opinion.
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Chapter 7: Managing Interest Rate Risk Using
Off-Balance-Sheet Instruments
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Sample Questions
Q1) Which of the following statements is true?
A)If a cash asset is hedged on a dollar for dollar basis with a forward or futures contract, we refer to this hedge as a dollar hedge.
B)If a cash asset is hedged on a dollar for dollar basis with a forward or futures contract, we refer to this hedge as a plain hedge.
C)If a cash asset is hedged on a dollar for dollar basis with a forward or futures contract, we refer to this hedge as a naïve hedge.
D)All of the listed options are correct.
Q2) The writer of a bond call option:
A)receives a premium and must stand ready to sell the bond at the exercise price
B)receives a premium and must stand ready to buy bonds at the exercise price
C)pays a premium and has the right to sell the underlying bond at the agreed exercise price
D)pays a premium and has the right to buy the underlying bond at the agreed exercise price
Q3) Explain the differences between using futures and options contracts to hedge interest rate risk.Use diagrams where possible to support your points.
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Page 9
Chapter 8: Managing Interest Rate Risk Using Securitisation
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Sample Questions
Q1) Illiquidity is a problem to an FI because while FI:
A)liabilities tend to be highly illiquid, its assets usually are not
B)assets tend to be highly liquid, its liabilities usually are not
C)liabilities tend to be highly liquid, its assets usually are not
D)None of the listed options are correct.
Q2) What are the two basic types of loan sale contracts or mechanisms by which loans can be transferred between seller and buyer?
A)participations and assignments
B)participations and originations
C)syndications and originations
D)transfers and assignments
Q3) Interest rate swaps are used to assist in interest rate risk management of the securitised assets.
A)True
B)False
Q4) Which of the following is true concerning loans sold without recourse?
A)The loan sale is technically removed from the balance sheet.
B)The buyer cannot put the loan back to the selling FI.
C)The FI has no explicit liability if the loan eventually goes bad.
D)None of the listed options are correct.
Page 10
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Chapter 9: Market Risk
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Sample Questions
Q1) Consider a VAR of $100 000 for a 95% confidence level.A problem with this information is that while we know that we will lose more than the VAR amount on 5 days out of every 100, we do not know the maximum amount we can lose.
A)True
B)False
Q2) Which of the following statements is true?
A)Unsystematic risk is specific to a particular firm.
B)Unsystematic risk is specific to a particular industry.
C)Unsystematic risk is specific to a particular geographical area.
D)Unsystematic risk relates to the whole market.
Q3) Assume an FI's daily earnings at risk are $5000 and that the FI is required to hold its position for 10 days.What is the position's VAR (round to two decimals)?
A)$5000 * \( \sqrt10\) = $15,811.39
B)$5000 * \( \sqrt{(10 - 1)}\) = $15,000.00
C) \( \sqrt{\$5000}\) * 10 = $707.11
D)\( \sqrt{\$5000}\) * (10 - 1) = $636.40
Q4) Explain the basic concept of the RiskMetric model.What are the major disadvantages? How can the major disadvantages be addressed?
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Chapter 10: Credit Risk I: Individual Loan Risk
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Sample Questions
Q1) Which of the following statements is true?
A)Zero-coupon corporate bonds are bonds without any intervening cash flows between issue and maturity and thus these bonds typically sell at a large discount from face value.
B)Zero-coupon corporate bonds are bonds with semi-annual cash flows between issue and maturity and thus these bonds typically sell at a large discount from face value.
C)Zero-coupon corporate bonds are bonds without any intervening cash flows between issue and maturity and thus these bonds typically sell at a small discount from face value.
D)Zero-coupon corporate bonds are bonds with annual cash flows between issue and maturity and thus these bonds typically sell at a large discount from face value.
Q2) A company with an Altman Z-score of 3.15 should not be granted a loan due to a high default probability.
A)True
B)False
Q3) What are the major ideas behind KMV's Credit Monitor model?
Q4) Explain the concept of RAROC and the major role RAROC models play in credit risk analysis.
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Page 12
Chapter 11: Credit Risk II: Loan Portfolio and Concentration
Risk
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Sample Questions
Q1) An FI that invests 40% of funds in a loan with an expected return of 10% and 60% of funds in a loan with an expected return of 12% can expect to earn 11% on its portfolio.
A)True
B)False
Q2) Which of the following statements is true?
A)Loan loss ratio based models rely on actual data and involve the estimation of the systematic loan loss risk of a particular industry relative to the loan loss risk of an FI's total loan portfolio.
B)Loan loss ratio based models rely on historic data and involve the estimation of the systematic loan loss risk of a particular industry relative to the loan loss risk of an FI's total loan portfolio.
C)Loan loss ratio based models rely on historic data and involve the estimation of the systematic loan loss risk of a particular borrower relative to the loan loss risk of an FI's total loan portfolio.
D)Loan loss ratio based models rely on actual data and involve the estimation of the systematic loan loss risk of a particular borrower relative to the loan loss risk of an FI's total loan portfolio.
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Page 13
Chapter 12: Sovereign Risk
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Sample Questions
Q1) If the country's interest and amortisation obligations are equal to $2 billion and exports are equal to $10 billion then the country's debt service ratio is equal to:
A)10
B)8
C)2
D)0.2
Q2) Debt repudiation is beneficial to the:
A)International Monetary Fund
B)World Bank
C)borrower
D)lender
Q3) Lenders considering lending money to a firm in another country only need to consider the firm's credit standing
A)True
B)False
Q4) The sovereign risk assessment methods most commonly used by large FIs are logit and probit models.
A)True
B)False
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Chapter 13: Foreign Exchange Risk
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Sample Questions
Q1) Which of the following are common FX trading activities?
A)The purchase and sale of foreign currencies for speculative purposes through forecasting or anticipating future movements in FX rates.
B)The purchase and sale of foreign currencies to allow customers (or the FI itself) to take positions in foreign real and financial investments.
C)The purchase and sale of foreign currencies for hedging purposes to offset customer (or FI) exposure in any given currency.
D)All of the listed options are correct.
Q2) Assume an Australian FI has US$100 000 in assets and US$200 000 in liabilities.Further, the FI has bought US$40 000 and sold US$20 000.What is the net FX bought position of the Australian FI?
A)-US$20,000
B)US$20,000
C)US$80,000
D)US$100,000
Q3) Discuss four trading activities that reflect FI's position in the FX markets.
Q4) Explain the concept of the interest rate parity theorem (IRPT) and its implications for FIs?
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Page 15
Chapter 14: Liquidity Risk
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Sample Questions
Q1) Use the following balance sheet (values in thousands of dollars) to answer the question. \[\begin{array} { | l | r | l | r | }
\hline{ \text { Assets } } & & { \text { Liabilities and equity } } & \\
\hline \text { Cash required reserves } & 21 & \text { Demand deposits } & 550 \\
\hline \text { Short-term securities } & 369 & \text { Interbank borrowed funds } & 151 \\
\hline \text { Loans } & 400 & \text { Equity } & 89 \\
\hline \text { Total } & 790 & \text { Total } & 790 \\
\hline
\end{array}\] If the bank experiences a $50 000 sudden liquidity drain caused by withdrawal of their demand deposits, what will be the impact on the balance sheet if purchased liquidity management techniques are used?
A)a reduction in cash of $21,000 and a decrease in demand deposits of $29,000
B)a reduction in securities and/or current loans totalling $50,000
C)a reduction in demand deposits of $50,000 and an increase in interbank borrowings of $50,000
D)a decrease in equity of $50,000
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16
Chapter 15: Liability and Liquidity Management
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Sample Questions
Q1) Which of the following liability products does not have withdrawal risk?
A)wholesale CDs
B)money market deposit accounts
C)cheque and retail saving accounts
D)All of the given options have withdrawal risk.
Q2) What is the average implicit interest rate on a $100 000 account if the bank's average management costs are $2500 and annual fees average $1750?
A)2.50%
B)1.75%
C)0.75%
D)-0.75%
Q3) Which of the following is a mechanism used by FI managers to reduce demand deposit withdrawal rates?
A)implicit interest payments
B)minimum balance requirements
C)explicit interest payments
D)There is no way to mitigate withdrawal risk.
Q4) What are the withdrawal risks and costs associated with the covered bonds?
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17
Chapter 16: Off-Balance-Sheet Activities
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Sample Questions
Q1) Which of the following statements is true?
A)Back-end fee is the fee imposed on the used component of a loan commitment.
B)Back-end fee is the fee imposed at the beginning of a loan contract.
C)Back-end fee is the fee imposed on the unused component of a loan commitment.
D)Back-end fee is the fee imposed at the end of a loan contract.
Q2) Which of the following are correct about off-balance sheet activities?
A)They provide a key source of interest income for many FIs.
B)By hedging against on-balance-sheet interest rate, FX and credit risks, OBS derivative instruments actually reduce FI overall insolvency risk.
C)Higher regulatory costs on derivative instruments may cause FIs to over-hedge resulting in a decrease in FI insolvency risk.
D)All of the listed options are correct.
Q3) The vega of an option measures:
A)interest rate risk
B)volatility risk
C)off-balance-sheet risk
D)price elasticity
Q4) Briefly explain how off-balance-sheet transactions can affect an FI's solvency.
Q5) Discuss four major types of off-balance-sheet activities
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Chapter 17: Technology and Other Operational Risks
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Sample Questions
Q1) The term daylight overdraft refers to a situation in which an FI's reserve account at the central bank is negative at the end of a banking day.
A)True
B)False
Q2) Which of the following statements is true?
A)FI's should invest in as much technology as possible as it will provide the FI with a competitive advantage.
B)FI's need to strike a balance as both, too much and too little investment in technology can be bad for the FI.
C)FI's should invest in as little technology as possible as these investments are too risky. D)Technology investments do not have an impact on the survival and profitability of the FI.
Q3) External and internal fraud are both sources of operational risk. A)True B)False
Q4) Outline the main sources of operational risk and why operational risk gained prominence during the GFC.
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19
Chapter 18: Capital Management and Adequacy
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Sample Questions
Q1) Current credit exposure is the cost of replacing a derivative securities contract at today's prices.
A)True
B)False
Q2) To calculate the operational risk capital charge, the DI's activities are first divided into:
A)investment banking, commercial banking and 'all other activity'
B)commercial lending, retail lending and 'all other activity'
C)derivative trading, foreign exchange trading and 'all other activity'
D)retail banking, commercial banking and 'all other activity'
Q3) Under Basel II, all standard residential mortgages attract a risk weight of 35%.
A)True
B)False
Q4) Why is a regulatory capital charge against operational risk necessary?
Q5) The leverage ratio is calculated as assets divided by core capital. A)True
B)False
Q6) Basel III has introduced the first set of global liquidity regulations.
A)True
B)False
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