Banking Operations
Question Bank
Course Introduction
Banking Operations provides a comprehensive overview of the key functions, procedures, and regulatory frameworks governing daily activities within commercial banks and financial institutions. This course explores the end-to-end processes that support retail and corporate banking services, including account management, payments processing, loan disbursement, check clearing, risk management, and compliance with industry standards. Students will gain practical insights into the technologies and systems used in modern banks, the importance of customer service, and methods for detecting and preventing fraud. The course also examines the impact of digital transformation and emerging trends shaping the future of banking operations.
Recommended Textbook
Financial Institutions Management 3rd Edition by Lange
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18 Chapters
1157 Verified Questions
1157 Flashcards
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Page 2
Chapter 1: Why Are Financial Institutions Special
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Sample Questions
Q1) The reason FIs can offer highly liquid, low price-risk contracts to savers while investing in relatively illiquid and higher risk assets is:
A)because diversification allows an FI to predict more accurately the expected returns on its asset portfolio.
B)significant amounts of portfolio risk are diversified away by investing in assets that have correlations between returns that are less than perfectly positive.
C)because individual savers cannot benefit from risk diversification.
D)All of the listed options are correct.
Answer: D
Q2) Which of the following refers to the term 'maturity intermediation'?
A)Creation of a secondary market mature enough to withstand volatility.
B)Overcoming constraints to buying assets imposed by large minimum denomination size.
C)Mismatching the maturities of assets and liabilities.
D)Reducing information costs or imperfections between households and corporations.
Answer: C
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Chapter 2: The Financial Services Industry: Depository
Institutions
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Sample Questions
Q1) PAIRS provides APRA with a score-card approach to assessing the risk of FI failure and the impact of any failure by detailing the 12 risk elements separately and disclosing the result to the FI being investigated.
A)True
B)False
Answer: False
Q2) Which of the following statements is true?
A)Australian banks' decreased reliance on off-shore funding post GFC led to funding pressures and increased the costs of obtaining funds.
B)Australian banks' increased reliance on off-shore funding post GFC led to funding pressures and increased the costs of funding.
C)Australian banks reduced their reliance on on-shore funding in an effort to reduce the costs of funding and ease pressure on mortgage interest rates.
D)Australian banks increased their reliance on on-shore funding post GFC which led to funding pressures and increased the costs of obtaining funds.
Answer: B
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4
Chapter 3: The Financial Services Industry: Other Financial Institutions
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56 Verified Questions
56 Flashcards
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Sample Questions
Q1) Which of the following did not occur in the life insurance industry during the most recent financial crisis?
A)Low equity values reduced asset-based fees on separate account assets.
B)Asset-based fees declined on products such as variable annuities and pension fund assets that were tied to equity returns.
C)Low interest rates and harsh economic conditions caused many policyholders to terminate or surrender their policies.
D)Policy premium increased as more households and small businesses attempted to transfer risk to insurance companies.
Answer: D
Q2) In firm commitment underwriting, the investment banker acts as a principal, purchasing securities from the issuer at one price and seeking to place them with public investors at a slightly higher price.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Risk of Financial Institutions
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Sample Questions
Q1) One of the most striking trends for many modern FIs has been the growth in their off-balance-sheet activities and thus their off-balance-sheet risk.Explain what is meant by off-balance-sheet activities and the risk associated with it using an example.
Q2) Many of the various risks, such as interest rate risk, market risk, credit risk and off-balance-sheet risk, faced by an FI often are interrelated with each other.
A)True
B)False
Q3) Based on the case of Indymac Bank, explain how liquidity risk and insolvency risk caused a bank failure despite deposit insurance.Outline the chain of events that led to this financial institution's illiquidity and eventual closure.
Q4) Which of the following may occur when a sufficient number of borrowers are unable to repay interest and principal on loans, thus causing an FI's equity to approach zero?
A)insolvency risk
B)sovereign risk
C)currency risk
D)liquidity risk
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Page 6
Chapter 5: Interest Rate Risk Measurement: The Repricing Model
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Sample Questions
Q1) The cumulative repricing gap position of an FI for a given extended time period is the sum of the repricing gap values for the individual time periods that make up the extended time period.
A)True
B)False
Q2) Because the repricing model ignores the market value effect of changing interest rates, the repricing gap is an incomplete measure of the true interest rate risk exposure of an FI.
A)True
B)False
Q3) Which of the following statements is true?
A)An FI with a positive repricing gap expects interest rates to remain stable.
B)An FI with a positive repricing gap expects interest rates to rise.
C)An FI with a positive repricing gap expects interest rates to remain fall.
D)An FI with a positive repricing gap has not particular expectations regarding interest rate movements.
Q4) Would you consider the repricing model to be a good and well-founded interest rate risk measurement and management tool? Why or why not?
Page 7
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Chapter 6: Interest Rate Risk Measurement: The Duration Model
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Sample Questions
Q1) The leverage adjusted duration gap reflects the degree of duration mismatch in an FI's balance sheet.
A)True
B)False
Q2) The modified duration is defined as:
A)duration multiplied by (1 + R).
B)duration divided by (1 + R).
C)duration minus (1 + R).
D)duration plus (1 + R).
Q3) The larger the size of an FI, the larger the _________ from any given interest rate shock.
A)duration mismatch
B)immunisation effect
C)net worth exposure
D)net interest income
Q4) As interest rates increase (decrease) the value of an asset or a liability decreases (increases).
A)True
B)False
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Chapter 7: Managing Interest Rate Risk Using Off Balance
Sheet Instruments
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Sample Questions
Q1) Buying a call option (standing ready to buy bonds at the exercise price) is a strategy that a FI may take when bond prices rise and interest rates are expected to fall.
A)True
B)False
Q2) Which of the following is an example of microhedging asset-side portfolio risk?
A)When an FI, attempting to lock in cost of funds to protect itself against a rise in short-term interest rates, takes a short position in futures contracts on CDs.
B)FI manager trying to pick a futures contract whose underlying deliverable asset is not matched to the asset position being hedged.
C)When an FI hedges a cash asset on a direct dollar-for-dollar basis with a forward or futures contract.
D)When an FI manager wants to insulate the value of the institution's bond portfolio fully against a rise in interest rates.
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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9
Chapter 8: Credit Risk I: Individual Loan Risk
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Sample Questions
Q1) Mortgage-backed bonds (MBB) differ from pass-throughs and collateralised mortgage obligations (CMOs) in which of the following ways?
A)The MBB bondholders have a junior claim to assets of the FI.
B)There is no direct link between the cash flow on the mortgages backing the bond and the interest and principal payments on the MBB.
C)The assets backing a MBB issue are normally removed from the balance sheet of the FI.
D)Tranches of a MBB are treated equally with respect to prepayments on mortgages backing the bond issue.
Q2) The buyer of a loan participation benefits because the only risk exposure is to the borrower.
A)True
B)False
Q3) Costs of securitisation include:
A)costs of public/private credit risk insurance and guarantees.
B)costs of over-collateralisation.
C)valuation and packaging costs (the cost of asset heterogeneity).
D)All of the listed options are correct.
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Chapter 9: Market Risk
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Sample Questions
Q1) RiskMetrics weights more recent observations more highly than past observations, which allows more recent news to be more heavily reflected in the calculation of the standard deviation.
A)True
B)False
Q2) In sequential order, the steps involved in back simulation are as follows: measure exposures, measure sensitivity, measure risk, measure risk again, rank days by risk from worst to best, VAR.
A)True
B)False
Q3) Explain the basic concept of the RiskMetric model.What are the major disadvantages? How can the major disadvantages be addressed?
Q4) 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.
Q5) Why is market risk measurement important?
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Chapter 10: Credit Risk I: Individual Loan Risk
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66 Verified Questions
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Sample Questions
Q1) Assume a $500 000 loan has a duration of 2.5 years.The current interest rate level is 10 per cent and a sudden change in the credit premium of 1 per cent is expected.Further assume that the one-year income on the loan is $2500.What is the loan's RAROC (round to two decimals)?
A)10.00 per cent
B)11.00 per cent
C)22.00 per cent
D)50.00 per cent
Q2) The estimate of loan (or capital) risk (?L) can be calculated as follows:
D<sub>L</sub> * L * [?R / (1+R)].
A)True
B)False
Q3) A loan provided by a group of FIs as opposed to a single lender is called:
A)a joint loan.
B)project finance.
C)a syndicated loan.
D)a multiple loan.
Q4) What are the major ideas behind KMV's Credit Monitor Model?
Q5) Explain the concept of RAROC and the major role RAROC models play in credit risk analysis.
Page 12
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Chapter 11: Credit Risk II: Loan Portfolio and Concentration
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Sample Questions
Q1) Loan sales and securitisation are increasingly seen as valuable tools in the management of credit risk.Which of the following are not advantageous to FIs?
A)Loan sales and securitisation allow FIs to better manage their customer relationships.
B)Loan sales and securitisation create moral hazard issues and reduce scrutiny of off-balance sheet activities of FIs.
C)Loan sales and securitisation reduce FIs industry and/or geographical concentration risk.
D)Loan sales and securitisation allow FIs to separate their credit risk exposure from the lending process itself.
Q2) Assume that the maximum loss as a percentage of capital is 12 per cent of an FI's capital to a particular sector and that the amount lost per dollar of defaulted loans in this sector is 35 per cent.What is the concentration limit (round to two decimals)?
A)12% * (1/0.35) = 34.29%
B)35% * (1/0.12) = 4.2%
C)12% / (1 + 0.35) = 8.89%
D)35% / (1 + 0.12) = 31.25%
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Chapter 12: Sovereign Risk
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Sample Questions
Q1) Which of the following are potential problems associated with using credit scoring as a tool for assessing country risk?
A)Measurement of key variables.
B)Political risk factors and incentive aspects.
C)Political risk factors and portfolio aspects.
D)Measurement of key variables, political risk factors, portfolio aspects and incentive aspects.
Q2) Which of the following statements is true?
A)The investment ratio is the ratio of a country's total investments to its GDP.
B)The investment ratio is the ratio of a country's real investments to its total foreign currency obligations.
C)The investment ratio is the ratio of a country's total investments to its imports.
D)None of the listed options are correct.
Q3) An FI would be most likely to lend to a country with a:
A)low debt service ratio.
B)high import ratio.
C)low investment ratio.
D)large variance of export revenue.
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Chapter 13: Foreign Exchange Risk
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Sample Questions
Q1) A positive net exposure position in FX implies that the FI is net:
A)long in a currency and exposed to depreciation of the foreign currency.
B)short in a currency and exposed to depreciation of the foreign currency.
C)long in a currency and exposed to appreciation of the foreign currency.
D)short in a currency and exposed to appreciation of the foreign currency.
Q2) Which of the following statements is true for an FI that holds 200 000 in assets and 150 000 in liabilities?
A)The FI is in a net long position.
B)The FI has net foreign assets of 50 000.
C)The FI faces the risk that the euro will fall in value against domestic currency.
D)All of the listed options are correct.
Q3) The role of the forward FX contract is to offset the uncertainty regarding the future spot rate on a particular currency at the end of the investment horizon.
A)True
B)False
Q4) Explain how forward contracts can be used to hedge an FI's FX exposures.
Q5) Explain the concept of the interest rate parity theorem (IRPT) and its implications for FIs?
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Chapter 14: Liquidity Risk
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Sample Questions
Q1) Consider the following hypothetical data: Sources of liquidity
Total cash-type assets
$3000
Maximum borrowed funds limit
$22 000
Excess cash in exchange settlement account (ESA)
$1000
Uses of liquidity
Funds borrowed
$12 500
ESA funds
$500
What is the FI's net liquidity position?
A)($12 500 + $500) - ($3000 + $22 000 + $1000) = -$13 000
B)($3000 + $22 000 + $1000) - ($12 500 + $500) = $13 000
C)($12 500 - $500) = $13 000
D)($3000 + $22 000 + $1000) = $26 000
Q2) The liquidity index will always lie between -1 and +1.
A)True
B)False
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Page 16
Chapter 15: Liability and Liquidity Management
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Sample Questions
Q1) An FI offers a $2500 minimum balance investment savings account paying 4 per cent annual interest, and there are no service charges as long as the customer maintains the minimum balance.The customer maintains a balance of $5000, and averages 750 cheques per year.Each cheque has a processing cost to the FI of $0.15.What is the annual gross interest return on this account to the customer?
A)$112.50
B)$100.00
C)$312.50
D)$212.50
Q2) Historically, asset liquidity was the primary method by which banks met cash demands.
A)True
B)False
Q3) 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 per cent
B)1.75 per cent
C)0.75 per cent
D)-0.75 per cent
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Page 17
Chapter 16: Off-Balance-Sheet Activities
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Sample Questions
Q1) The delta of an option is always greater than one.
A)True
B)False
Q2) Basis risk refers to the variable spread between a lending rate and a borrowing rate, or between any two interest rates or prices
A)True
B)False
Q3) An exporter demands a letter of credit in order to:
A)guarantee safe delivery of goods to the importer.
B)guarantee receipt of payment from the importer upon receipt of the goods.
C)protect against adverse changes in foreign exchange rates.
D)ascertain the creditworthiness of the importer.
Q4) 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.
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Chapter 17: Technology and Other Operational Risk
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Sample Questions
Q1) How can interest income of an FI be increased by improved technological efficiency?
A)By improving the efficiency of management of information flows.
B)By obtaining access to low cost sources of funds.
C)By linking services to the quality of the FI's technology.
D)By innovating new interest earning products.
Q2) Technological efficiency focuses exclusively on the cost side of financial intermediation.
A)True
B)False
Q3) Which of the following observations concerning the production approach is true?
A)It views FIs' outputs of services as having three underlying inputs.
B)Labour and capital are the only inputs.
C)It views the output as being produced by labour, capital and the funds used to produce intermediated services.
D)Deposit costs are viewed as an input in the banking and non-banking deposit institutions.
Q4) Outline the main sources of operational risk and why operational risk gained prominence during the GFC.
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Page 19
Chapter 18: Capital Management and Adequacy
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Sample Questions
Q1) Which of the following statements is true for Basel II agreement?
A)The Basel capital framework consists of three mutually reinforcing pillars.
B)Pillar I deals with the calculation of regulatory capital against FI's credit risk only.
C)Pillar II deals with market discipline.
D)Pillar III deals with the supervisory review process.
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) What are the major differences between the Basel I and the Basel II approaches to capital regulation?
Q4) In determining the risk-adjusted value of the on-balance-sheet credit equivalent amounts of the contingent guaranty contracts, the risk weights are determined by the credit rating of the underlying counterparty of the off-balance-sheet activity.
A)True
B)False
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Page 20