Commercial Banking
Question Bank
Course Introduction
Commercial Banking provides an in-depth exploration of the functions, operations, and regulatory environment of banks and other financial institutions that offer commercial banking services. The course examines the structure of the banking industry, the various types of banking products and services, risk management practices, and the role of commercial banks in the broader financial system and economy. Students will gain an understanding of how banks manage assets and liabilities, assess credit risk, determine loan pricing, and adhere to regulatory requirements. Additionally, the course covers recent trends and technological developments in banking, including digital transformation and fintech integration.
Recommended Textbook
Financial Institutions Management 4th Edition by SAUNDERS
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18 Chapters
1337 Verified Questions
1337 Flashcards
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Page 2
Chapter 1: Why Are Financial Institutions Special
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Sample Questions
Q1) An action by an economic agent that imposes costs on other economic agents is referred to as a:
A)negative endogenous reaction
B)positive endogenous reaction
C)positive externality
D)negative externality
Answer: D
Q2) Why is the failure of a large bank more detrimental to the economy than the failure of a large steel manufacturer?
A)The bank failure usually leads to a government bailout.
B)There are fewer steel manufacturers than there are banks.
C)The large bank failure reduces credit availability throughout the economy.
D)Since the steel company's assets are tangible, they are more easily reallocated than the intangible bank assets.
Answer: C
Q3) FIs play a significant role in the transmission of monetary policy.
A)True
B)False
Answer: True
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Page 3
Chapter 2: The Financial Service Industry: Depository
Institutions
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Sample Questions
Q1) Which of the following statements is true?
A)Non-bank depository institutions exclude building societies and credit unions.
B)A non-bank depository institution meets the legal definition of a bank.
C)Building societies are the same as credit unions.
D)A non-bank depository institution may be a building society or a credit union and a non-bank depository institution undertakes many of the same activities of a bank without meeting the legal definition of a bank.
Answer: D
Q2) Australia's current financial regulatory framework was reformed in 1999 and moved from industry-based regulation to functional regulation of financial institutions.
A)True
B)False
Answer: True
Q3) The Australian major banks' 30-year average return on equity (ROE) is:
A)-16 %
B)-5 %
C)5 %
D)16 %
Answer: D
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Chapter 3: The Financial Service Industry: Other Financial Institutions
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68 Verified Questions
68 Flashcards
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Sample Questions
Q1) Higher uncertainty of losses forces property-casualty firms to:
A)invest in more short-term assets than life insurance firms
B)invest in more long-term assets than life insurance firms
C)hold a lower percentage of capital and reserves than life insurance firms
D)invest in riskier equity securities than life insurance firms
Answer: A
Q2) Which of the following statements is true?
A)Policy liabilities are a liability item for insurers that reflects their worst-case payment commitments on existing policy contracts.
B)Policy liabilities are an asset item for insurers that reflects their best-case payment inflows on existing policy contracts.
C)Policy liabilities are an asset item for insurers that reflects their expected payment inflows on existing policy contracts.
D)Policy liabilities are a liability item for insurers that reflects their expected payment commitments on existing policy contracts.
Answer: D
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5
Chapter 4: Risks of Financial Institutions
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Sample Questions
Q1) Economically speaking, contingent assets and liabilities are not contractual claims that directly impact the economic value of the equity holders' stake in an FI.
A)True
B)False
Q2) An example of refinancing risk is a case in which an FI:
A)funds two-year maturity assets with one-year maturity liabilities
B)funds one-year maturity assets with two-year maturity liabilities
C)funds two-year maturity assets with two-year maturity liabilities
D)None of the listed options are correct.
Q3) Matching the foreign currency book protects the FI from:
A)sovereign country risk
B)interest rate risk
C)liquidity risk
D)foreign exchange risk
Q4) An FI that matches the maturities of its assets and liabilities is perfectly hedged against interest rate risk.
A)True
B)False
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Chapter 5: Interest Rate Risk Measurement: The Repricing Model
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78 Verified Questions
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Sample Questions
Q1) Which of the following statements is true?
A)A major reason for cheque accounts to be excluded from 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 fall, 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 by predicting depositors' behaviours.
D)None of the listed options are correct.
Q2) Which of the following statements is true?
A)The major focus of the repricing gap is the capital loss effect.
B)The major focus of the repricing gap is the capital gains effect.
C)The repricing gap focuses on all three, the capital gains, the capital loss and the interest income effect.
D)The major focus of the repricing gap is the interest income effect.
Q3) The repricing gap considers the timing and size of cash flows.
A)True
B)False
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Chapter 6: Interest Rate Risk Measurement: the Duration
Model
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Sample Questions
Q1) The effect of interest rate changes on the market value of an FI's net worth breaks down into three effects, these being the leverage adjusted duration gap, the:
A)size of the FI and the reputation of the FI
B)size of the FI and the size of the interest rate shock
C)reputation of the FI and the size of the interest rate shock
D)size of the FI and the direction of the interest rate changes
Q2) The leverage adjusted duration gap measures:
A)the change in an FI's net worth if interest rates change
B)the degree of duration mismatch in an FI's profit and loss statement
C)the degree of duration mismatch in an FI's balance sheet
D)All of the listed options are correct.
Q3) The lower the coupon or interest payment on a security:
A)the lower its duration
B)coupon or interest payments have no impact on a security's duration
C)the higher its duration
D)None of the listed options are correct.
Q4) In simple words, duration measures the average life of an asset or liability.
A)True
B)False
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Chapter 7: Managing Interest Rate Risk Using
Off-Balance-Sheet Instruments
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75 Verified Questions
75 Flashcards
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Sample Questions
Q1) In a put option, the purchaser of the bond option is committed to handing over the specified bond at a specified time.
A)True
B)False
Q2) An Australian bank must pay US$10 million in 90 days.It wishes to hedge the risk in the futures market.To do so, the bank should:
A)buy A$10 million in US dollar futures
B)sell A$10 million in US dollar futures, with three-month maturity
C)buy US$10 million in US dollar futures
D)sell US$10 million in US dollar futures
Q3) Some futures exchanges have deliverable bond futures, meaning that at the contract's expiry holders of bought futures positions must take physical delivery and sellers must make delivery.
A)True
B)False
Q4) 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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Chapter 8: Managing Interest Rate Risk Using Securitisation
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Sample Questions
Q1) An assumable mortgage is a mortgage contract that allows a change of asset to be mortgaged.
A)True
B)False
Q2) Syndication is the creation of securities based on a pool of underlying assets; and the value and income payments of the created securities are derived from the underlying assets.
A)True
B)False
Q3) Loan participations are typically sold to correspondent banks because:
A)they are insiders and can be trusted
B)they offer the best prices
C)the ongoing relationship offers the greatest monitoring opportunities
D)this is a regulatory requirement
Q4) Assignments:
A)are common in loan syndications
B)do not have buyer restrictions
C)comprise less than 30 per cent of the US loan sales market
D)involve extremely high monitoring costs
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Chapter 9: Market Risk
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61 Flashcards
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Sample Questions
Q1) Which of the following statements is true?
A)Daily price volatility is calculated as the price sensitivity to a small change in yield multiplied by the adverse daily yield move.
B)Daily price volatility is calculated as the negative modified duration of a security multiplied by the adverse daily yield move.
C)The daily price volatility of a security influences how much an FI might lose in case of adverse market movements.
D)All of the listed options are correct.
Q2) Assume the market value of a position is $100 000 and that its modified duration is 3.30 years.Further assume that the potential adverse move in yield is 16.5 basis points.What are the daily earnings at risk for this position (round to two decimals)?
A)$54.45
B)$544.50
C)$54,450.00
D)There is not enough information to solve the question.
Q3) Describe the process of the fuller risk factor approach.
Q4) Describe the process of the partial risk factor approach.
Q5) Why is market risk measurement important?
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Chapter 10: Credit Risk I: Individual Loan Risk
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75 Verified Questions
75 Flashcards
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Sample Questions
Q1) What are the major ideas behind KMV's Credit Monitor model?
Q2) The term 'spot loan' refers to a loan:
A)that is granted on the spot
B)that needs to be repaid on the spot
C)granted at the spot rate
D)for which the full loan amount is withdrawn by the borrower on the spot
Q3) Assume the interest rate in the market for one-year zero-coupon government bonds is i = 7.5% and the rate for one-year zero-coupon grade BB bonds is k = 11.8%.What is the implied probability of default on the corporate bond (round to two decimals)?
A)3.85%
B)4.00%
C)96.00%
D)96.15%
Q4) Credit card facilities are a revolving loan product.
A)True B)False
Q5) Unsecured loans are riskier than secured loans from the investor perspective. A)True B)False
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Chapter 11: Credit Risk II: Loan Portfolio and Concentration
Risk
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Sample Questions
Q1) Consider the following table with information on the weightings and expected returns of three assets held by an FI. \[\begin{array} { | c | c | c | }
\hline \text { Loan } i & \text { Weight } i & \text { Expected return } i \\
\hline 1 & 0.15 & 12.35 \% \\
\hline 2 & 0.55 & 10.25 \% \\
\hline 3 & 0.30 & 15.75 \% \\
\hline
\end{array}\] What is the expected return on the portfolio (round to two decimals)?
A)(0.15 * 12.35 + 0.55 * 10.25 + 0.30 * 15.75) / 3 = 4.07%
B)(0.15 * 12.35 + 0.55 * 10.25 + 0.30 * 15.75) * 3 = 36.66%
C)0.15 * 12.35 + 0.55 * 10.25 + 0.30 * 15.75 = 12.22%
D)(12.35 + 10.25 + 15.75) / 3 = 12.78%
Q2) Minimum risk portfolios generally generate the highest returns. A)True B)False
Q3) The most important swap contract in terms of quantity is the credit swap. A)True B)False
Q4) Explain the basic concept of loan loss ratio based models.
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Chapter 12: Sovereign Risk
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Sample Questions
Q1) What are the costs and benefits of rescheduling for the lenders and for the borrowers?
Q2) Which of the following statements is true?
A)There should be a positive relationship between the size of a country's variance of export revenue and the probability of rescheduling.
B)There should be a negative relationship between the size of a country's variance of export revenue and the probability of rescheduling.
C)There should be no relationship between the size of a country's variance of export revenue and the probability of rescheduling.
D)The relationship between the size of a country's variance of export revenue and the probability of rescheduling depends on a set of variables relating to the borrowing country.
Q3) Debt moratorium refers to a delay in repaying interest and/or principal on debt. A)True
B)False
Q4) Debt rescheduling is the least common form of sovereign risk event.
A)True
B)False
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Page 14
Chapter 13: Foreign Exchange Risk
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Sample Questions
Q1) Off-balance-sheet hedging involves making changes in the on-balance-sheet assets and liabilities to protect the FI's profits from FX risk and taking positions in forward or other derivative securities to hedge FX risk.
A)True
B)False
Q2) Which of the following statements is true?
A)Holding less assets than liabilities in a given currency is referred to as a net short position.
B)Holding less assets than liabilities in a given currency is referred to a net long position.
C)Holding less assets than liabilities in a given currency is referred to as a gross short position.
D)Holding less assets than liabilities in a given currency is referred to as a gross long position.
Q3) Which of the following is not a source of foreign exchange risk?
A)Trading foreign currencies.
B)Making domestic-currency loans to foreign corporations.
C)Buying foreign-issued securities.
D)Issuing foreign currency-denominated debt.
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Chapter 14: Liquidity Risk
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Sample Questions
Q1) Consider the following situation: an FI holds two assets in equal proportions, these being liquid securities with a fair market value of $200 and housing loans with a fair market value of $800.Further assume that in case of immediate liquidation, the FI would receive $185 for its liquid securities and $700 for its housing loans.What is the FI's liquidity index (round to two decimals)?
A)I = (185/200) + (700/800) = 1.80
B)I = (185/200) * (700/800) = 0.81
C)I = 0.5 * (185/200) + 0.5 * (700/800) = 0.90
D)I = [0.5 * (185/200)] * [0.5 * (700/800)] = 0.20
Q2) Which of the following statements is true?
A)A positive financing gap means that the FI must fund it by using its cash and liquid assets or by raising funds in the money market.
B)A negative financing gap means that the FI must fund it by using its cash and liquid assets or by raising funds in the money market.
C)A positive financing gap means that the FI has excess liquidity.
D)A negative financing gap means that the FI is in need of liquidity.
Q3) What are the main components of a liquidity plan? Discuss the vital role such a plan plays in reducing liquidity risk.
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16
Chapter 15: Liability and Liquidity Management
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Sample Questions
Q1) Basel III liquidity reforms:
A)will strengthen global illiquidity rules with the key aim of promoting a resilient global sector
B)introduce the need for adequate high-quality liquid assets that meet the available stable funding (ASF) requirement
C)introduce the need for adequate high-quality liquid assets that meet the net stable funding ratio (NSFR)
D)introduce the need for adequate high-quality liquid assets that meet the liquidity coverage ratio (LCR)
Q2) APS210 specifies that 'high-quality liquid assets' must be free from encumbrances and include:
A)cash
B)long-term loans
C)cash and eligible securities approved by APRA
D)cash and long-term loans
Q3) NCDs are short-term, fixed-term deposits and are known as wholesale CDs, which have a face value of below $100 000.
A)True
B)False
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Page 17
Chapter 16: Off-Balance-Sheet Activities
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Sample Questions
Q1) Briefly explain how off-balance-sheet transactions can affect an FI's solvency.
Q2) FIs may issue standby letters of credit to cover contingencies that are potentially more severe, less predictable and not necessarily trade related.
A)True
B)False
Q3) Explain how the use of forward and future contracts creates contingent credit risk for an FI.
Q4) Settlement in case of 'when issued' (WI) trading must be completed on:
A)the date on which the counterparties agree
B)Tuesday
C)Wednesday
D)Thursday
Q5) The delta of an option refers to the change in the value of an:
A)option for a large unit change in the price of the underlying security
B)option for a small unit change in the price of the underlying security
C)underlying security for a small unit change in the price of the option
D)underlying security for a large unit change in the price of the option
Q6) 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) Some of the most important retail payment product innovations are:
A)ATMs, EFTPOS and online banking
B)home banking, telephone banking and business-to-business ecommerce
C)online banking, smart cards and account reconciliation
D)All of the listed options are correct.
Q2) 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
Q3) Economies of scope refers to the:
A)fall in an FI's average costs of production as its output increases
B)increase in an FI's average costs of production as its output increases
C)situation in which the costs of joint production of FI services are higher than they would be if they were produced independently
D)ability of an FI to generate synergistic cost savings through joint use of inputs in producing multiple outputs
Q4) External insurance is one way of operational risk loss prevention.
A)True
B)False
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Chapter 18: Capital Management and Adequacy
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Sample Questions
Q1) Which of the following is true?
A)Total capital is the sum of Tier I and Tier II capital less deductions.
B)Total capital must equal or exceed 8% of risk-weighted assets.
C)The total of Tier II capital is limited to 100% of Tier I capital.
D)All of the listed options are correct.
Q2) 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 FIs' credit risk only.
C)Pillar II deals with market discipline.
D)Pillar III deals with the supervisory review process.
Q3) Retained earnings are:
A)the accumulated value of past profits not yet paid out in dividends to shareholders
B)the face value of the ordinary shares issued by the FI
C)a special reserve set aside out of retained earnings to meet expected and actual losses on the portfolio
D)the difference between the price the public paid for common stock or shares when originally offered and their par values times the number of shares outstanding
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Page 20