Risk Management in Banking Test Bank
Course Introduction
Risk Management in Banking explores the fundamental principles and practices used by financial institutions to identify, assess, and mitigate various types of risks, such as credit, market, operational, and liquidity risks. Students will examine regulatory frameworks, risk measurement techniques, and the role of capital adequacy in safeguarding banks stability. The course emphasizes practical tools and strategic approaches for developing robust risk governance structures, stress testing, and scenario analysis, with real-world case studies that highlight effective risk management decision-making in an evolving financial landscape.
Recommended Textbook Bank Management and Financial Services 9th Edition by Peter S. Rose
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20 Chapters
2365 Verified Questions
2365 Flashcards
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Page 2
Chapter 1: An Overview of the Changing Financial-Services Sector
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Sample Questions
Q1) Which of the following reasons leads to an implication that traditional banking is dying?
A)Decrease in number of branches
B)Increased restructuring of loans
C)Degradation of market share
D)Reduction of public trust and confidence in the system.
E)Increase in risky arbitrage services
Answer: C
Q2) Banks perform the indispensable task of:
A)creating money without making loans.
B)absorbing the excess liquidity created by other financial institutions.
C)intermediating between surplus-spending parties and deficit-spending parties.
D)issuing risky deposits.
E)None of the options are correct
Answer: C
Q3) _____________ refers to the movement of businesses across industry lines in order to broaden its base.
Answer: Convergence
Q4) The country with the most banks is ______________________.
Answer: the United States
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Chapter 2: The Impact of Government Policy and Regulation on
the Financial-Services Industry
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Sample Questions
Q1) Common minimum capital requirements on banks in leading industrialized nations that are based on the riskiness of their assets is imposed by:
A)the National Banking Act.
B)the Financial Institutions Reform,Recovery and Enforcement Act.
C)the International Banking Act.
D)the Basel Agreement.
E)None of the options are correct.
Answer: D
Q2) The term "regulatory dialectic" refers to the dual system of banking regulation in the United States and selected other countries where both the federal or central government and local governments regulate banks.
A)True
B)False
Answer: False
Q3) One tool that the Federal Reserve uses to control the money supply is ________________.The Federal Reserve will change the interest rate they charge for short-term loans when they are using this tool of monetary policy.
Answer: changing the discount rate
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Chapter 3: The Organization and Structure of Banking and the Financial-Services Industry
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Sample Questions
Q1) Which of the following is one of the few states that has opted out of interstate banking?
A)New York
B)Ohio
C)Texas
D)Montana
E)None of the options are correct
Answer: D
Q2) A bank devoted principally to the markets for smaller,locally based deposits and loans is often referred to as a(n):
A)wholesale bank.
B)retail bank.
C)commercial bank.
D)investment bank.
E)social bank.
Answer: B
Q3) Banks acquired by holding companies are referred to as affiliated banks.
A)True
B)False
Answer: True
Page 5
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Chapter 4:
Establishing New Banks, Branches, ATMs, Telephone Services, and Websites
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Sample Questions
Q1) The Jones State Bank is planning to add a branch office on the west side of Edmond,Oklahoma.The bank has done a study and found that the site where it wants to build the branch office sees 35,000 cars pass in an average day.Which factor would this address when considering whether to add a new branch?
A)Traffic count
B)Number of retail shops
C)Average age of the local population
D)Population Density
E)Population Growth
Q2) The most desirable sites for full-service branch bank offices usually have which of the following characteristics?
A)Heavy traffic volume
B)Large numbers of retail shops and stores
C)Above-average age populations
D)All of the options are correct
E)None of the options are correct
Q3) A(n)______________________ is a full service facility which offers many of the same services as the home or main office of a bank.
Q4) The acronym ACH stands for _____________.
Page 6
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Chapter 5: The Financial Statements of Banks and Their Principal Competitors
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Sample Questions
Q1) Loan-loss reserves set aside to cover a particular loan or loans expected to be a problem or loans that represent above-average risk are known as specific reserves.
A)True
B)False
Q2) The __________________________ shows the amount of revenues received and expenses incurred over a specific time period.
Q3) Which of the following assets is the largest asset item on the bank's balance sheet?
A)Securities
B)Cash
C)Loans and leases
D)Bank premises
E)None of the options are correct.
Q4) U.S.banks (especially those with $500 million or more in total assets)are required to file financial statements,audited by an independent public accountant,with their principal federal regulatory agency and with the FDIC.
A)True
B)False
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Chapter 6: Measuring and Evaluating the Performance of Banks
and Their Principal Competitors
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Sample Questions
Q1) The difference between such sources of bank income as service charges on deposits and trust-service fees,and such sources of bank expenses as salaries and wages and overhead expenses divided by total assets or total earning assets is called the:
A)net profit margin.
B)net operating margin.
C)net noninterest margin.
D)net return on assets.
E)None of the options is correct.
Q2) __________________________ measures the amount of debt or leverage a bank has and is one part of the evaluation of the bank's ROE.It is generally a number larger than one.
Q3) According to the textbook,the ratio of a bank's pre-tax net operating income to total operating revenues is a measure of expense-control efficiency.
A)True
B)False
Q4) One of the principal components of evaluating ROE is _____________________ ratio,which reflects a bank's portfolio management policies and the mix and yield on its assets.
Page 8
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Chapter 7: Risk Management for Changing Interest Rates:
Asset-Liability Management and Duration Techniques
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155 Flashcards
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Sample Questions
Q1) Which of the following statements concerning a bank's leverage-adjusted duration gap is true?
A)If it has a positive duration gap and interest rates rise,its net worth will decline.
B)If it has a positive duration gap and interest rates fall,its net worth will decline.
C)If it has a negative duration gap and interest rates rise,its net worth will decline.
D)If it has a negative duration gap and interest rates fall,its net worth will increase.
E)All of the options are correct.
Q2) The __________________________ is the rate of return on a financial instrument using a 360-day year relative to the instrument's face value.
Q3) Financial institutions laden with home mortgages tend be immune to interest-rate risk.
A)True
B)False
Q4) Interest sensitive assets divided by interest sensitive liabilities is known as: ____________________________.
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9
Chapter 14: Investment Banking,Insurance,and Other
Sources of Fee Income
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148 Verified Questions
148 Flashcards
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Sample Questions
Q1) The number of futures contracts needed to hedge a position increases as the bank's duration gap increases.
A)True
B)False
Q2) Basis risk is the difference in the interest rates (or prices)of the same security between the cash market and the futures market.
A)True
B)False
Q3) A(n)_________________________ is the fee a buyer must pay to be able to put securities to,or to call securities away from the option writer.
Q4) A(n)_________________________ is a contract where two parties exchange interest payments in order to save money and hedge against interest rate risks.
Q5) U.S.Treasury bond futures contracts call for the future delivery of U.S.T-bonds with minimum denominations of $100,000 and minimum maturities of 15 years.
A)True
B)False
Q6) The combination of both a cap and floor is known as an interest-rate ________.
Page 10
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Chapter 9: Risk Management: Asset-Backed Securities,
Loan Sales, Credit Standbys, and Credit Derivatives
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Sample Questions
Q1) Securitization of loans can easily be applied to business loans since these loans tend to have similar cash flow schedules and comparable risk structures.
A)True
B)False
Q2) A bank is concerned about excess volatility in its cash flows from some recent business loans it has made.Many of these loans have a fixed rate of interest and the bank's economics department has forecast a sharp increase in interest rates.The bank wants more stable cash flows.Which type of credit derivative contract would you most recommend for this situation?
A)Credit-linked note
B)Credit option
C)Credit risk option
D)Total-return swap
E)Credit swap
Q3) The buyer of a participation loan must watch both the borrower and the seller bank closely.
A)True
B)False
Q4) Insurance companies are the principal __________ of credit derivatives.
Page 11
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Chapter 10: The Investment Function in Financial-Services Management
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Sample Questions
Q1) Bank income from loans is usually taxable.
A)True
B)False
Q2) The yield to maturity is the discount rate that equates a security's purchase price with the stream of income expected until it is sold to another investor.
A)True
B)False
Q3) A(n)________________ is a picture of how market interest rates differ across loans and securities of varying times to maturity.
Q4) The principal risk banks face from investing in structured notes is credit (default)risk. A)True
B)False
Q5) A security issued by the federal government with greater than 10 years to maturity at the time of issue is called a(n)_______________.
Q6) ________________ are a type of municipal bond that are paid only from certain stipulated sources of funds.
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Chapter 11: Liquidity and Reserves Management: Strategies and Policies
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Sample Questions
Q1) A manager that examines the bank's stock price behavior and risk premium on the CDs to measure liquidity position is using:
A)the sources and uses of funds approach.
B)the structured funds approach.
C)the liquidity indicator approach.
D)signals from the marketplace.
E)None of the options is correct.
Q2) For several decades,the largest banks around the world have chosen _____________,which calls for borrowing immediately spendable funds to cover all anticipated demands for liquidity.
Q3) Discount window loans jumped dramatically the day following 9/11.
A)True
B)False
Q4) Robberies of cash from banks have declined in recent years. A)True
B)False
Q5) Liquid assets generally have a stable price but are not necessarily reversible. A)True
B)False
Q6) The fed funds rate is generally most volatile on a bank's __________ day. Page 13
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Page 14
Chapter 12: Managing and Pricing Deposit Services
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Sample Questions
Q1) Depositors must send their customers the amount of interest earnings received,along with the _________________ earned.It is the interest rate the customer has actually earned on the account.
Q2) A customer has a savings account for one year.During the year he earns $65.50 in interest.For 180 days he has $2,000 in the account and for another 180 days he has $1,000 in the account.What is the annual percentage yield on this savings account?
A)6.55%
B)3.28%
C)4.42%
D)8.73%
E)None of the options is correct
Q3) Personal checking accounts tend to be more profitable for banks than commercial checking accounts.
A)True
B)False
Q4) A(n)_________________________ is a conditional method of pricing deposit services in which the fees paid by the customer depend mainly on the account balance and volume of activity.
Q5) The _________________________ is the added cost of bringing in new funds.
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Chapter 13: Managing Nondeposit Liabilities
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Sample Questions
Q1) The type of discount window loan available at higher interest rates to depository institutions not qualifying for primary credit is known as ___________ credit.
Q2) Which of the following is the role performed by accommodating banks?
A)They act as intermediaries in the Eurodollar market.
B)They issue negotiable CDs for themselves and for other banks.
C)They sell commercial paper to raise funds for themselves and other firms belonging to their bank holding company.
D)They buy and sell federal funds simultaneously in order to make a market for reserves of customer banks.
E)None of the options is correct.
Q3) The spread between current and expected loans and investments and the current and expected inflows from deposits and other sources of funds is known as the
Q4) When the first priority of a bank is to make loans to all good quality loan customers it is following the _________________________ doctrine.
Q5) Federal Reserve balances of banks can be transferred from one institution to another in seconds through the Fed's wire transfer network called the
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Chapter 14: Investment Banking, insurance, and Other
Sources of Fee Income
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Sample Questions
Q1) When a financial institution offers a(n)__________________ mutual fund,it acts as broker for an unaffiliated mutual fund or group of funds and does not act as an investment advisor.
Q2) A bank is considering adding security brokerage services to the services it offers.It has estimated that the expected return and standard deviation of its traditional service are 6% and 14% respectively.It has estimated that the expected return and standard deviation of its new securities brokerage services are 14% and 24% respectively.The correlation between these services has been estimated to be -0.4 and the bank estimates that 60% of its business will be from traditional services and 40% from the new services.What is the expected return of the new combined firm?
A)14.0 percent
B)10.8 percent
C)10.0 percent
D)9.2 percent
E)6.0 percent
Q3) State Street Bank in Boston is a good example of a fee-focused banking company. A)True B)False
Q4) The most rapidly growing source of income for banks is ________ income.
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Chapter 15: The Management of Capital
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Sample Questions
Q1) Second National Bank is forecasting a return on equity of 15 percent for this year.The board of directors wants to maintain its current policy of paying the bank's stockholders 40 percent of any net earnings the bank will earn.How fast can the bank's assets grow this year without jeopardizing its ratio of capital to assets?
A)15 percent
B)9 percent
C)8 percent
D)6 percent
E)None of the options is correct.
Q2) Which of the following assets fit(s)into the 0 percent risk-weight category?
A)Cash
B)Deposits at the Federal Reserve
C)Treasury Bills
D)GNMA mortgage-backed securities
E)All of the options are assets that fit into the 0 percent risk-weight category.
Q3) It is anticipated that Basel III may increase capital requirements for banks.
A)True
B)False
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Chapter 16: Lending Policies and Procedures: Managing Credit Risk
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Sample Questions
Q1) According to the Community Reinvestment Act,selected lenders must make an "affirmative effort" to provide loans and other services to all credit-worthy borrowers in their chosen service area.
A)True
B)False
Q2) Real estate loans made by national banks in the U.S.cannot exceed:
A)15 percent of that bank's total assets or 25 percent of its total capital.
B)that bank's total capital and surplus or 70 percent of its time and savings deposits,whichever is greater.
C)20 percent of that bank's capital and surplus or 80 percent of its savings deposits,whichever is lesser.
D)25 percent of capital or 10 percent of core deposits of the bank,whichever is higher.
E)None of the options is correct.
Q3) The principal reason why banks are chartered by federal and state governments is to make loans to their customers.
A)True
B)False
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Page 19
Chapter 17: Lending to Business Firms and Pricing Business Loans
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Sample Questions
Q1) Weak loans considered to be substandard or doubtful are also known as __________ credits.
Q2) ______________________ are designed to fund long-term investments such as the purchase of equipment.Money is borrowed in one lump sum and repayments are generally made in installments.
Q3) The business loan pricing method that estimates the before-tax yield expected from the loan by considering the all revenues and expenses associated with a particular borrower and the net amount of loanable funds that the bank must turn over to the borrower,is called the:
A)the cost-plus loan pricing method.
B)the price leadership model.
C)the below-prime market pricing model.
D)customer profitability analysis.
E)None of the options is correct.
Q4) Syndicated loans are a type of working capital loan.
A)True
B)False
Q5) _____________________ is the rate on short-term Eurocurrency deposits which range in maturity from a few days to a few months.
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Chapter 18: Consumer Loans, Credit Cards, and Real Estate
Lending
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Sample Questions
Q1) The Truth-in-Lending Act of 1968 gave consumers the right to access the information from their credit files kept at local and regional credit bureaus.
A)True
B)False
Q2) The law that limits how far a creditor or credit collection agency can go in pressing a customer to pay a past due debt is the ______________________ Act.It does not allow a debt collector to "harass" a debtor.
Q3) In a revolving line of credit,where a customer is subject to high fees and interest costs and is required to make only a small portion of total debt owed,usually called "minimum payment",often results in:
A)amortization of debt.
B)negative amortization of debt.
C)depreciation of debt.
D)cumulative depreciation of debt.
E)prepayment of debt.
Q4) A rule of thumb used to determine how much interest income a bank is allowed to accrue at any point in time from a consumer loan that is being paid off in monthly installments is known as the ____________.
Page 21
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Chapter 19: Acquisitions and Mergers in Financial-Services Management
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Q1) If one of the banks is in financial stress,a merger is not allowed to take place. A)True
B)False
Q2) In the United States,regulations require bank merger premiums to range between 150 to 250 percent.
A)True
B)False
Q3) When a national bank wants to acquire another bank,it must apply to the __________________ for approval.
Q4) A market area served by one bank which is the only provider of financial services in that market would have an HHI of 100 percent.
A)True
B)False
Q5) Many mergers arise from expected ___________________________ benefits.This takes place particularly when an acquired firm has earnings losses that can be used to offset taxable profits of the acquirer.
Q6) A large metropolitan or money center bank is often called a(n)______________.
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Chapter 20: International Banking and the Future of Banking and Financial Services
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Sample Questions
Q1) The ___________________________________________ is an agreement between the U.S. ,Japan,Canada,and several other nations of Western Europe to adopt common capital standards for all of their banks.
Q2) A call option is often employed to protect a bank or bank customer against losses from falling currency prices.
A)True
B)False
Q3) The biggest problem for international banks at the beginning of the 21<sup>st</sup>century is:
A)the Internet.
B)interest rate risk.
C)foreign exchange risk.
D)non-performing loans.
E)None of the options is correct.
Q4) If an international bank has adopted a net short position in a particular currency,and that currency's exchange value increases,the bank will achieve a profit from trading the currency.
A)True
B)False