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Financial Institutions Management 4th Edition by Saunders -Test Bank

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Chapter 02 Testbank

Student: ___________________________________________________________________________

Which of the following statements is true?

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.

Which of the following statements is true?

Authorised depository institutions are those that have been granted an authority by the RBA to operate in Australia.
B. Authorised depository institutions are those that have been granted an authority by APRA to operate in Australia.
C. Authorised depository institutions are those that have been granted an authority by the Australian government to operate in Australia.
D. Authorised depository institutions are those that have been granted an authority by ASIC to operate in Australia.

Which of the following statements is true?

Building societies are depository institutions.
B. Building societies usually operate on a cooperative basis.
C. In case of building societies the depositors are also members of the society.
D. All of the listed options are correct.

Authorised depository institutions include:

banks, building societies, credit unions
B. banks, building societies
C. banks, credit unions
D. only banks

Which of the following statements is true?

Credit unions are mutual cooperative organisations.
B. Credit unions provide deposit facilities, personal and housing loans and payments services to their members.
C. In case of credit unions the depositors are also members of the society.
D. Credit unions are mutual cooperative organisations that provide deposit facilities, personal and housing loans and payments services to their members.

Which of the following statements is true?

An off-balance-sheet item is recorded on the balance sheet of a financial institution when the annual report is being prepared.
B. An off-balance-sheet liability is an item that moves onto the liability side of the balance sheet when a contingent event occurs.
C. An off-balance-sheet asset is an item that moves onto the asset side of the balance sheet when a contingent event occurs or at the end of a financial period.
D. All of the listed options are correct.

Which of the following is a reason for the increase in the number of banks since the mid-1980s?

relaxation of entry requirements into the Australian banking industry
B. changes in the regulatory requirements of non-bank depository institutions
C. the need for a more sophisticated banking system in Australia
D. relaxation of entry requirements into the Australian banking industry and changes in the regulatory requirements of non-bank depository institutions

Which of the following statements is true for the Australian banking industry?

The Australian banking industry is highly concentrated.
B. There are four major banks in Australia.
C. The four major banks and the five regional banks offer a full range of commercial and investment banking services.
D. All of the listed options are correct.

Australia’s big four banks include:

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.

The Australian major banks’ 30-year average return on equity (ROE) is:

-16 %
B. -5 %
C. 5 %
D. 16 %

The difference between Australian major bank margins and those of regional banks is in the main due to:

flexibility of the regional banks.
B. the ability of the regional banks to issue covered bonds.
C. the advantage of the major banks in the funding market and to a lesser extent their asset mix.
D. None of the listed options are correct.

Which of the following is true of off-balance-sheet activities?

They involve generation of fees without exposure to any risk.
B. They include contingent activities recorded in the current balance sheet.
C. They invite regulatory costs and additional ‘taxes’.
D. They have both risk-reducing as well as risk-increasing attributes.

The most important source of bank funding is:

short-term debt
B. long-term debt
C. covered bonds
D. domestic deposits

Following the global financial crisis, banks strengthened their funding and liquidity profiles by:

reducing their holdings of liquid assets
B. increasing their holdings of liquid assets
C. reducing their use of wholesale funds and increasing their holdings of liquid assets
D. increasing their use of wholesale funds and decreasing their holdings of liquid assets

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:

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

Which of the following statements is true?

The net interest margin is a profitability indicator and is measured as net income divided by earning assets.
B. The net interest margin is a profitability indicator and is measured by interest income minus interest expense, divided by earning assets.
C. The net interest margin is a profitability indicator and is measured by interest income plus interest expense, divided by earning assets.
D. The net interest margin is a profitability indicator and is measured as interest income minus non-interest income divided by total assets.

The market structure of the banking sector has changed since deregulation of the financial system during the 1980s. Which statement more closely reflects the current structure of the banking sector in Australia?

Foreign banks dominate in number and share of total assets.
B. The major banks no longer hold the largest share of total assets.
C. Total assets are fairly evenly distributed between the major, regional and foreign banks.
D. The number of banks has grown steadily since the 1980s and the major banks maintain the highest percentage share of total assets.

Which of the following is a role of a bank?

Attract funds from the capital markets to facilitate borrowing by the household sector.
B. Accept deposits and make loans and in doing so facilitate the flow of funds from borrowers to lenders.
C. Accept deposits and make loans and in doing so facilitate the flow of funds from savers to borrowers.
D. Manage the level of interest rates.

Which of the following is true?

All banks are depository institutions and are authorised by APRA to carry out financial intermediation.
B. All authorised depository institutions are banks.
C. All financial intermediaries are authorised depository institutions by APRA to carry out financial intermediation.
D. All of the listed options are correct.

The number of banks has grown steadily since the middle of the 1980s for the following reasons:

liberalisation of conditions for foreign bank entry by APRA
B. deregulation of the banking industry, including the relaxation of bank entry requirements
C. changes to the regulatory regime for non-bank depository institutions favoured conversion from building society to banks
D. All of the listed options are correct.

The main features of the local banking industry over the two decades to 2010 have been an increase in concentration. This has occurred due to mergers and acquisitions motivated by the desire to:

be competitive in global markets
B. protect against takeover by foreign competitors
C. increase efficiency in terms of economies of scale and scope
D. All of the listed options are correct.

Which of the following statements is true?

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.

In response to the GFC and the global liquidity crisis the Australian government introduced the following measure in 2008:

a financial claims scheme that provided coverage to all depositors in any financial institution
B. a financial claims scheme that guaranteed bank deposits coverage to depositors up to a million dollars per depositor
C. a financial claims scheme that guaranteed bank deposits coverage to depositors up to a million dollars per depositor and provided a temporary wholesale funding guarantee
D. All of the listed options are correct.

Since 1 February 2012, a financial claims scheme provides protection to depositors up to:

$250 000 per account holder per ADI
B. $500 000 per account holder per ADI
C. $750 000 per account holder per ADI
D. $1 000 000 per account holder per ADI

The term ‘spread’ refers to the difference between an FI’s:

assets and liabilities
B. liabilities and equity
C. short-term lending rates and long-term lending rates
D. lending and deposit rates

Which of the following statements is true?

Capital adequacy regulations of banks were introduced in 1989.
B. Capital adequacy regulations require banks to hold, on average, less capital for low-risk assets such as housing loans compared to higher risk assets such as commercial loans.
C. Capital adequacy regulations were abolished in 2000.
D. Capital adequacy regulations of banks were introduced in 1989 and capital adequacy regulations require banks to maintain levels of capital adequate for the type of activity undertaken, on average, less capital for low-risk assets such as housing loans compared to higher risk assets such as commercial loans.

The major reasons for the shift in the composition of bank lending commitments from the retail market to the commercial market are the:

introduction of capital adequacy regulations in 1989
B. number of non-bank depository institutions that gained banking licences in the early 1990s
C. fact that commercial loans paid higher returns than housing loans
D. None of the listed options are correct as the shift was from commercial loans to housing loans.

Depository institutions are required by APRA to be responsible for:

their own liquidity management strategy that must include scenario analysis
B. their own capital management strategy that must include risk analysis
C. both their own liquidity, capital management strategies and a business continuity plan
D. None of the listed options are correct. APRA is responsible for the supervision and oversight of all depository institutions.

Which of the following statements is true?

Off-balance-sheet transactions for Australian banks include direct credit substitutes, interest rate derivative contracts and foreign exchange derivative contracts.
B. On-balance-sheet transactions for Australian banks include direct futures and forward contracts.
C. Off-balance-sheet transactions for Australian banks include the commercial loans and term deposits.
D. All of the listed options are correct.

Which of the following statements is true?

On average building societies are larger than credit unions and their total share of the depository institution market has increased since 1992.
B. On average building societies are smaller than credit unions and their total share of the depository institution market has decreased significantly since 1992.
C. On average building societies are larger than credit unions and their total share of the depository institution market has decreased significantly since 1992.
D. On average building societies are smaller than credit unions and their total share of the depository institution market has increased since 1992.

Which of the following statements is true?

The majority of players in terms of asset value as a percentage of GDP in the Australian financial system are credit unions.
B. The majority of players in terms of asset value as a percentage of GDP in the Australian financial system are building societies.
C. The majority of players in terms of asset value as a percentage of GDP in the Australian financial system are banks.
D. The majority of players in terms of asset value as a percentage of GDP in the Australian financial system are superannuation funds.

Which of the following statements is true?

During the 1960s and 1970s, the growth of building societies ensured an increasing supply of funds for housing loans at reasonable rates.
B. During the 1960s and 1970s, the credit union expansion ensured the availability of relatively low cost unsecured and secured personal loans.
C. During the 1960s and 1970s, regulatory constraints meant that banks could not in general satisfy the demand for consumer credit.
D. All of the listed options are correct.

Which of the following statements is true?

Deregulation of the banking system in the 1980s brought greater competition from the banks.
B. Deregulation of the banking system in the 1980s resulted in loss of market share by non-bank depository institutions.
C. Deregulation of the banking system in the 1980s brought greater competition from the non-bank depository institutions.
D. Deregulation of the banking system in the 1980s brought greater competition from the banks and resulted in loss of market share by non-bank depository institutions.

In which way did building societies respond to the competitive pressures resulting from the deregulation of the banking system in the 1980s?

They engaged in mergers for efficiency and scale reasons.
B. They adopted improved technology.
C. They diversified their products and activities.
D. All of the listed options are correct.

Which of the following statements is true?

Key performance ratios for credit unions and building societies indicate that from 2005 to 2014 their cost structures were higher than for banks.
B. Key performance ratios for credit unions and building societies indicate that from 2005 to 2014 their cost structures were lower than for banks.
C. Deposits are a higher proportion of the funding base for banks than for credit unions and building societies.
D.

Despite credit unions and building societies having higher cost structures over the period 2005–2014 than banks, they have much lower bad debt expenses than banks and hence have navigated the GFC well in terms of their overall performance.

Costs to average assets ratio is the lowest for:

major banks
B. credit unions
C. building societies
D. credit unions and building societies

Costs to average assets ratio is the highest for:

major banks
B. credit unions
C. building societies
D. major banks and building societies

Which of the following statements is not true?

ACCC is responsible for market integrity and consumer protection across the financial system.
B. The RBA is responsible for prudential supervision and the promotion of financial system stability.
C. The RBA is responsible for monetary policy and for overall financial system stability.
D. APRA is responsible for prudential supervision of the financial services industry and supervises all deposit-taking institutions.

Which of the following statements is true?

Australia’s current financial regulatory system has its origins in the late 1990s’ Financial System Inquiry, commonly known as the Campbell Committee.
B. Australia’s current financial regulatory system has its origins in the late 1990s’ Financial System Inquiry, commonly known as the Wallis Committee.
C. Australia’s current financial regulatory system has its origins in the late 1990s’ Financial System Inquiry, commonly known as the Martin Committee.
D. Australia’s current financial regulatory system has its origins in the late 1990s’ Financial System Inquiry, commonly known as the Valentine Committee.

The current financial system in Australia consists of three major agencies, these being:

APRA, ASIC and the Australian government
B. APRA, the RBA and the Australian government
C. APRA, ASIC and the RBA
D. the RBA, ASIC and the Australian government

Which of the following statements is true?

APRA stands for Australian Prudential Regulation Authority.
B. APRA stands for Australian Payments Regulation Association.
C. APRA stands for Australian Payments Review Authority.
D. None of the listed options are correct.

Which of the following statements is true?

APRA is responsible for market integrity and consumer protection across the financial system.
B. The RBA is responsible for prudential supervision.
C. ASIC is responsible for monetary policy and for overall financial system stability.
D. None of the listed options are correct.

APRA’s aim is to develop prudential policies that:

promote financial safety and efficiency and that enable smaller institutions to put competitive pressures on larger institutions
B. balance financial safety and efficiency, competition contestability and competitive neutrality
C. promote financial system stability and fair interest rates
D. protect consumers from predatory behaviour of financial institutions

The Probability and Impact Rating System (PAIRS):

determines the response ASIC should make to the outcomes of PAIRS ratings
B. determines the response the RBA should make to the outcomes of bank failures
C. determines the response the RBA should make to the outcomes of financial crisis
D. None of the listed options are correct.

Some prudential standards issued by APRA include regulations regarding:

capital adequacy for market risk and liquidity
B. credit quality and capital adequacy for credit risk
C. large exposures, business continuity management and securitisation
D. All of the listed options are correct.

APRA’s Supervisory Oversight and Response System (SOARS) is designed to assess the:

likelihood of FI failure
B. impact of the FI failure
C. impact of FI failure and provide the appropriate supervisory response, which in the case of a low PAIRS probability rating will require restructure
D. impact of FI failure and provide the appropriate supervisory response, which in the case of an extreme PAIRS probability rating will require restructure

Off-balance-sheet activities are:

not shown on the current balance sheet
B. not shown on the balance sheet but after the completion of the financial year are recorded on the balance sheet
C. not shown on the current balance sheet but are an off-balance-sheet asset/liability, if when a contingent event occurs, the activity moves onto the asset/liability side of the balance sheet
D. contingent events which move the asset or liability from the balance sheet to off balance sheet

Which of the following is true?

PAIRS provides APRA with a score-card approach to assessing the risk of FI failure and the impact of any failure.
B. PAIRS provides APRA with a single rating which incorporates both the probability that the FI will fail and the impact of any failure.
C. PAIRS provides APRA with a rating that assesses the risk of FI failure.
D. PAIRS provides APRA with an impact factor that determines what regulatory response needs to be implemented to prevent FI failure.

Customer loans are classified on a DI’s balance sheet as:

liabilities, because the customer may default on the loan
B. assets, because the DI earns servicing fees on the loan
C. liabilities, because the DI must transfer funds to the borrower at the initiation of the loan
D. assets, because DIs originate and monitor loan portfolios

Which of the following is true of off-balance-sheet activities?

They involve generation of fees without exposure to any risk.
B. They include contingent activities recorded in the current balance sheet.
C. They invite regulatory costs and additional ‘taxes’.
D. They have both risk-reducing as well as risk-increasing attributes.

Which of the following is not an off-balance-sheet activity for banks?

derivative contracts
B. loan commitments
C. standby letters of credit
D. trust services

Which of the following observations concerning credit unions is not true?

They invest heavily in corporate securities.
B. Member loans constitute a majority of their total assets.
C. They engage in off-balance-sheet activities.
D. They focus more on providing services and less on profitability.

Which of the following is part of the supervisory activities of APRA?

Prudential review is the most important as it provides a detailed assessment of an FI’s inherent risks and the adequacy of its risk management controls.
B. Licensing is the last stage of APRA’s supervision which ensures that only FIs that have the capacity to successfully operate can operate in the market.
C. Enforcement supervision is not part of APRA supervisory activity as it would involve enforcement teams to specifically intervene in the running of the FI.
D. Entity financial analysis is the FI’s own assessment of its financial position.

Which of the following statements is not correct concerning credit risk?

Credit risk is the risk of counterparty default and is usually the single largest risk facing an FI.
B. Credit risk occurs when borrowers are unable to repay their loans on time.
C. Credit risk decreases when FIs concentrate their loan exposures on a few counterparties and APRA requires that FIs have appropriate policies to manage such risk.
D. Credit risk increases when FIs concentrate their loan exposures on a few counterparties.

Business continuity relates to:

an FI that has a business plan that meets the liquidity and capital requirements of APRA
B. a whole-of-business approach to FI operations and profitability
C. a business continuity plan which reduces the impact of any disruption on FI operations, reputation, profitability, depositors and other stakeholders of an FI
D. a business continuity plan which increases profitability of an FI

Credit unions were generally less affected than other depository institutions by the recent financial crisis because:

they hold more government securities, on average
B. they hold less government securities, on average
C. they had a focus on high-quality domestic assets
D. they had a focus on domestic deposits and more assets in residential mortgages

Responding to the financial crisis, the Australian government introduced a number of measures to ease liquidity issues and included the following:

a permanent financial claims scheme (FCS) in October 2008, which explicitly guaranteed bank deposits with a $1 million cap
B. a semi-permanent financial claims scheme (FCS), which implicitly guaranteed bank deposits
C. a permanent guarantee scheme for large deposits and wholesale funding which, for a fee, guaranteed bank deposits greater than $1 million
D. a permanent financial claims scheme (FCS) in October 2008, which explicitly guaranteed bank deposits with a $1 million cap; the guarantee was reduced to $250 000 per depositor from 2012

Covered bonds:

were introduced following the GFC to ease liquidity pressures on the bank’s balance sheet
B. are issued by a bank, backed by a pool of assets, which remain on the balance sheet of the issuing bank
C. are issued by a bank, backed by a pool of assets, which are off-balance-sheet items of the issuing bank
D. are issued by the Reserve Bank of Australia to FIs with liquidity problems

Covered bonds:

can only be issued by building societies
B. can only be issued by credit unions
C. can only be issued by building societies and credit unions
D. are issued by a bank, backed by a pool of assets

Depository institutions are financial institutions that only take deposits from savers, but do not lend money to borrowers.

True False

Depository institutions are financial institutions that only lend money to borrowers, but do not take deposits from savers.

True False

Non-bank depository institutions are also referred to as CUBS.

True False

CUBS means credit unions and building societies.

True False

In case of building societies, the members are usually linked to the society by some common bond such as locality or trade union.

True False

In case of credit unions, the members are usually linked to the society by some common bond such as employer or profession.

True False

A financial institution is an institution that performs financial intermediary services and/or services requiring transactions in the capital markets.

True False

Most foreign banks have succeeded in establishing a well-developed and profitable retail banking network in Australia.

True False

The growth in off-balance-sheet activities during the two decades from 1990 to 2014 was due, in large part, to the use of derivative contracts.

True False

During the 1960s and 1970s, the growth of credit unions ensured an increasing supply of funds for housing loans at reasonable rates, while the building society expansion ensured the availability of relatively low cost unsecured and secured personal loans.

True False

The use of off-balance-sheet activities and instruments will always reduce the risk to a bank.

True False

The major banks’ return on equity, a measure of bank profitability, has been lower than the regional banks with the gap widening since 2007.

True False

ASIC stands for Australian Society of Inter-bank Cooperation and ASIC is responsible for market integrity and consumer protection across the financial system.

True False

Australia’s current financial regulatory framework was reformed in 1999 and moved from industry-based regulation to functional regulation of financial institutions.

True False

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.

True False

Discuss the factors that contributed to Australia’s financial resilience and relatively strong performance during the global financial crisis.

Explain the Post Wallis Inquiry regulatory framework in Australia.

Compare and contrast credit unions with the major banks.

APRA conducts a prudential supervisory framework that assesses FI risk and likelihood of FI failure and determines an appropriate supervisory response. Outline the two systems implemented by APRA—PAIRS and SOARS—and the purpose of the assessment system.

Chapter 02 Testbank Key

Which of the following statements is true?

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.

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1-3
Learning Objective: 2.1 Learn the different types of depository institutions in Australia and how they compete in the same market and face similar risks

Which of the following statements is true?

Authorised depository institutions are those that have been granted an authority by the RBA to operate in Australia.
B. Authorised depository institutions are those that have been granted an authority by APRA to operate in Australia.
C. Authorised depository institutions are those that have been granted an authority by the Australian government to operate in Australia.
D. Authorised depository institutions are those that have been granted an authority by ASIC to operate in Australia.

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: 1-3
Learning Objective: 2.5 Learn the history of the industry comprising credit unions and building societies and the structure of their industry

Which of the following statements is true?

Building societies are depository institutions.
B. Building societies usually operate on a cooperative basis.
C. In case of building societies the depositors are also members of the society.
D. All of the listed options are correct.

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 2.5 Learn the history of the industry comprising credit unions and building societies and the structure of their industry

Authorised depository institutions include:

banks, building societies, credit unions
B. banks, building societies
C. banks, credit unions
D. only banks

Which of the following statements is true?

Credit unions are mutual cooperative organisations.
B. Credit unions provide deposit facilities, personal and housing loans and payments services to their members.
C. In case of credit unions the depositors are also members of the society.
D. Credit unions are mutual cooperative organisations that provide deposit facilities, personal and housing loans and payments services to their members.

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1-3
Learning Objective: 2.5 Learn the history of the industry comprising credit unions and building societies and the structure of their industry

Which of the following statements is true?

An off-balance-sheet item is recorded on the balance sheet of a financial institution when the annual report is being prepared.
B. An off-balance-sheet liability is an item that moves onto the liability side of the balance sheet when a contingent event occurs.
C. An off-balance-sheet asset is an item that moves onto the asset side of the balance sheet when a contingent event occurs or at the end of a financial period.
D. All of the listed options are correct.

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Hard
Est time: 1-3
Learning Objective: 2.3 Gain an insight into the balance sheet of banks and the trends in assets, liabilities and capital

Which of the following is a reason for the increase in the number of banks since the mid-1980s?

relaxation of entry requirements into the Australian banking industry
B. changes in the regulatory requirements of non-bank depository institutions
C. the need for a more sophisticated banking system in Australia
D. relaxation of entry requirements into the Australian banking industry and changes in the regulatory requirements of non-bank depository institutions

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1-3
Learning Objective: 2.2 Gain an understanding of the major activities of banks and the industry structure

Which of the following statements is true for the Australian banking industry?

The Australian banking industry is highly concentrated.
B. There are four major banks in Australia.
C. The four major banks and the five regional banks offer a full range of commercial and investment banking services.
D. All of the listed options are correct.

AACSB: Analytic
Bloom’s: Application
Difficulty: Easy
Est time: <1
Learning Objective: 2.1 Learn the different types of depository institutions in Australia and how they compete in the same market and face similar risks
Learning Objective: 2.2 Gain an understanding of the major activities of banks and the industry structure

Australia’s big four banks include:

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.

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 2.1 Learn the different types of depository institutions in Australia and how they compete in the same market and face similar risks
Learning Objective: 2.2 Gain an understanding of the major activities of banks and the industry structure

The Australian major banks’ 30-year average return on equity (ROE) is:

-16 %
B. -5 %
C. 5 %
D. 16 %

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: <1
Learning Objective: 2.4 Appreciate the key performance ratios of banks and the trends in bank performance

The difference between Australian major bank margins and those of regional banks is in the main due to:

flexibility of the regional banks.
B. the ability of the regional banks to issue covered bonds.
C. the advantage of the major banks in the funding market and to a lesser extent their asset mix.
D. None of the listed options are correct.

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: <1
Learning Objective: 2.4 Appreciate the key performance ratios of banks and the trends in bank performance

Which of the following is true of off-balance-sheet activities?

They involve generation of fees without exposure to any risk.
B. They include contingent activities recorded in the current balance sheet.
C. They invite regulatory costs and additional ‘taxes’.
D. They have both risk-reducing as well as risk-increasing attributes.

AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 1-3
Learning Objective: 2.3 Gain an insight into the balance sheet of banks and the trends in assets, liabilities and capital

The most important source of bank funding is:

short-term debt
B. long-term debt
C. covered bonds
D. domestic deposits

AACSB: Analytic
Bloom’s: Application
Difficulty: Easy
Est time: <1
Learning Objective: 2.2 Gain an understanding of the major activities of banks and the industry structure

Following the global financial crisis, banks strengthened their funding and liquidity profiles by:

reducing their holdings of liquid assets
B. increasing their holdings of liquid assets
C. reducing their use of wholesale funds and increasing their holdings of liquid assets
D. increasing their use of wholesale funds and decreasing their holdings of liquid assets

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1-3
Learning Objective: 2.3 Gain an insight into the balance sheet of banks and the trends in assets, liabilities and capital

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

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1-3
Learning Objective: 2.3 Gain an insight into the balance sheet of banks and the trends in assets, liabilities and capital

Which of the following statements is true?

The net interest margin is a profitability indicator and is measured as net income divided by earning assets.
B. The net interest margin is a profitability indicator and is measured by interest income minus interest expense, divided by earning assets.
C. The net interest margin is a profitability indicator and is measured by interest income plus interest expense, divided by earning assets.
D. The net interest margin is a profitability indicator and is measured as interest income minus non-interest income divided by total assets.

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1-3
Learning Objective: 2.2 Gain an understanding of the major activities of banks and the industry structure

Foreign banks dominate in number and share of total assets.
B. The major banks no longer hold the largest share of total assets.
C. Total assets are fairly evenly distributed between the major, regional and foreign banks.
D. The number of banks has grown steadily since the 1980s and the major banks maintain the highest percentage share of total assets.

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1-3
Learning Objective: 2.2 Gain an understanding of the major activities of banks and the industry structure

Which of the following is a role of a bank?

Attract funds from the capital markets to facilitate borrowing by the household sector.
B. Accept deposits and make loans and in doing so facilitate the flow of funds from borrowers to lenders.
C. Accept deposits and make loans and in doing so facilitate the flow of funds from savers to borrowers.
D. Manage the level of interest rates.

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1-3
Learning Objective: 2.2 Gain an understanding of the major activities of banks and the industry structure

Which of the following is true?

All banks are depository institutions and are authorised by APRA to carry out financial intermediation.
B. All authorised depository institutions are banks.
C. All financial intermediaries are authorised depository institutions by APRA to carry out financial intermediation.
D. All of the listed options are correct.

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: <1
Learning Objective: 2.1 Learn the different types of depository institutions in Australia and how they compete in the same market and face similar risks

The number of banks has grown steadily since the middle of the 1980s for the following reasons:

liberalisation of conditions for foreign bank entry by APRA
B. deregulation of the banking industry, including the relaxation of bank entry requirements
C. changes to the regulatory regime for non-bank depository institutions favoured conversion from building society to banks
D. All of the listed options are correct.

AACSB: Analytic
Bloom’s: Application
Difficulty: Easy
Est time: 1-3
Learning Objective: 2.2 Gain an understanding of the major activities of banks and the industry structure

The main features of the local banking industry over the two decades to 2010 have been an increase in concentration. This has occurred due to mergers and acquisitions motivated by the desire to:

be competitive in global markets
B. protect against takeover by foreign competitors
C. increase efficiency in terms of economies of scale and scope
D. All of the listed options are correct.

AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 1-3
Learning Objective: 2.2 Gain an understanding of the major activities of banks and the industry structure

Which of the following statements is true?

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.

AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 1-3
Learning Objective: 2.3 Gain an insight into the balance sheet of banks and the trends in assets, liabilities and capital

In response to the GFC and the global liquidity crisis the Australian government introduced the following measure in 2008:

a financial claims scheme that provided coverage to all depositors in any financial institution
B. a financial claims scheme that guaranteed bank deposits coverage to depositors up to a million dollars per depositor
C. a financial claims scheme that guaranteed bank deposits coverage to depositors up to a million dollars per depositor and provided a temporary wholesale funding guarantee
D. All of the listed options are correct.

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1-3
Learning Objective: 2.3 Gain an insight into the balance sheet of banks and the trends in assets, liabilities and capital

Since 1 February 2012, a financial claims scheme provides protection to depositors up to:

$250 000 per account holder per ADI
B. $500 000 per account holder per ADI
C. $750 000 per account holder per ADI
D. $1 000 000 per account holder per ADI

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 2.3 Gain an insight into the balance sheet of banks and the trends in assets, liabilities and capital

The term ‘spread’ refers to the difference between an FI’s:

assets and liabilities
B. liabilities and equity
C. short-term lending rates and long-term lending rates
D. lending and deposit rates

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 2.2 Gain an understanding of the major activities of banks and the industry structure

Which of the following statements is true?

Capital adequacy regulations of banks were introduced in 1989.
B. Capital adequacy regulations require banks to hold, on average, less capital for low-risk assets such as housing loans compared to higher risk assets such as commercial loans.
C. Capital adequacy regulations were abolished in 2000.
D. Capital adequacy regulations of banks were introduced in 1989 and capital adequacy regulations require banks to maintain levels of capital adequate for the type of activity undertaken, on average, less capital for low-risk assets such as housing loans compared to higher risk assets such as commercial loans.

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1-3
Learning Objective: 2.8 Understand the key areas of regulation and the reasons why these areas are targeted for regulation

The major reasons for the shift in the composition of bank lending commitments from the retail market to the commercial market are the:

introduction of capital adequacy regulations in 1989
B. number of non-bank depository institutions that gained banking licences in the early 1990s
C. fact that commercial loans paid higher returns than housing loans
D. None of the listed options are correct as the shift was from commercial loans to housing loans.

AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 1-3
Learning Objective: 2.3 Gain an insight into the balance sheet of banks and the trends in assets, liabilities and capital

Depository institutions are required by APRA to be responsible for:

their own liquidity management strategy that must include scenario analysis
B. their own capital management strategy that must include risk analysis
C. both their own liquidity, capital management strategies and a business continuity plan
D. None of the listed options are correct. APRA is responsible for the supervision and oversight of all depository institutions.

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1-3
Learning Objective: 2.8 Understand the key areas of regulation and the reasons why these areas are targeted for regulation

Which of the following statements is true?

Off-balance-sheet transactions for Australian banks include direct credit substitutes, interest rate derivative contracts and foreign exchange derivative contracts.
B. On-balance-sheet transactions for Australian banks include direct futures and forward contracts.
C. Off-balance-sheet transactions for Australian banks include the commercial loans and term deposits.
D. All of the listed options are correct.

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: 1-3
Learning Objective: 2.3 Gain an insight into the balance sheet of banks and the trends in assets, liabilities and capital

Which of the following statements is true?

On average building societies are larger than credit unions and their total share of the depository institution market has increased since 1992.
B. On average building societies are smaller than credit unions and their total share of the depository institution market has decreased significantly since 1992.
C. On average building societies are larger than credit unions and their total share of the depository institution market has decreased significantly since 1992.
D. On average building societies are smaller than credit unions and their total share of the depository institution market has increased since 1992.

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1-3
Learning Objective: 2.5 Learn the history of the industry comprising credit unions and building societies and the structure of their industry

Which of the following statements is true?

The majority of players in terms of asset value as a percentage of GDP in the Australian financial system are credit unions.
B. The majority of players in terms of asset value as a percentage of GDP in the Australian financial system are building societies.
C. The majority of players in terms of asset value as a percentage of GDP in the Australian financial system are banks.
D. The majority of players in terms of asset value as a percentage of GDP in the Australian financial system are superannuation funds.

Which of the following statements is true?

During the 1960s and 1970s, the growth of building societies ensured an increasing supply of funds for housing loans at reasonable rates.
B. During the 1960s and 1970s, the credit union expansion ensured the availability of relatively low cost unsecured and secured personal loans.
C. During the 1960s and 1970s, regulatory constraints meant that banks could not in general satisfy the demand for consumer credit.
D. All of the listed options are correct.

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1-3
Learning Objective: 2.6 Gain an understanding of the changing shape of the market for credit unions and building societies and how they have performed

Which of the following statements is true?

Deregulation of the banking system in the 1980s brought greater competition from the banks.
B. Deregulation of the banking system in the 1980s resulted in loss of market share by non-bank depository institutions.
C. Deregulation of the banking system in the 1980s brought greater competition from the non-bank depository institutions.
D. Deregulation of the banking system in the 1980s brought greater competition from the banks and resulted in loss of market share by non-bank depository institutions.

In which way did building societies respond to the competitive pressures resulting from the deregulation of the banking system in the 1980s?

They engaged in mergers for efficiency and scale reasons.
B. They adopted improved technology.
C. They diversified their products and activities.
D. All of the listed options are correct.

AACSB: Analytic
Bloom’s: Application
Difficulty: Easy
Est time: <1
Learning Objective: 2.6 Gain an understanding of the changing shape of the market for credit unions and building societies and how they have performed

Which of the following statements is true?

Key performance ratios for credit unions and building societies indicate that from 2005 to 2014 their cost structures were higher than for banks.
B. Key performance ratios for credit unions and building societies indicate that from 2005 to 2014 their cost structures were lower than for banks.
C. Deposits are a higher proportion of the funding base for banks than for credit unions and building societies.
D.

Costs to average assets ratio is the lowest for:

major banks
B. credit unions
C. building societies
D. credit unions and building societies

Costs to average assets ratio is the highest for:

major banks
B. credit unions
C. building societies
D. major banks and building societies

Which of the following statements is not true?

ACCC is responsible for market integrity and consumer protection across the financial system.
B. The RBA is responsible for prudential supervision and the promotion of financial system stability.
C. The RBA is responsible for monetary policy and for overall financial system stability.
D. APRA is responsible for prudential supervision of the financial services industry and supervises all deposit-taking institutions.

Which of the following statements is true?

Australia’s current financial regulatory system has its origins in the late 1990s’ Financial System Inquiry, commonly known as the Campbell Committee.
B. Australia’s current financial regulatory system has its origins in the late 1990s’ Financial System Inquiry, commonly known as the Wallis Committee.
C. Australia’s current financial regulatory system has its origins in the late 1990s’ Financial System Inquiry, commonly known as the Martin Committee.
D. Australia’s current financial regulatory system has its origins in the late 1990s’ Financial System Inquiry, commonly known as the Valentine Committee.

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: 1-3
Learning Objective: 2.7 Appreciate the regulatory framework governing the activities of Australian depository institutions and the key regulatory agencies

The current financial system in Australia consists of three major agencies, these being:

APRA, ASIC and the Australian government
B. APRA, the RBA and the Australian government
C. APRA, ASIC and the RBA
D. the RBA, ASIC and the Australian government

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 2.7 Appreciate the regulatory framework governing the activities of Australian depository institutions and the key regulatory agencies

Which of the following statements is true?

APRA stands for Australian Prudential Regulation Authority.
B. APRA stands for Australian Payments Regulation Association.
C. APRA stands for Australian Payments Review Authority.
D. None of the listed options are correct.

Which of the following statements is true?

APRA is responsible for market integrity and consumer protection across the financial system.
B. The RBA is responsible for prudential supervision.
C. ASIC is responsible for monetary policy and for overall financial system stability.
D. None of the listed options are correct.

APRA’s aim is to develop prudential policies that:

promote financial safety and efficiency and that enable smaller institutions to put competitive pressures on larger institutions
B. balance financial safety and efficiency, competition contestability and competitive neutrality
C. promote financial system stability and fair interest rates
D. protect consumers from predatory behaviour of financial institutions

The Probability and Impact Rating System (PAIRS):

determines the response ASIC should make to the outcomes of PAIRS ratings
B. determines the response the RBA should make to the outcomes of bank failures
C. determines the response the RBA should make to the outcomes of financial crisis
D. None of the listed options are correct.

Some prudential standards issued by APRA include regulations regarding:

capital adequacy for market risk and liquidity
B. credit quality and capital adequacy for credit risk
C. large exposures, business continuity management and securitisation
D. All of the listed options are correct.

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1-3
Learning Objective: 2.8 Understand the key areas of regulation and the reasons why these areas are targeted for regulation

APRA’s Supervisory Oversight and Response System (SOARS) is designed to assess the:

likelihood of FI failure
B. impact of the FI failure
C. impact of FI failure and provide the appropriate supervisory response, which in the case of a low PAIRS probability rating will require restructure
D. impact of FI failure and provide the appropriate supervisory response, which in the case of an extreme PAIRS probability rating will require restructure

Off-balance-sheet activities are:

not shown on the current balance sheet
B. not shown on the balance sheet but after the completion of the financial year are recorded on the balance sheet
C. not shown on the current balance sheet but are an off-balance-sheet asset/liability, if when a contingent event occurs, the activity moves onto the asset/liability side of the balance sheet
D. contingent events which move the asset or liability from the balance sheet to off balance sheet

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1-3
Learning Objective: 2.3 Gain an insight into the balance sheet of banks and the trends in assets, liabilities and capital

Which of the following is true?

PAIRS provides APRA with a score-card approach to assessing the risk of FI failure and the impact of any failure.
B. PAIRS provides APRA with a single rating which incorporates both the probability that the FI will fail and the impact of any failure.
C. PAIRS provides APRA with a rating that assesses the risk of FI failure.
D. PAIRS provides APRA with an impact factor that determines what regulatory response needs to be implemented to prevent FI failure.

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1-3
Learning Objective: 2.7 Appreciate the regulatory framework governing the activities of Australian depository institutions and the key regulatory agencies
Learning Objective: 2.8 Understand the key areas of regulation and the reasons why these areas are targeted for regulation

Customer loans are classified on a DI’s balance sheet as:

liabilities, because the customer may default on the loan
B. assets, because the DI earns servicing fees on the loan
C. liabilities, because the DI must transfer funds to the borrower at the initiation of the loan
D. assets, because DIs originate and monitor loan portfolios

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: <1
Learning Objective: 2.3 Gain an insight into the balance sheet of banks and the trends in assets, liabilities and capital

Which of the following is true of off-balance-sheet activities?

They involve generation of fees without exposure to any risk.
B. They include contingent activities recorded in the current balance sheet.
C. They invite regulatory costs and additional ‘taxes’.
D. They have both risk-reducing as well as risk-increasing attributes.

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: <1
Learning Objective: 2.3 Gain an insight into the balance sheet of banks and the trends in assets, liabilities and capital

Which of the following is not an off-balance-sheet activity for banks?

derivative contracts
B. loan commitments
C. standby letters of credit
D. trust services

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: <1
Learning Objective: 2.3 Gain an insight into the balance sheet of banks and the trends in assets, liabilities and capital

Which of the following observations concerning credit unions is not true?

They invest heavily in corporate securities.
B. Member loans constitute a majority of their total assets.
C. They engage in off-balance-sheet activities.
D. They focus more on providing services and less on profitability.

Which of the following is part of the supervisory activities of APRA?

Prudential review is the most important as it provides a detailed assessment of an FI’s inherent risks and the adequacy of its risk management controls.
B. Licensing is the last stage of APRA’s supervision which ensures that only FIs that have the capacity to successfully operate can operate in the market.
C. Enforcement supervision is not part of APRA supervisory activity as it would involve enforcement teams to specifically intervene in the running of the FI.
D. Entity financial analysis is the FI’s own assessment of its financial position.

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1-3
Learning Objective: 2.7 Appreciate the regulatory framework governing the activities of Australian depository institutions and the key regulatory agencies
Learning Objective: 2.8 Understand the key areas of regulation and the reasons why these areas are targeted for regulation

Which of the following statements is not correct concerning credit risk?

Credit risk is the risk of counterparty default and is usually the single largest risk facing an FI.
B. Credit risk occurs when borrowers are unable to repay their loans on time.
C. Credit risk decreases when FIs concentrate their loan exposures on a few counterparties and APRA requires that FIs have appropriate policies to manage such risk.
D. Credit risk increases when FIs concentrate their loan exposures on a few counterparties.

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1-3
Learning Objective: 2.8 Understand the key areas of regulation and the reasons why these areas are targeted for regulation

Business continuity relates to:

an FI that has a business plan that meets the liquidity and capital requirements of APRA
B. a whole-of-business approach to FI operations and profitability
C. a business continuity plan which reduces the impact of any disruption on FI operations, reputation, profitability, depositors and other stakeholders of an FI
D. a business continuity plan which increases profitability of an FI

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1-3
Learning Objective: 2.8 Understand the key areas of regulation and the reasons why these areas are targeted for regulation

Credit unions were generally less affected than other depository institutions by the recent financial crisis because:

they hold more government securities, on average
B. they hold less government securities, on average
C. they had a focus on high-quality domestic assets
D. they had a focus on domestic deposits and more assets in residential mortgages

Responding to the financial crisis, the Australian government introduced a number of measures to ease liquidity issues and included the following:

a permanent financial claims scheme (FCS) in October 2008, which explicitly guaranteed bank deposits with a $1 million cap
B. a semi-permanent financial claims scheme (FCS), which implicitly guaranteed bank deposits
C. a permanent guarantee scheme for large deposits and wholesale funding which, for a fee, guaranteed bank deposits greater than $1 million
D. a permanent financial claims scheme (FCS) in October 2008, which explicitly guaranteed bank deposits with a $1 million cap; the guarantee was reduced to $250 000 per depositor from 2012

Chapter 04 Testbank

Student: ___________________________________________________________________________

If an FI is long-funded it means that the:

maturity of assets equals the maturity of liabilities
B. bank holds more long-term assets than short-term assets
C. maturity of liabilities is less than the maturity of assets
D. maturity of liabilities is longer than the maturity of its assets

An FI that invests $100 million into corporate bonds is exposed to the following risks:

credit and interest rate risk
B. liquidity and technology risk
C. solvency and technology risk
D. off-balance-sheet and interest rate risk

An FI that holds more short-term assets relative to long-term liabilities is:

exposed to refinancing risk
B. exposed to restructuring risk
C. exposed to reinvestment risk
D. not exposed to any risks

An example of refinancing risk is a case in which an FI:

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.

A decrease in interest rates means that the discount rate on cash flows is:

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.

An increase in interest rates means that the discount rate on cash flows is:

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

Market risk is defined as the risk:

incurred by granting loans to companies that do not hold a large market share
B. incurred in the trading of assets and liabilities due to changes in interest rates, exchange rates and other asset prices
C. that a sudden surge in liability withdrawals may require FIs to liquidate assets at less than fair market prices
D. that an FI loses market share

The market risk of an FI increases with:

increasing volatility of asset prices
B. increasingly large unhedged short positions in bonds, equities and other commodities
C. increasingly large unhedged long positions in bonds, equities and other commodities
D. All of the listed options are correct.

Why are depository institutions and life insurance companies more exposed to credit risk than, for instance, money market managed funds and general insurance companies?

Because the average maturities of their assets are longer than those of money market managed funds/general insurance companies.
B. Because the average maturities of their assets are shorter than those of money market managed funds/general insurance companies.
C. They are not exposed to more risk.
D. Because they are not specialised in credit risk management.

Non-performing loans are defined as loans that:

are either in default or close to being in default and are at least 90 days in arrears
B. have been written off and loans that are at least 80 days in arrears
C. are either in default or close to being in default and are at least 60 days in arrears
D. have been written off and loans that are at least 60 days in arrears

What does systematic credit risk mean?

The risk of default of the borrowing firm that arises from the borrowing firm’s specific projects.
B. The risk of default associated with microeconomic conditions affecting some borrowers.
C. The risk of default associated with general macroeconomic conditions affecting all borrowers.
D. The risk of default associated with general macroeconomic conditions affecting some borrowers.

The major difference between firm-specific credit risk and systematic credit risk is that:

FIs can diversify systematic credit risk, while firm-specific credit risk cannot be diversified.
B. FIs can diversify firm-specific credit risk, while systematic credit risk cannot be diversified.
C. None of the listed options are correct, as FIs can diversify both types of credit risk.
D. None of the listed options are correct, as FIs cannot diversify either type of credit risk.

¼ can be reduced by diversification.

Firm-specific credit risk
B. Systematic credit risk
C. Firm-specific and systematic credit risks
D. None of the listed options are correct.

A high-quality loan book for Australian banks during the global financial crisis (GFC) meant that:

their non-performing loans as a percentage of their total domestic loan portfolio fell during the GFC
B. their non-performing loans as a percentage of their total domestic loan portfolio increased above 2 per cent during the GFC
C. Australian banks’ profitability fell and Australian FIs were severely impacted by the GFC
D. Australian banks’ profitability was maintained and Australian FIs were not severely impacted by the GFC

Which of the following are typical off-balance-sheet activities?

letters of credit
B. loan commitments
C. forward contracts, swaps and other derivative securities
D. All of the listed options are correct.

What are the major objectives of technological expansion?

To lower operating costs, increase profits and capture new markets.
B. To stabilise operating costs, increase profits and capture new markets.
C. To lower operating costs, stabilise profits and capture new markets.
D. To lower operating costs, increase profits and stabilise the existing market share.

What type of risk focuses upon future contingencies?

liquidity risk
B. interest rate risk
C. credit risk
D. off-balance-sheet risk

Which of the following is a suitable description of the term ‘economies of scope’?

the use of several inputs to produce one common output
B. the ability to generate cost savings by producing more than one output with the same inputs
C. the ability to lower average operating costs by expanding its output of financial services
D. the ability to lower average operating costs by lowering its output of financial services

Which of the following is a suitable description of the term ‘economies of scale’?

the use of several inputs to produce one common output
B. the ability to generate cost savings by producing more than one output with the same inputs
C. the ability to lower average operating costs by expanding its output of financial services
D. the ability to lower average operating costs by lowering its output of financial services

Which of the following are typical operational risk sources?

employee fraud
B. back-office failures
C. general technological glitches
D. All of the listed options are correct.

In which of the following situations is an Australian FI exposed to a depreciation of the euro against the Australian dollar?

The FI holds €00 million in assets and €70 million in liabilities.

The FI holds €100 million in assets and €100 million in liabilities.

The FI holds 70 million in assets and €100 million in liabilities.

The FI does not hold any assets or liabilities in euros, but considers doing so in the future.

An Australian FI that invests €50 million in three-year maturity loans and partially funds these loans with €30 million one-year deposits is exposed to the following risks.

A depreciation of the euro against the Australian dollar plus credit risk plus refinancing risk, such as increasing interest rates in the Eurozone.
B. An appreciation of the euro against the Australian dollar plus credit risk plus refinancing risk, such as increasing interest rates in the Eurozone.
C. A depreciation of the euro against the Australian dollar plus credit risk plus reinvestment risk, such as decreasing interest rates in the Eurozone.
D. A depreciation of the euro against the Australian dollar reinvestment risk, such as increasing interest rates in the Eurozone.

Sovereign risk refers to the risk that repayments from:

local borrowers are interrupted because of interference from foreign governments
B. foreign borrowers are interrupted because of interference from local governments
C. foreign borrowers are interrupted because of interference from foreign governments
D. None of the listed options are correct.

Which of the following is an effective measure for claimholders if a foreign government prohibits repayment of debt obligations to an international lender?

The claimholder can recover its outstanding debt through local courts.
B. The claimholder can recover its outstanding debt through international courts
C. The claimholder cannot do anything.
D. The claimholder has limited recourse through normal legal channels but may exert leverage if it has control over future loans or supply of funds.

Unanticipated diseconomies of scale and scope are a result of:

technology risk
B. interest rate risk
C. foreign exchange risk
D. credit risk

The major source of risk exposure resulting from issuance of standby letters of credit is:

technology risk
B. interest rate risk
C. credit risk
D. off-balance-sheet risk

Politically motivated limitations on payments of foreign currency may expose the FI to:

sovereign or country risk
B. interest rate risk
C. credit risk
D. foreign exchange risk

The risk that a debt security’s price will fall, subjecting the investor to a capital loss is:

credit risk
B. political risk
C. currency risk
D. market risk

The risk that interest income will increase at a slower rate than interest expense is:

credit risk
B. political risk
C. currency risk
D. interest rate risk

The risk that borrowers are unable to repay their loans on time is called:

credit risk
B. sovereign risk
C. currency risk
D. liquidity risk

A letter of credit is:

a credit guarantee issued by an FI’s customer to pay a predetermined amount of money to the FI at a future point in time
B. an on-balance-sheet transaction for the issuing FI
C. a credit guarantee issued by an FI on which payment is contingent on some future event occurring
D. None of the listed options are correct.

A bank has liabilities of $4 million with an average maturity of two years paying interest rates of 4 per cent annually. It has assets of $5 million with an average maturity of five years earning interest rates of 6 per cent annually. To what risk is the bank exposed?

reinvestment risk
B. refinancing risk
C. interest rate risk
D. refinancing risk and interest rate risk

Matching the foreign currency book protects the FI from:

sovereign country risk
B. interest rate risk
C. liquidity risk
D. foreign exchange risk

An FI that finances a German euro loan with US dollar deposits is exposed to:

technology risk
B. interest rate risk
C. credit risk
D. foreign exchange risk

An example of a discrete risk is sudden changes in:

the interest rate
B. banking regulations
C. foreign exchange rates
D. commodity prices

Event risks such as earthquakes, fraud and theft:

do not have an impact on an FI’s performance
B. are easy to measure and to predict
C. form a normal cost of doing business for FIs
D. may have a significant and negative impact on an FI’s performance but are difficult to measure and to predict

During periods of high and volatile inflation, an FI’s:

interest rate risk exposure and credit risk exposure tends to decrease
B. interest rate risk exposure and credit risk exposure tends to increase
C. interest rate risk exposure and credit risk exposure tends to be unaffected
D. None of the listed options are correct.

An FI with a low level of leverage, such as a high level of capitalisation:

is generally less profitable
B. is better able to withstand losses
C. has improved ability to remain solvent
D. All of the listed options are correct.

Credit risk puts both the principal loaned and expected interest payments at risk. As a result, FIs issue financial claims that have a risk–return profile with:

high probability of fixed upside return
B. high probability of large downside risk
C. low probability of large downside risk
D. both high probability of fixed upside return and low probability of large downside risk

The collapse of the US bank IndyMac Bank was an example of:

market risk
B. operational risk
C. insolvency risk
D. insolvency and liquidity risk

Technological risk:

can only lead to an FI’s short-term distress
B. refers to the scenario that technological investments produce the anticipated cost savings
C. can result in major losses and the long-term viability of the FI
D. refers to the scenario that technological investments do not produce the anticipated savings, and can cause major losses and impact on the viability of the FI

The Bank for International Settlements:

defines operational risk as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people, and systems or from external events
B. does not include technology risk in its categorisation of operational risk
C. is the principal organisation of central banks in the minor economies of the world
D. All of the listed options are correct.

A mortgage loan officer is found to have provided false documentation that resulted in a lower interest rate on a loan approved for one of her friends. The loan was subsequently added to a loan pool, securitised and sold. Which of the following risks applies to the false documentation by the employee?

market risk
B. credit risk
C. operational risk
D. technological risk

Which function of an FI involves buying primary securities and issuing secondary securities?

brokerage
B. asset transformation
C. investment research
D. trading

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?

insolvency risk
B. sovereign risk
C. currency risk
D. liquidity risk

The BIS definition ‘the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events’ encompasses which of the following risks?

credit risk and liquidity risk
B. operational risk and technology risk
C. credit risk and market risk
D. technology risk and liquidity risk

The increased opportunity for a bank to securitise loans into liquid and tradable assets is likely to affect which type of risk?

sovereign risk
B. market risk
C. insolvency risk
D. technological risk

Which of the following situations pose a refinancing risk for an FI?

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.

The risk that an investor will be forced to place earnings from a loan or security into a lower yielding investment is known as:

liquidity risk
B. reinvestment risk
C. credit risk
D. foreign exchange risk

The major source of risk exposure resulting from issuance of standby letters of credit is:

interest rate risk
B. credit risk
C. foreign exchange risk
D. off-balance-sheet risk

The positive difference between an FI’s contingent liabilities and contingent assets represents:

an additional obligation, or claim, on the FI’s net worth
B. an additional profit for the FI
C. an increase in assets
D. None of the listed options are correct.

The potential exercise of unanticipated contingencies can result in:

technology risk
B. interest rate ris.
C. credit risk
D. off-balance-sheet risk

Matching the foreign currency book does not protect the FI from:

sovereign country risk
B. interest rate risk
C. liquidity risk
D. foreign exchange risk

A small local bank failed because of a housing market collapse following the departure of the area’s largest employer. What type of risk applies to the failure of the institution?

firm-specific risk
B. technological risk
C. operational risk
D. insolvency risk

Interest rate risk is the risk incurred by an FI when the maturities of its assets and liabilities are mismatched.

True False

An FI that only operates domestically is never exposed to foreign exchange rate risk.

True False

An FI that matches the maturities of its assets and liabilities is perfectly hedged against interest rate risk.

True False

A short-funded FI is exposed to increasing interest rates.

True False

When analysing an FI’s performance, it is not important to consider its off-balance-sheet activities as they have no current or future impact on the FI’s financial standing.

True False

Firm-specific credit risk can be reduced by diversification.

True False

Systematic credit risk can be reduced by diversification.

True False

Credit risk refers to the possibility that promised cash flows on financial claims such as loans and securities are not paid in full.

True False

Economies of scope imply an FI’s ability to lower its average cost by expanding its output of financial services.

True False

Technological failure, employee fraud and employee errors are all sources of operational risk.

True False

An Australian FI that holds a net short asset position in $US is exposed to foreign exchange rate risk if the $US appreciates against the $A over the investment period.

True False

A ‘fire-sale’ means that an FI increases its liquidity position by selling part of its assets at the assets’ fair market values.

True False

Sovereign risk involves the inability of a foreign corporation to repay the principal or interest on a loan because of stipulations by the foreign government that are out of the control of the foreign corporation.

True False

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.

True False

FIs that make loans or buy bonds with long maturity liabilities are more exposed to interest rate risk than FIs that make loans or buy bonds with short maturity liabilities.

True False

If the difference between an FI’s contingent liabilities and contingent assets is positive then there is an additional obligation, or claim, on the FI’s net worth.

True False

Economically speaking, contingent assets and liabilities are contractual claims that directly impact the economic value of the equity holders’ stake in an FI.

True False

Economically speaking, contingent assets and liabilities are not contractual claims that directly impact the economic value of the equity holders’ stake in an FI.

True False

Assume that you are a financial advisor to ABC Bank. The bank wishes to invest $50 million in loans with an average maturity of three years. The average interest rate on these loans is 12 per cent per annum. The bank can either grant the loans at a variable rate or at a fixed rate for the time of the investment. ABC Bank has the choice of funding these loans through either at-call deposits or through five-year maturity term deposits. Explain the different types of risks that ABC Bank faces when funding its loans.

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.

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.

The Reserve Bank of Australia believes that operational risk could lead to severe financial distress for FIs. Outline what is meant by operational risk and how it can impact on a financial institution. In particular, illustrate your answer with recent cases of bank operational risk, for example: retail bank system failures, trading loss fraud and Ponzi scheme fraud.

Chapter 04 Testbank Key

If an FI is long-funded it means that the:

maturity of assets equals the maturity of liabilities
B. bank holds more long-term assets than short-term assets
C. maturity of liabilities is less than the maturity of assets
D. maturity of liabilities is longer than the maturity of its assets

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 4.1 Learn about the importance of interest rate risk and its impact on FI performance

An FI that invests $100 million into corporate bonds is exposed to the following risks:

credit and interest rate risk
B. liquidity and technology risk
C. solvency and technology risk
D. off-balance-sheet and interest rate risk

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 4.1 Learn about the importance of interest rate risk and its impact on FI performance
Learning Objective: 4.3 Gain an understanding of the influence of credit risk on FIs

An FI that holds more short-term assets relative to long-term liabilities is:

exposed to refinancing risk
B. exposed to restructuring risk
C. exposed to reinvestment risk
D. not exposed to any risks

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 4.1 Learn about the importance of interest rate risk and its impact on FI performance

An example of refinancing risk is a case in which an FI:

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.

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 4.1 Learn about the importance of interest rate risk and its impact on FI performance

A decrease in interest rates means that the discount rate on cash flows is:

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.

AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 1–3
Learning Objective: 4.1 Learn about the importance of interest rate risk and its impact on FI performance

An increase in interest rates means that the discount rate on cash flows is:

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

AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 1–3
Learning Objective: 4.1 Learn about the importance of interest rate risk and its impact on FI performance

Market risk is defined as the risk:

incurred by granting loans to companies that do not hold a large market share
B. incurred in the trading of assets and liabilities due to changes in interest rates, exchange rates and other asset prices
C. that a sudden surge in liability withdrawals may require FIs to liquidate assets at less than fair market prices
D. that an FI loses market share

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 4.2 Understand the significance of market risk for FIs

The market risk of an FI increases with:

increasing volatility of asset prices
B. increasingly large unhedged short positions in bonds, equities and other commodities
C. increasingly large unhedged long positions in bonds, equities and other commodities
D. All of the listed options are correct.

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 4.2 Understand the significance of market risk for FIs

Why are depository institutions and life insurance companies more exposed to credit risk than, for instance, money market managed funds and general insurance companies?

Because the average maturities of their assets are longer than those of money market managed funds/general insurance companies.
B. Because the average maturities of their assets are shorter than those of money market managed funds/general insurance companies.
C. They are not exposed to more risk.
D. Because they are not specialised in credit risk management.

AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 1–3
Learning Objective: 4.3 Gain an understanding of the influence of credit risk on FIs

Non-performing loans are defined as loans that:

are either in default or close to being in default and are at least 90 days in arrears
B. have been written off and loans that are at least 80 days in arrears
C. are either in default or close to being in default and are at least 60 days in arrears
D. have been written off and loans that are at least 60 days in arrears

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 4.3 Gain an understanding of the influence of credit risk on FIs

What does systematic credit risk mean?

The risk of default of the borrowing firm that arises from the borrowing firm’s specific projects.
B. The risk of default associated with microeconomic conditions affecting some borrowers.
C. The risk of default associated with general macroeconomic conditions affecting all borrowers.
D. The risk of default associated with general macroeconomic conditions affecting some borrowers.

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Easy
Est time: 1–3
Learning Objective: 4.3 Gain an understanding of the influence of credit risk on FIs

The major difference between firm-specific credit risk and systematic credit risk is that:

FIs can diversify systematic credit risk, while firm-specific credit risk cannot be diversified.
B. FIs can diversify firm-specific credit risk, while systematic credit risk cannot be diversified.
C. None of the listed options are correct, as FIs can diversify both types of credit risk.
D. None of the listed options are correct, as FIs cannot diversify either type of credit risk.

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 4.3 Gain an understanding of the influence of credit risk on FIs

¼ can be reduced by diversification.

Firm-specific credit risk
B. Systematic credit risk
C. Firm-specific and systematic credit risks
D. None of the listed options are correct.

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: <1
Learning Objective: 4.3 Gain an understanding of the influence of credit risk on FIs

A high-quality loan book for Australian banks during the global financial crisis (GFC) meant that:

their non-performing loans as a percentage of their total domestic loan portfolio fell during the GFC
B. their non-performing loans as a percentage of their total domestic loan portfolio increased above 2 per cent during the GFC
C. Australian banks’ profitability fell and Australian FIs were severely impacted by the GFC
D. Australian banks’ profitability was maintained and Australian FIs were not severely impacted by the GFC

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 4.3 Gain an understanding of the influence of credit risk on FIs

Which of the following are typical off-balance-sheet activities?

letters of credit
B. loan commitments
C. forward contracts, swaps and other derivative securities
D. All of the listed options are correct.

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 4.7 Learn about the importance of off-balance-sheet risk on FI management

What are the major objectives of technological expansion?

To lower operating costs, increase profits and capture new markets.
B. To stabilise operating costs, increase profits and capture new markets.
C. To lower operating costs, stabilise profits and capture new markets.
D. To lower operating costs, increase profits and stabilise the existing market share.

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 4.8 Identify the importance of technology and operational risks for FIs

What type of risk focuses upon future contingencies?

liquidity risk
B. interest rate risk
C. credit risk
D. off-balance-sheet risk

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Medium
Est time: <1
Learning Objective: 4.7 Learn about the importance of off-balance-sheet risk on FI management

Which of the following is a suitable description of the term ‘economies of scope’?

the use of several inputs to produce one common output
B. the ability to generate cost savings by producing more than one output with the same inputs
C. the ability to lower average operating costs by expanding its output of financial services
D. the ability to lower average operating costs by lowering its output of financial services

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 4.8 Identify the importance of technology and operational risks for FIs

Which of the following is a suitable description of the term ‘economies of scale’?

the use of several inputs to produce one common output
B. the ability to generate cost savings by producing more than one output with the same inputs
C. the ability to lower average operating costs by expanding its output of financial services
D. the ability to lower average operating costs by lowering its output of financial services

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 4.8 Identify the importance of technology and operational risks for FIs

Which of the following are typical operational risk sources?

employee fraud
B. back-office failures
C. general technological glitches
D. All of the listed options are correct.

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 4.8 Identify the importance of technology and operational risks for FIs

In which of the following situations is an Australian FI exposed to a depreciation of the euro against the Australian dollar?

The FI holds €00 million in assets and €70 million in liabilities.

The FI holds €100 million in assets and €100 million in liabilities.

The FI holds 70 million in assets and €100 million in liabilities.

The FI does not hold any assets or liabilities in euros, but considers doing so in the future.

AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 1–3
Learning Objective: 4.5 Discover the reasons why foreign exchange risk management is necessary for FIs

An Australian FI that invests €50 million in three-year maturity loans and partially funds these loans with €30 million one-year deposits is exposed to the following risks.

A depreciation of the euro against the Australian dollar plus credit risk plus refinancing risk, such as increasing interest rates in the Eurozone.
B. An appreciation of the euro against the Australian dollar plus credit risk plus refinancing risk, such as increasing interest rates in the Eurozone.
C. A depreciation of the euro against the Australian dollar plus credit risk plus reinvestment risk, such as decreasing interest rates in the Eurozone.
D. A depreciation of the euro against the Australian dollar reinvestment risk, such as increasing interest rates in the Eurozone.

AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 1–3
Learning Objective: 4.5 Discover the reasons why foreign exchange risk management is necessary for FIs

Sovereign risk refers to the risk that repayments from:

local borrowers are interrupted because of interference from foreign governments
B. foreign borrowers are interrupted because of interference from local governments
C. foreign borrowers are interrupted because of interference from foreign governments
D. None of the listed options are correct.

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 4.4 Discover why country or sovereign risk is a key concern of FI managers

Which of the following is an effective measure for claimholders if a foreign government prohibits repayment of debt obligations to an international lender?

The claimholder can recover its outstanding debt through local courts.
B. The claimholder can recover its outstanding debt through international courts
C. The claimholder cannot do anything.
D. The claimholder has limited recourse through normal legal channels but may exert leverage if it has control over future loans or supply of funds.

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 4.4 Discover why country or sovereign risk is a key concern of FI managers

Unanticipated diseconomies of scale and scope are a result of:

technology risk
B. interest rate risk
C. foreign exchange risk
D. credit risk

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 4.8 Identify the importance of technology and operational risks for FIs

The major source of risk exposure resulting from issuance of standby letters of credit is:

technology risk
B. interest rate risk
C. credit risk
D. off-balance-sheet risk

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 4.7 Learn about the importance of off-balance-sheet risk on FI management

Politically motivated limitations on payments of foreign currency may expose the FI to:

sovereign or country risk
B. interest rate risk
C. credit risk
D. foreign exchange risk

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 4.4 Discover why country or sovereign risk is a key concern of FI managers

The risk that a debt security’s price will fall, subjecting the investor to a capital loss is:

credit risk
B. political risk
C. currency risk
D. market risk

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 4.2 Understand the significance of market risk for FIs

The risk that interest income will increase at a slower rate than interest expense is:

credit risk
B. political risk
C. currency risk
D. interest rate risk

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 4.1 Learn about the importance of interest rate risk and its impact on FI performance

The risk that borrowers are unable to repay their loans on time is called:

credit risk
B. sovereign risk
C. currency risk
D. liquidity risk

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 4.3 Gain an understanding of the influence of credit risk on FIs

A letter of credit is:

a credit guarantee issued by an FI’s customer to pay a predetermined amount of money to the FI at a future point in time
B. an on-balance-sheet transaction for the issuing FI
C. a credit guarantee issued by an FI on which payment is contingent on some future event occurring
D. None of the listed options are correct.

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 4.7 Learn about the importance of off-balance-sheet risk on FI management

reinvestment risk
B. refinancing risk
C. interest rate risk
D. refinancing risk and interest rate risk

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 4.1 Learn about the importance of interest rate risk and its impact on FI performance

Matching the foreign currency book protects the FI from:

sovereign country risk
B. interest rate risk
C. liquidity risk
D. foreign exchange risk

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 4.5 Discover the reasons why foreign exchange risk management is necessary for FIs

An FI that finances a German euro loan with US dollar deposits is exposed to:

technology risk
B. interest rate risk
C. credit risk
D. foreign exchange risk

AACSB: Analytic
Bloom’s: Application
Difficulty: Easy
Est time: <1
Learning Objective: 4.5 Discover the reasons why foreign exchange risk management is necessary for FIs

An example of a discrete risk is sudden changes in:

the interest rate
B. banking regulations
C. foreign exchange rates
D. commodity prices

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: <1
Learning Objective: 4.10 Gain an understanding of the interconnectedness and complexity of the risks facing managers of modern FIs

Event risks such as earthquakes, fraud and theft:

do not have an impact on an FI’s performance
B. are easy to measure and to predict
C. form a normal cost of doing business for FIs
D. may have a significant and negative impact on an FI’s performance but are difficult to measure and to predict

AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 1–3
Learning Objective: 4.10 Gain an understanding of the interconnectedness and complexity of the risks facing managers of modern FIs

During periods of high and volatile inflation, an FI’s:

interest rate risk exposure and credit risk exposure tends to decrease
B. interest rate risk exposure and credit risk exposure tends to increase
C. interest rate risk exposure and credit risk exposure tends to be unaffected
D. None of the listed options are correct.

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 4.10 Gain an understanding of the interconnectedness and complexity of the risks facing managers of modern FIs

An FI with a low level of leverage, such as a high level of capitalisation:

is generally less profitable
B. is better able to withstand losses
C. has improved ability to remain solvent
D. All of the listed options are correct.

AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 1–3
Learning Objective: 4.9 Learn the importance of insolvency risk and its relationship to other risks

Credit risk puts both the principal loaned and expected interest payments at risk. As a result, FIs issue financial claims that have a risk–return profile with:

high probability of fixed upside return
B. high probability of large downside risk
C. low probability of large downside risk
D. both high probability of fixed upside return and low probability of large downside risk

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 4.3 Gain an understanding of the influence of credit risk on FIs

The collapse of the US bank IndyMac Bank was an example of:

market risk
B. operational risk
C. insolvency risk
D. insolvency and liquidity risk

AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 1–3
Learning Objective: 4.6 Understand the emphasis placed on liquidity risk management by FIs
Learning Objective: 4.9 Learn the importance of insolvency risk and its relationship to other risks

Technological risk:

can only lead to an FI’s short-term distress
B. refers to the scenario that technological investments produce the anticipated cost savings
C. can result in major losses and the long-term viability of the FI
D. refers to the scenario that technological investments do not produce the anticipated savings, and can cause major losses and impact on the viability of the FI

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 4.8 Identify the importance of technology and operational risks for FIs

The Bank for International Settlements:

defines operational risk as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people, and systems or from external events
B. does not include technology risk in its categorisation of operational risk
C. is the principal organisation of central banks in the minor economies of the world
D. All of the listed options are correct.

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Hard
Est time: 1–3
Learning Objective: 4.8 Identify the importance of technology and operational risks for FIs

market risk
B. credit risk
C. operational risk
D. technological risk

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 4.8 Identify the importance of technology and operational risks for FIs

Which function of an FI involves buying primary securities and issuing secondary securities?

brokerage
B. asset transformation
C. investment research
D. trading

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 4.1 Learn about the importance of interest rate risk and its impact on FI performance

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?

insolvency risk
B. sovereign risk
C. currency risk
D. liquidity risk

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 4.9 Learn the importance of insolvency risk and its relationship to other risks

The BIS definition ‘the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events’ encompasses which of the following risks?

credit risk and liquidity risk
B. operational risk and technology risk
C. credit risk and market risk
D. technology risk and liquidity risk

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Easy
Est time: 1–3
Learning Objective: 4.8 Identify the importance of technology and operational risks for FIs

The increased opportunity for a bank to securitise loans into liquid and tradable assets is likely to affect which type of risk?

sovereign risk
B. market risk
C. insolvency risk
D. technological risk

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: <1
Learning Objective: 4.2 Understand the significance of market risk for FIs

Which of the following situations pose a refinancing risk for an FI?

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.

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 4.1 Learn about the importance of interest rate risk and its impact on FI performance

The risk that an investor will be forced to place earnings from a loan or security into a lower yielding investment is known as:

liquidity risk
B. reinvestment risk
C. credit risk
D. foreign exchange risk

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Medium
Est time: <1
Learning Objective: 4.5 Discover the reasons why foreign exchange risk management is necessary for FIs

The major source of risk exposure resulting from issuance of standby letters of credit is:

interest rate risk
B. credit risk
C. foreign exchange risk
D. off-balance-sheet risk

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 4.7 Learn about the importance of off-balance-sheet risk on FI management

The positive difference between an FI’s contingent liabilities and contingent assets represents:

an additional obligation, or claim, on the FI’s net worth
B. an additional profit for the FI
C. an increase in assets
D. None of the listed options are correct.

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 4.7 Learn about the importance of off-balance-sheet risk on FI management

The potential exercise of unanticipated contingencies can result in:

technology risk
B. interest rate ris.
C. credit risk
D. off-balance-sheet risk

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Medium
Est time: <1
Learning Objective: 4.7 Learn about the importance of off-balance-sheet risk on FI management

Matching the foreign currency book does not protect the FI from:

sovereign country risk
B. interest rate risk
C. liquidity risk
D. foreign exchange risk

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: <1
Learning Objective: 4.5 Discover the reasons why foreign exchange risk management is necessary for FIs

A small local bank failed because of a housing market collapse following the departure of the area’s largest employer. What type of risk applies to the failure of the institution?

firm-specific risk
B. technological risk
C. operational risk
D. insolvency risk

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 4.9 Learn the importance of insolvency risk and its relationship to other risks

Interest rate risk is the risk incurred by an FI when the maturities of its assets and liabilities are mismatched.

TRUE

AACSB: Analytic
Bloom’s: Knowledge
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 4.1 Learn about the importance of interest rate risk and its impact on FI performance

An FI that only operates domestically is never exposed to foreign exchange rate risk.

FALSE

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: <1
Learning Objective: 4.5 Discover the reasons why foreign exchange risk management is necessary for FIs

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Financial Institutions Management 4th Edition by Saunders -Test Bank

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