Banking Operations and Risk Management Test Questions
Course Introduction
This course provides a comprehensive overview of the key functions and processes within modern banking operations, with a strong emphasis on risk management practices. Students will explore the structure and regulation of banking institutions, the lifecycle of core banking products and services, and the operational workflows that support daily financial transactions. The course delves into various types of risks faced by banks including credit, market, liquidity, and operational risks and introduces industry-standard frameworks and tools for identifying, assessing, and mitigating these risks. Through case studies and real-world examples, students will gain practical insights into the challenges of maintaining financial stability, complying with regulatory standards, and implementing effective risk controls in a dynamic banking environment.
Recommended Textbook
Financial Institutions Management A Risk Management Approach 9th Edition by Anthony Saunders
Available Study Resources on Quizplus
26 Chapters
3081 Verified Questions
3081 Flashcards
Source URL: https://quizplus.com/study-set/2974 Page 2
Chapter 1: Why Are Financial Institutions Special
Available Study Resources on Quizplus for this Chatper
100 Verified Questions
100 Flashcards
Source URL: https://quizplus.com/quiz/59155
Sample Questions
Q1) The part of the money supply produced by depository institutions is referred to outside money because it is produced outside of the government.
A)True
B)False
Answer: False
Q2) The ability of savers to transfer wealth between youth and old age and across generations is called maturity intermediation.
A)True
B)False
Answer: False
Q3) Because bank loans have a shorter maturity than most debt contracts, FIs typically exercise less monitoring power and control over the borrower.
A)True
B)False
Answer: False
To view all questions and flashcards with answers, click on the resource link above. Page 3
Chapter 2: Financial Services: Depository Institutions
Available Study Resources on Quizplus for this Chatper
226 Verified Questions
226 Flashcards
Source URL: https://quizplus.com/quiz/59154
Sample Questions
Q1) The credit union industry avoided much of the financial distress of the 1980s because of the short maturity and relatively lower credit risk of their assets.
A)True
B)False
Answer: True
Q2) The primary regulators of savings institutions are
A)the Federal Reserve and the FDIC.
B)the Office of Thrift Supervision and the FDIC.
C)the FDIC and the Office of the Comptroller of the Currency.
D)the Office of Thrift Supervision and the Comptroller of the Currency.
Answer: B
Q3) The part of the money supply produced by depository institutions is referred to outside money because it is produced outside of the government.
A)True
B)False
Answer: False
To view all questions and flashcards with answers, click on the resource link above. Page 4
Chapter 3: Financial Services: Finance Companies
Available Study Resources on Quizplus for this Chatper
82 Verified Questions
82 Flashcards
Source URL: https://quizplus.com/quiz/59153
Sample Questions
Q1) A finance company that lends money to high risk customers is known as a subprime lender.
A)True
B)False
Answer: True
Q2) The growth in home equity lines of credit over the last two decades has occurred in part because of the tax deductibility of the interest payments.
A)True
B)False
Answer: True
Q3) Finance companies generally charge lower interest rates on consumer loans than do depository institutions.
A)True
B)False
Answer: False
Q4) Sales finance institutions provide financing to customers of specific retailers. A)True
B)False Answer: True
To view all questions and flashcards with answers, click on the resource link above. Page 5
Chapter 4: Financial Services: Securities Firms and Investment Banks
Available Study Resources on Quizplus for this Chatper
119 Verified Questions
119 Flashcards
Source URL: https://quizplus.com/quiz/59152
Sample Questions
Q1) Competition from internet-based and electronic exchanges has led to a decrease in profits of market making.
A)True
B)False
Q2) Discount brokers
A)are securities firms focused on providing research support for customers.
B)conduct trades for customers but do not offer investment advice.
C)allow customers to receive investment advice at very low rates.
D)complete trades for customers on- or offline while offering investment advice.
Q3) The process of providing custody and escrow services,clearance and settlement services,and research and other advisory services by a securities firm involves the function of
A)mergers and acquisitions.
B)market making.
C)investment banking.
D)back-office functions.
Q4) Securities firms and investment banks engage in as many as seven key activity areas.
A)True B)False
To view all questions and flashcards with answers, click on the resource link above. Page 6
Chapter 5: Financial Services: Mutual Fund and Hedge Fund Companies
Available Study Resources on Quizplus for this Chatper
129 Verified Questions
129 Flashcards
Source URL: https://quizplus.com/quiz/59151
Sample Questions
Q1) The return from investing in mutual funds can include dividends,gains from the sale of the mutual fund assets,and gains from the sale of the mutual fund shares.
A)True
B)False
Q2) The Investment Advisors Act of 1940 sets out rules to prevent conflicts of interest,fraud,and excessive fees or charges for mutual fund shares.
A)True
B)False
Q3) A mutual fund that charges investors a fee similar to a commission charge is called a
A)12b-1 fee.
B)no-load fund.
C)load fund.
D)long-term fund.
Q4) Mutual funds often offer multiple share classes which differentiate between different methods of paying the sales loads and management fees.
A)True
B)False
Page 7
To view all questions and flashcards with answers, click on the resource link above.
Chapter 6: Financial Services: Insurance Companies
Available Study Resources on Quizplus for this Chatper
124 Verified Questions
124 Flashcards
Source URL: https://quizplus.com/quiz/59150
Sample Questions
Q1) The problem of adverse selection
A)implies that many people who do not need insurance coverage have it through group plans.
B)means that those people who apply for insurance are the least likely to need insurance coverage.
C)causes insurance underwriters to alter the health statistics of the general population when determining appropriate premiums.
D)creates a savings element along with the insurance component of the premium and policy.
Q2) Industry leaders appear to be increasing their share of the PC business over time.
A)True
B)False
Q3) The benefit payment of a credit life policy usually varies based on the outstanding principal and interest of the loan it is intended to insure.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 8
Chapter 7: Risks of Financial Institutions
Available Study Resources on Quizplus for this Chatper
128 Verified Questions
128 Flashcards
Source URL: https://quizplus.com/quiz/59149
Sample Questions
Q1) An FI can hold assets denominated in a foreign country,but it cannot issue foreign liabilities.
A)True
B)False
Q2) During a liquidity crisis assets might be sold at a loss because of the rising interest rates caused by financial institutions attempting to raise funds.
A)True
B)False
Q3) Which of the following refers to an FI's ability to generate cost synergies by producing more than one output with the same inputs?
A)Market intermediation.
B)Economies of scope.
C)Break-even point.
D)Economies of scale.
Q4) A lower level of equity capital increases the risk of insolvency to a financial institution.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 9
Chapter 8: Interest Rate Risk I
Available Study Resources on Quizplus for this Chatper
124 Verified Questions
124 Flashcards
Source URL: https://quizplus.com/quiz/59148
Sample Questions
Q1) Calculate the funding gap for Gotbucks Bank using (a)a 30 day maturity period and (b)a 91 day maturity period.
A)-$25 and +$80.
B)-$50 and -$75.
C)-$75 and +$5.
D)+$55 and -$40.
Q2) Can an FI immunize itself against interest rate risk exposure even though its maturity gap is not zero?
A)Yes,because with a maturity gap of zero the change in the market value of assets exactly offsets the change in the market value of liabilities.
B)No,because with a maturity gap of zero the change in the market value of assets exactly offsets the change in the market value of liabilities.
C)Yes,because the maturity model does not consider the timing of cash flows.
D)No,because the timing of cash flows is relevant to immunization against interest rate risk exposure.
Q3) The repricing gap model is a book value accounting based model.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
Chapter 9: Interest Rate Risk II
Available Study Resources on Quizplus for this Chatper
124 Verified Questions
124 Flashcards
Source URL: https://quizplus.com/quiz/59147
Sample Questions
Q1) The shortcomings of this strategy are the following except
A)duration changes as the time to maturity changes,making it difficult to maintain a continuous hedge.
B)estimation of duration is difficult for some accounts such as demand deposits and passbook savings account.
C)it ignores convexity which can be distorting for large changes in interest rates.
D)it is difficult to compute market values for many assets and liabilities.
E)it does not assume a flat term structure,so its estimation is imprecise.
Q2) Convexity is a desirable effect to a portfolio manager because it is easy to measure and price.
A)True
B)False
Q3) What is the leverage-adjusted duration gap?
A)0.605 years.
B)0.956 years.
C)0.360 years.
D)0.436 years.
To view all questions and flashcards with answers, click on the resource link above.
11
Chapter 10: Credit Risk: Individual Loan Risk
Available Study Resources on Quizplus for this Chatper
119 Verified Questions
119 Flashcards
Source URL: https://quizplus.com/quiz/59146
Sample Questions
Q1) Which of the following is not a characteristic of a loan commitment?
A)The maximum amount of the loan is negotiated at the time of the loan agreement.
B)The interest rate on fixed-rate loans is determined at the time of the loan is actually taken down.
C)Floating-rate loans transfer the interest rate risk to the borrower.
D)The time period for which the loan is available is negotiated at the time of the loan agreement.
Q2) Onyx Corporation has a $200,000 loan that will mature in one year.The risk free interest rate is 6 percent.The standard deviation in the rate of change in the underlying asset's value is 12 percent,and the leverage ratio for Onyx is 0.8 (80 percent).The value for N(h1)is 0.02743,and the value for N(h2)is 0.96406. What is the required yield on this risky loan?
A)6.165 percent.
B)6.00 percent.
C)0.165 percent.
D)5.835 percent.
To view all questions and flashcards with answers, click on the resource link above.
Page 12
Chapter 11: Credit Risk: Loan Portfolio and Concentration
Available Study Resources on Quizplus for this Chatper
65 Verified Questions
65 Flashcards
Source URL: https://quizplus.com/quiz/59145
Sample Questions
Q1) A Hypothetical Rating Migration,or Transition Matrix,reflects all of the following EXCEPT
A)rating at which the portfolio ended the year.
B)transition probabilities.
C)rating at which the portfolio of loans began the year.
D)future migration expected in the portfolio.
Q2) According to Moody's Analytics,default correlations tend to be _____ and lie between _______.
A)Low;0.002 and 0.15
B)High;1.86 and 2.99
C)Low;0.001 and 0.002
D)High;2.99 and 3.50
Q3) Comparing the loan mix of an individual FI to a national benchmark loan mix is useful in determining the extent that the individual FI may differ from an efficient portfolio composition.
A)True
B)False
Q4) Included in the Moody's Analytics model are recovery rates on defaulted loans. A)True
B)False
Page 13
To view all questions and flashcards with answers, click on the resource link above.
Chapter 12: Liquidity Risk
Available Study Resources on Quizplus for this Chatper
108 Verified Questions
108 Flashcards
Source URL: https://quizplus.com/quiz/59144
Sample Questions
Q1) The net stable funds ratio (NSFR)attempts to ensure illiquid assets and securities are funded with a minimum amount of stable liabilities for at least a one year time horizon.
A)True
B)False
Q2) Purchased liquidity management carries the potential risk of significant increases in the cost of funds during periods of high interest rate volatility.
A)True
B)False
Q3) For life insurance companies,the distribution of premium income minus policyholder liquidations is unpredictable.
A)True
B)False
Q4) Net asset value is the current value of a mutual fund's assets divided by the number of shares outstanding.
A)True B)False
To view all questions and flashcards with answers, click on the resource link above.
Page 14
Chapter 13: Foreign Exchange Risk
Available Study Resources on Quizplus for this Chatper
109 Verified Questions
109 Flashcards
Source URL: https://quizplus.com/quiz/59143
Sample Questions
Q1) The following are the net currency positions of a U.S.FI (stated in U.S.dollars).
\(\begin{array}{lrrrr}
\text { Currency} &\text { Assets } & \text { Liabilities } & \text { FX Bought } & \text { FX Sold } \\
\text { British pound} &24,600 & 70,000 & 170,400 & 321,000 \\
\text { Yen} &31,000 & 20,400 & 250,000 & 220,000 \\
\text { Swiss franc} &10,200 & 9,800 & 8,000 & 10,800
\end{array}\) What is the FI's net exposure in the Swiss franc?
A)+2,400.
B)+400.
C)-2,800.
D)-2,400.
Q2) The FI is acting as a FX market agent for its customers when it A)buys or sells currency to balance the FI's net exposure.
B)takes a nonzero net position in a particular currency.
C)processes an exporter's transaction in a foreign currency.
D)makes a market in its domestic currency.
Q3) Average daily turnover in the FX market has recently been over $5 trillion. A)True B)False
To view all questions and flashcards with answers, click on the resource link above. Page 15
Chapter 14: Sovereign Risk
Available Study Resources on Quizplus for this Chatper
94 Verified Questions
94 Flashcards
Source URL: https://quizplus.com/quiz/59142
Sample Questions
Q1) Sellers of LDC debt in secondary markets include small FIs wishing to disengage themselves from the LDC market.
A)True
B)False
Q2) Performing loans in the LDC debt market are loans on which the foreign country is making promised payments.
A)True
B)False
Q3) In international finance,the investment ratio is determined by dividing the value of real investment by the A)total foreign exchange reserves.
B)real investment.
C)gross national product.
D)value of exports.
Q4) One problem with using country risk analysis (CRA)statistical credit scoring models to evaluate sovereign credit risk is the classification into only two possible outcomes. A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
Page 16
Chapter 15: Market Risk
Available Study Resources on Quizplus for this Chatper
104 Verified Questions
104 Flashcards
Source URL: https://quizplus.com/quiz/59141
Sample Questions
Q1) City bank has six-year zero coupon bonds with a total face value of $20 million.The current market yield on the bonds is 10 percent. What is the modified duration of these bonds?
A)5.45 years.
B)6.00 years.
C)6.60 years.
D)10.0 years.
Q2) In the early 2000s the market risk capital requirement was a large proportion of the total risk capital requirements for the largest U.S.banks.
A)True
B)False
Q3) The back simulation approach to estimating market risk exposure requires the use of daily prices or returns for some period of immediately recent history. A)True
B)False
Q4) Depository institutions are prohibited from proprietary trading by the Volcker Rule. A)True B)False
To view all questions and flashcards with answers, click on the resource link above. Page 17
Chapter 16: Off-Balance-Sheet Risk
Available Study Resources on Quizplus for this Chatper
109 Verified Questions
109 Flashcards
Source URL: https://quizplus.com/quiz/59140
Sample Questions
Q1) Standby letters of credit perform an insurance function similar to that of commercial and trade letters of credit.
A)True B)False
Q2) The ability to form financial holding companies for the purpose of creating full-service financial institutions has caused an increase in affiliate risk.
A)True B)False
Q3) Standby letters of credit are classified as
A)on-balance-sheet assets.
B)off-balance-sheet assets.
C)off-balance-sheet liabilities.
D)on-balance-sheet liabilities.
Q4) If an FI is a counterparty to a swap arrangement,it must record the notational value of the swap as the market value.
A)True B)False
To view all questions and flashcards with answers, click on the resource link above.
18
Chapter 17: Technology and Other Operational Risks
Available Study Resources on Quizplus for this Chatper
112 Verified Questions
112 Flashcards
Source URL: https://quizplus.com/quiz/59139
Sample Questions
Q1) Which of the following is NOT a retail banking service?
A)Check deposit services.
B)Point of sale/debit cards.
C)Telephone bill paying services.
D)Pre-authorized debits/credits.
Q2) Compared to the United States,the use of electronic methods of payment is lower in other major developed countries.
A)True
B)False
Q3) Which of the following best describes economies of scope?
A)They occur when the average cost of production decreases as the level of output increases.
B)They are effects on costs related to managerial ability and other hard-to-quantify factors.
C)They occur when cost savings are realized from using many of the same inputs to produce multiple products.
D)They occur when the average cost of production increases as the level of output increases.
To view all questions and flashcards with answers, click on the resource link above.
19
Chapter 18: Liability and Liquidity Management
Available Study Resources on Quizplus for this Chatper
131 Verified Questions
131 Flashcards
Source URL: https://quizplus.com/quiz/59138
Sample Questions
Q1) A NOW account requires a minimum monthly balance of $500 if annual interest of 5 percent is to be earned monthly on its deposits.An account holder has maintained an average balance of $300 for the first nine months of the year and $800 for the last three months of the year.She has written an average of 20 checks a month and is not charged for these services.However,it costs the bank $0.02 to process each check.
What is the average return earned (both explicit and implicit)by the account holder over the full year if the minimum balance is reduced to $200?
A)2.01 percent.
B)2.65 percent.
C)3.78 percent.
D)5.35 percent.
E)6.13 percent.
Q2) Although they are subject to reserve requirements,many DIs have begun to issue medium-term notes because they are a stable source of funds.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 20
Chapter 19: Deposit Insurance and Other Liability
Guarantees
Available Study Resources on Quizplus for this Chatper
108 Verified Questions
108 Flashcards
Source URL: https://quizplus.com/quiz/59137
Sample Questions
Q1) The required contribution from surviving insurers to protect policyholders of failed insurance companies usually is on a pro rata amount based on the relative asset size of the surviving company.
A)True
B)False
Q2) The following table shows the market value balance sheet of a failed bank ($ millions):
\(\begin{array}{lccc} \text { Assets } & \text {400 Insured Deposits }& \$200\\ & \text { Urinsured Deposits} & \$400 \end{array}\)
What is the market value of capital?
A)$200 million.
B)-$200 million.
C)$0.
D)$400 million.
Q3) Moral hazard encourages the FI to take less,rather than more,risk.
A)True
B)False
Page 21
To view all questions and flashcards with answers, click on the resource link above.
Chapter 20: Capital Adequacy
Available Study Resources on Quizplus for this Chatper
138 Verified Questions
138 Flashcards
Source URL: https://quizplus.com/quiz/59136
Sample Questions
Q1) Under market value accounting methods,FIs
A)must write down the value of their assets to fully reflect market values.
B)have a great deal of discretion in timing the write downs of problem loans.
C)must conform to regulatory write-down schedules.
D)have an incentive to fully reflect problem assets as they become known.
Q2) Those regulatory agencies that have adopted some form of book value accounting standard to measure an FI's capital include all of the following except
A)The Securities and Exchange Commission (SEC).
B)The Federal Reserve.
C)The Office of the Comptroller of the Currency (OCC).
D)The FDIC.
Q3) The determination of risk-adjusted on-balance-sheet assets under Basel III requires the segregation of assets into nine categories of credit risk exposure.
A)True
B)False
Q4) Under Basel II (2006),total capital is equal to Tier I capital plus Tier II capital.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
Page 22
Chapter 21: Product and Geographic Expansion
Available Study Resources on Quizplus for this Chatper
155 Verified Questions
155 Flashcards
Source URL: https://quizplus.com/quiz/59135
Sample Questions
Q1) Large size is an important characteristic in international banking because it gives a bank a greater ability to diversify across borders.
A)True
B)False
Q2) A value below 1,000 of the Herfindahl-Hirschman Index (HHI)is considered to reflect
A)a highly concentrated market.
B)an unconcentrated market.
C)a high growth market.
D)a moderately concentrated market.
Q3) A one bank holding company is a parent bank holding company with only one subsidiary involved in banking activities.
A)True
B)False
Q4) The FBSEA of 1991 required a foreign bank to have Fed approval to establish a branch as a new entry,but does not require such approval if the entry is by acquisition.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 23
Chapter 22: Futures and Forwards
Available Study Resources on Quizplus for this Chatper
130 Verified Questions
130 Flashcards
Source URL: https://quizplus.com/quiz/59134
Sample Questions
Q1) The average duration of the loans is 10 years.The average duration of the deposits is 3 years. \(\begin{array}{llr}
\text { Consumer loans } & \$ 50 \text { million Deposits } & \$ 235 \text { million } \\
\text { Commercial Loans } & \$ 200 \text { million Equity } & \$ 15 \text { million } \\ \text { Total Assets } & \$ 250 \text { million Total Liabilities \& Equity } & \$ 250 \text { million } \end{array}\)
If the current (spot)rate for one-year British pound futures is currently at $1.58/\(\le\) and each contract size is \(\le\)62,500,how many contracts are required to be purchased or sold in order to fully hedge against the pound exposure? (Assume no basis risk).
A)Sell 1,600 BP futures.
B)Buy 1,600 BP futures.
C)Sell 1,712 BP futures.
D)Buy 2,560 BP futures.
E)Buy 1,712 BP futures.
To view all questions and flashcards with answers, click on the resource link above. Page 24
Chapter 23: Options, Caps, Floors, and Collars
Available Study Resources on Quizplus for this Chatper
120 Verified Questions
120 Flashcards
Source URL: https://quizplus.com/quiz/59133
Sample Questions
Q1) Assume a binomial pricing model where there is an equal probability of interest rates increasing or decreasing 1 percent per year.
What should be the price of a three-year 5 percent floor if the current (spot)rates are also 6 percent? The face value is $5,000,000,and time periods are zero,one,and two.
A)$8,250.
B)$10,799.
C)$12,550.
D)$15,875.
Q2) The purchaser of an option must pay the writer a A)strike price.
B)market price.
C)margin.
D)premium.
Q3) Buying a call option on a bond ensures an FI that it will be able to sell the bond at a given point in time for a price at least equal to the exercise price of the option.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
Chapter 24: Swaps
Available Study Resources on Quizplus for this Chatper
104 Verified Questions
104 Flashcards
Source URL: https://quizplus.com/quiz/59132
Sample Questions
Q1) The type of swap that is in the largest segment of the global swap market is
A)a commodity swap.
B)a credit swap.
C)a currency swap.
D)an equity swap.
E)an interest rate swap.
Q2) What is replacement risk in the swap market?
A)The risk of substituting a defaulted swap with a new swap at less favorable terms.
B)The cost incurred by the swap dealer in replacing the defaulting party on the same terms as the original swap.
C)The risk involved in exchanging fixed interest payments for floating interest payments by two counterparties.
D)The risk associated with long-term hedge sometimes for as long as 15 years.
Q3) It is possible to negotiate a swap in which the notational value changes over the life of the swap.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 26
Chapter 25: Loan Sales
Available Study Resources on Quizplus for this Chatper
96 Verified Questions
96 Flashcards
Source URL: https://quizplus.com/quiz/59131
Sample Questions
Q1) The sellers of domestic loans and HLT loans include all of the following EXCEPT
A)major money center banks.
B)foreign banks.
C)U.S.government and its agencies.
D)non-financial companies.
Q2) Although a loan sale strategy for an FI may reduce or eliminate credit risk,the strategy does not affect the FI's liquidity risk.
A)True
B)False
Q3) Highly leveraged transaction (HLT)loans typically are used to finance new fixed assets of an ongoing firm.
A)True
B)False
Q4) Currently,this basic type of loan sale contracts comprises the bulk of loan sales trading.
A)Participations.
B)Originations.
C)Syndications.
D)Assignments.
To view all questions and flashcards with answers, click on the resource link above. Page 27
Chapter 26: Securitization
Available Study Resources on Quizplus for this Chatper
120 Verified Questions
120 Flashcards
Source URL: https://quizplus.com/quiz/59130
Sample Questions
Q1) On September 7,2008,both FHMA and FHLMC were placed under conservatorship by the
A)Federal Reserve.
B)Federal Housing Finance Agency.
C)Federal Deposit Insurance Corporation.
D)Federal Home Loan Bank.
Q2) Which of the following is true concerning an assumable mortgage?
A)The aggregate percent of the mortgage pool that has been prepaid prior to the month under consideration.
B)The mortgage contract is transferred from the seller to the buyer of a house.
C)The required interest spread of a pass-through security over a treasury when prepayment risk is taken into account.
D)A mortgage-backed bond issued in multiple classes or tranches.
Q3) All else equal,advantages of a DI operating as an asset broker in regard to mortgages includes all of the following EXCEPT
A)lower regulatory taxes.
B)increased fee-based income.
C)increased liquidity.
D)decreased asset and liability duration mismatch.
E)increased capital requirements.
To view all questions and flashcards with answers, click on the resource link above. Page 28