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Chapter 2 MC Questions Flashcards

1
Q

Deregulation of the banking sector throughout the late 1970s and 1980s sought to…

A. reduce the reliance of major Australian companies on international capital markets

B. reduce the excess profits of banks

C. reduce the discrimination against banks owing to direct controls on them only

D. provide reduced control on the money supply

A

C. reduce the discrimination against banks owing to direct controls on them only

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2
Q 
The changes to the barriers to entry to the banking industry under deregulation in the early 1980s
\_\_\_\_\_\_\_ the number of foreign banks.
A. decreased
B. increased
C. did not alter
D. dramatically decreased
3. Which of the following statements
A

B. increased

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3
Q

Which of the following statements concerning banks is INCORRECT?
A. Currently in Australia, banks account for the largest share of assets of all financial institutions.
B. Bank loans and commitments must be supported by a minimum specified amount of capital.
C. At least 50% of the capital requirement must be in the form of Tier 1 capital.
D. The Australian Reserve Bank monitors capital adequacy requirements for banks.

A

D. The Australian Reserve Bank monitors capital adequacy requirements for banks.

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4
Q

Unlike most other businesses, a bank’s balance sheet is made up mainly of:
A. real assets and financial liabilities
B. real liabilities and financial liabilities
C. real assets and real liabilities
D. financial assets and liabilities

A

D. financial assets and liabilities

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5
Q

The level of banks’ share of assets of all Australian financial institutions from the 1950s onwards first
_______, then in the 1980s _______, and recently has _______ owing to banks forming consolidated
corporate entities.
A. increased; decreased; increased
B. increased; decreased; remained stable
C. decreased; increased; decreased
D. decreased; increased; remained stable

A

C. decreased; increased; decreased

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6
Q

The market structure of the banking sector has changed since deregulation of the financial system during
the 1980s. Which statement most closely reflects the current structure of the banking sector in Australia?
A. Foreign banks dominate in number and share of total assets.
B. Major Australian 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. Major banks maintain the highest percentage of branches and share of total assets.

A

D. Major banks maintain the highest percentage of branches and share of total assets.

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7
Q

Which of the following is a role of a bank?
A. Attracting funds from the capital markets to facilitate borrowing by the household sector
B. Facilitating the flow of funds from borrowers to lenders
C. Facilitating the flow of funds from savers to borrowers
D. Managing the level of interest rates

A

C. Facilitating the flow of funds from savers to borrowers

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8
Q

Banks have gradually moved to liability management in the management of their balance sheets. Which
statement best describes liability management?
A. The loan portfolio is tailored to match the available deposit base.
B. The deposit base and other funding sources are managed in order to fund loan and other commitments.
C. The ratio of debt to equity is managed to meet capital adequacy requirements.
D. The liability to assets ratio is maintained within Reserve Bank standards.

A

B. The deposit base and other funding sources are managed in order to fund loan and other commitments.

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9
Q

Asset management for banks refers to:
A. managing the assets of the banks; that is, their deposits
B. managing the real assets, the bank buildings
C. managing the loans portfolio
D. protecting the deposits by using derivatives

A

C. managing the loans portfolio

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10
Q 
When a bank raises funds in the international markets to fund new lending growth, it is involved in:
A. asset management
B. off-balance-sheet business
C. liability management
D. derivative management
A

C. liability management

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11
Q

For banks, liability management refers to:
A. managing the liabilities of the banks; that is, the loans
B. banks ensuring they have sufficient funds by managing their deposit base
C. managing the real assets, the bank buildings
D. protecting the loans and other commitments by using derivatives

A

B. banks ensuring they have sufficient funds by managing their deposit base

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12
Q

The assets on the balance sheet of a bank are:
A. the sources of funds
B. the uses of funds
C. the different types of deposits the bank offers
D. equal to the liabilities of the banks

A

B. the uses of funds

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13
Q

The liabilities on the balance sheet of a bank are:
A. the sources of funds
B. the uses of funds
C. the different types of deposits the bank offers
D. equal to the assets of the banks

A

A. the sources of funds

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14
Q 
All of the following balance sheet portfolio items are liabilities of a bank EXCEPT:
A. term deposits
B. bill acceptance facilities
C. certificates of deposit
D. overdrafts
A

D. overdrafts

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15
Q 
All of the following balance sheet portfolio items are sources of funds for a bank EXCEPT:
A. term deposits
B. bill acceptance facilities
C. certificates of deposit
D. overdrafts
A

D. overdrafts

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16
Q 
Which of the following is a bank liability?
A. Consumer loans
B. Lease finance
C. Bills receivable
D. Certificates of deposit
A

D. Certificates of deposit

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17
Q

Which of the following statements about deposits is correct?
A. Call accounts represent a fluctuating source of funds for banks.
B. Term deposits are funds lodged with a bank for longer than two weeks.
C. As current accounts are highly liquid, they form an unstable source of funds for a bank.
D. A cheque account may pay interest.

A

D. A cheque account may pay interest.

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18
Q

Which of the following statements about banks’ current accounts is INCORRECT?
A. Current accounts today generally pay interest.
B. They are a relatively stable source of bank funds.
C. Deregulation had a major impact on current accounts.
D. They form an increasingly important type of asset for banks.

A

D. They form an increasingly important type of asset for banks.

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19
Q

Which of the following statements is NOT true of term deposits?
A. They are less liquid than a current deposit.
B. They usually offer a higher return than a current deposit.
C. They are attractive to investors who expect interest rates to fall.
D. They are generally negotiable instruments

A

D. They are generally negotiable instruments

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20
Q

20: As a depositor shifts funds from current deposits to term deposits in a bank, generally the
depositor’s:
A. liquidity increases and credit risk increases
B. liquidity decreases and interest income increases
C. liquidity decreases and interest income decreases
D. implicit interest increases and explicit interest decreases

A

B. liquidity decreases and interest income increases

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21
Q 
If a bank required more short-term funding, it would issue:
A. a certificate of deposit
B. a debenture
C. an unsecured note
D. preference shares
A

A. a certificate of deposit

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22
Q

Which of the following is generally a highly liquid instrument?
A. A bank bill
B. A certificate of deposit
C. Neither a bank bill nor a certificate of deposit
D. Both bank bills and certificates of deposit are liquid instruments

A

D. Both bank bills and certificates of deposit are liquid instruments

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23
Q

The term ‘negotiable’ for a security means:
A. its price can be bargained for when sold
B. it can be sold easily
C. its buyer can negotiate its price when buying
D. it is reasonably illiquid and will drop in price when sold

A

B. it can be sold easily

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24
Q

Which of the following regarding certificates of deposit (CDs) is correct?
A. CDs pay daily interest instead of monthly as for ordinary deposits.
B. CDs generally pay higher interest, as they are not liquid.
C. The rate of interest on a CD can be adjusted quickly.
D. CDs with a face value of more than $100 000 are non-negotiable.

A

C. The rate of interest on a CD can be adjusted quickly.

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25
Q

The advantage of a CD to a bank is:
A. its rate of interest may be adjusted quickly
B. it can be sold quickly in the money market for cash
C. it is a negotiable instrument
D. All of the given answers.

A

D. All of the given answers.

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26
Q

A major difference between a bank’s term deposit and a certificate of deposit is a:
A. term deposit represents an asset for a bank, while a certificate of deposit is a liability
B. certificate of deposit does not pay interest until maturity
C. certificate of deposit is illiquid when compared with a term deposit
D. certificate of deposit is a high-credit-risk instrument when compared with a term deposit

A

B. certificate of deposit does not pay interest until maturity

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27
Q

With regard to bank bills, the bill is sold at a discount:
A. because the bank needs to find a buyer
B. to encourage buyers
C. because the difference between the initial price and the final sale price is the return to the holder
D. because the bank pays the face value of the funds to the borrower at maturity

A

C. because the difference between the initial price and the final sale price is the return to the holder

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28
Q

With regard to bank bills, the expression ‘the issuer sells the bill at the best discount’ means the
issuer:
A. is providing the funding
B. is acting as mediator between the borrower and the bank
C. is selling the bill into the market at the lowest yield
D. pays the lowest face value of the funds to the holder at maturity

A

C. is selling the bill into the market at the lowest yield

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29
Q

With regard to bank bills, the actual role of the acceptor is to:
A. provide the initial funding
B. act as mediator between the borrower and bank
C. issue the bank bill
D. pay the face value of the funds to the holder at maturity

A

D. pay the face value of the funds to the holder at maturity

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30
Q

Which of the following in relation to bill financing is INCORRECT?
A. The drawer is the party seeking the funds.
B. If a bank accepts the bill this enhances its credit quality.
C. An issuer will seek to sell the bill in the market at the highest yield.
D. Bills are sold at a discount to face value.

A

C. An issuer will seek to sell the bill in the market at the highest yield.

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31
Q

For a bank, the advantage of bill financing is:
A. it earns income from accepting bills
B. it doesn’t necessarily have to use its own funds
C. interest rates on bill funding can be adjusted rapidly
D. All of the given answers.

A

D. All of the given answers.

32
Q 
Commercial banks take part in the money markets as:
A. lenders of funds only
B. borrowers of funds only
C. both lenders and borrowers of funds
D. underwriters only
A

C. both lenders and borrowers of funds

33
Q

Foreign currency liabilities have increased in importance as a source of funds for Australian banks. Major
reasons for this include:
I. Deregulation of the foreign exchange market
II. Diversification of funding sources
III. Demand from multinational corporate clients
IV. Internationalisation of global financial markets
V. Avoidance of the non-callable deposit prudential requirement
VI. Expansion of banks’ asset-base denominated in foreign currencies

A. I, II, III, IV, VI
B. II, III, IV, V, VI
C. I, III, IV, V, VI
D. All of the given answers.

A

A. I, II, III, IV, VI

34
Q 
Alternatives to the usual source of long-term bank funds that have the characteristics of both debt and
equity are called:
A. secured debentures
B. transferable certificates of deposit
C. promissory notes
D. subordinated notes
A

D. subordinated notes

35
Q 
All of the following balance sheet portfolio items are assets of a bank EXCEPT:
A. overdrafts
B. lease finance
C. certificates of deposit
D. credit card draw-downs
36. Short-term discount securities
A

C. certificates of deposit

36
Q 
Short-term discount securities issued by a drawer at a discount, with the promise to repay the face value
at maturity, are called:
A. commercial paper
B. commercial bills
C. certificates of deposit
D. All of the given answers.
A

D. All of the given answers.

37
Q 
All of the following financial securities are 'uses of funds' by the banks EXCEPT:
A. commercial bills
B. credit cards
C. certificates of deposit
D. overdrafts
A

C. certificates of deposit

38
Q

If you take out a mortgage from a bank, the mortgage is a/an:
A. liability to the bank and an asset to you
B. liability to you and an asset to the bank
C. liability to both you and the bank
D. asset to both you and the bank

A

B. liability to you and an asset to the bank

39
Q

BBSW refers to:
A. the reference rate for medium-term funding
B. a rate calculated each day from the offer rate of the last daily sale in the bank bill market
C. the average mid-point of the bid and offer rates in the bank bill market
D. the bank bill security rate

A

C. the average mid-point of the bid and offer rates in the bank bill market

40
Q

Banks invest in government securities because:
A. they offer high yield owing to their risk
B. they offer a low yield owing to their illiquidity
C. all government bonds offer protection against inflation risk
D. they can be used as security against banks’ borrowing

A

D. they can be used as security against banks’ borrowing

41
Q

Off-balance-sheet business for a bank refers to:
A. deposits and loans longer than one year
B. transactions that are currently only a contingent liability
C. call deposits that may be withdrawn on demand
D. consumer loans that are in default

A

B. transactions that are currently only a contingent liability

42
Q 
All of the following are off-balance-sheet transactions of a bank EXCEPT:
A. documentary letters of credit
B. performance guarantees
C. underwriting facilities
D. bills receivable
A

D. bills receivable

43
Q

By the end of 2000, there had been a substantial expansion in fee-related income for banks. What is the
principal reason for this expansion?
A. Increased confidence in banks by individual investors
B. Increased off-sheet business (OBS) for banks
C. Reduced guidelines by APRA
D. Increased deposits in banks

A

B. Increased off-sheet business (OBS) for banks

44
Q

Which of the following is true for off-balance-sheet business for banks?
A. It is a small part of a bank’s income.
B. It is recorded on a bank’s statement of income and expense.
C. It represents fee-based income.
D. It records deposits that do not fit on the balance sheet.

A

C. It represents fee-based income.

45
Q

Which of the following statements about market-related items for a bank is FALSE?
A. They are generally called off-balance-sheet items.
B. They are liabilities that may require an outflow of funds for a bank.
C. They are included in the BIS capital-adequacy guidelines.
D. They form a small part of banks’ OBS business.

A

D. They form a small part of banks’ OBS business.

46
Q

The off-balance-sheet business of banks is listed below. Which category represents the most significant
proportion of total off-balance-sheet business of the banks?

A. Direct credit substitutes
B. Trade and performance-related items
C. Commitments
D. Market-rate-related transactions

A

D. Market-rate-related transactions

47
Q

Most of the market-rate-related off-balance-sheet business of banks is listed below. Which category
represents the most significant proportion of total market-rate-related off-balance-sheet business of the
banks?
A. Currency swap agreements
B. Foreign exchange contracts
C. Interest rate swaps
D. Interest rate futures

A

C. Interest rate swaps

48
Q

An example of an ‘off-sheet business’ transaction that banks are generally involved in is:
A. providing a ‘standby letter of credit’
B. providing a note issuance facility
C. providing a short-term, self-liquidating trade contingency
D. All of the given answers.

A

D. All of the given answers.

49
Q

Off-balance-sheet business is usually divided into four major categories:
A. Direct credit substitutes; trade and performance-related items; commitments; and trade guarantees
B.
Direct credit substitutes; trade and performance-related items; commitments; and market-related
transactions
C.
Direct credit substitutes; trade and performance-related items; commitments; and underwriting
facilities
D. Direct credit substitutes; ‘standby letters of credit’; commitments; and market-related transactions

A

B.
Direct credit substitutes; trade and performance-related items; commitments; and market-related
transactions

50
Q

A ‘commitment’ by a bank is:
A. a form of swap
B. a promise by a large depositor to provide extra funds to the bank
C. the unused balance on a bank credit card
D. an undertaking to advance funds or to acquire an asset in the future

A

D. an undertaking to advance funds or to acquire an asset in the future

51
Q

The Basel capital adequacy requirements apply to:
A. all financial institutions
B. banks, investment banks and merchant banks only
C. all financial institutions supervised by ASIC
D. all banks registered with APRA and some other financial institutions

A

D. all banks registered with APRA and some other financial institutions

52
Q

Some of the elements in assessing capital adequacy requirements for banks under the Basel II capital
accord are:
A. credit risk, liquidity risk and interest rate risk
B. credit risk, market risk and type of capital held
C. default risk, interest rate risk and market risk
D. default risk, liquidity risk and type of capital held

A

B. credit risk, market risk and type of capital held

53
Q 
According to the textbook, the Basel II approach to capital adequacy involves \_\_\_\_ main elements.
A. three
B. four
C. five
D. six
A

D. six

54
Q

Which of the following does NOT apply to Tier 1 capital?
A. It is described as ‘core capital’.
B. It must constitute at least 50% of a bank’s capital base.
C. Paid-up ordinary shares can be included in it.
D. Cumulative irredeemable APRA-approved preference shares can be included in it.

A

D. Cumulative irredeemable APRA-approved preference shares can be included in it.

55
Q

Which of the following statements about regulatory capital is FALSE?
A
.
Tier 1 capital includes paid-up ordinary shares, retained earnings, non-cumulative irredeemable
preference shares and general reserves.
B.
Tier 2 capital includes general provision for doubtful debts, revaluation reserves of premises,
mandatory convertible notes and approved perpetual subordinated debt.
C.
Tier 1 capital is core capital, including paid-up ordinary shares, non-cumulative irredeemable
preference shares and general reserves.
D.
Tier 2 capital includes general reserves for doubtful debts, asset revaluation reserves of premises, other
preference shares, mandatory convertible notes, cumulative redeemable preference shares and perpetual
subordinated debt.

A

D.
Tier 2 capital includes general reserves for doubtful debts, asset revaluation reserves of premises, other
preference shares, mandatory convertible notes, cumulative redeemable preference shares and perpetual
subordinated debt.

56
Q

The Pillar 1 approach of Basel II capital adequacy incorporates three risk components:
A. Credit risk, interest-rate risk and market risk
B. Default risk, interest-rate risk and operational risk
C. Credit risk, market risk and operational risk
D. Default risk, foreign exchange risk and operational risk

A

C. Credit risk, market risk and operational risk

57
Q

Which of the following statements regarding capital adequacy requirements is INCORRECT?
A.
Existing credit-risk guidelines are extended to include market risk arising from a bank’s trading
activities.
B. Regulators focus on credit risk, market risks, operational risk and type of capital held.
C. Eligible Tier 1 capital must constitute at least 70% of a bank’s capital base.
D. Tier 2 capital is divided into upper and lower Tier 2 parts.

A

C. Eligible Tier 1 capital must constitute at least 70% of a bank’s capital base.

(only 50%)

58
Q

Under the capital adequacy requirement for banks, in order to fund a $100 000 loan for a multinational
corporate client with a Standard & Poor’s rating of AA, a bank will:
A. assign a risk-weighting of 20% for the balance
B. allocate Tier 1 and Tier 2 capital to the loan according to the riskiness of the company
C. seek funding in the euromarkets to minimise the capital adequacy requirements
D. apply a risk weighting of 50% to the loan to determine the total capital requirement

A

A. assign a risk-weighting of 20% for the balance

59
Q 
In the Basel II standardised approach to external rating grades, the asset counterparty weights for capital
adequacy guidelines are:
A. 10%, 20%, 50% and 100%
B. 10%, 50%, 100% and 150%
C. 20%, 50%, 100% and 150%
D. 20%, 50%, 100% and 200%
A

C. 20%, 50%, 100% and 150%

60
Q 
The Basel II risk weighting factor for a bank loan to an Australian company with a Moody's Investors
Service rating of C is:
A. 20%
B. 50%
C. 100%
D. 150%
A

D. 150%

61
Q 
Under Pillar 1 of the Basel II framework, the risk weight for a residential housing loan is determined by
the:
A. amount borrowed
B. level of mortgage insurance
C. house valuation
D. All of the given answers.
A

D. All of the given answers.

62
Q

A bank provides a loan of $1 million to a company that has an A rating. Calculate the dollar value of
capital required under the capital adequacy requirements to support the facility.
A. $16 000
B. $40 000
C. $80 000
D. $120 000

A

4% x 1 million = 40 000

B. $40 000

63
Q

A bank provides documentary letters of credit for a company that has a credit rating of A+. The
face value of contracts outstanding is $2 million. Calculate the dollar value of capital required under
the capital adequacy requirements to support these facilities, given that the bank supervisor’s credit
conversion factor is 20%.
A. $6 400
B. $16 000
C. $160 000
D. $240 000

A

(20% x 2 million) x 4% = 16 000

B. $16 000

64
Q

A large commercial bank operating in the international markets will generally apply to the banks’
supervisor to use the _____ to credit risk.
A. advanced internal ratings-based approach
B. foundation external ratings-based approach
C. standardised approach
D. standardised approach with external ratings

A

A. advanced internal ratings-based approach

65
Q

Which of the following statements about recently adopted guidelines covering capital requirements for
market risk that banks are required to perform is FALSE?
A. They use a risk measurement model based on a VaR approach.
B. They estimate the sensitivity of portfolio components to small changes in prices.
C. They must hold capital against risk of loss from changes in interest rates.
D.
They hold a fixed allocation of funds between various balance sheet assets and off-balance-sheet
business.

A

D.
They hold a fixed allocation of funds between various balance sheet assets and off-balance-sheet
business.

66
Q

For a commercial bank that operates in foreign exchange, interest rate and equity markets, the capital
adequacy guidelines for the market risk it is exposed to fall under:
A. Pillar 1
B. Pillar 2
C. Pillar 3
D. Pillar 4

A

A. Pillar 1

67
Q 
Under \_\_\_\_\_ of Basel II, bank supervisors should review and evaluate banks' internal capital adequacy
assessments.
A. Pillar 4
B. Pillar 3
C. Pillar 1
D. Pillar 2
A

D. Pillar 2

68
Q 
Part of a bank's liquidity management is for it to hold a portfolio of:
A. term loans
B. mortgages
C. Commonwealth securities
D. credit card loans
A

C. Commonwealth securities

69
Q

Generally, commercial banks are the main type of financial institution in a financial system because they
hold the largest amounts of financial assets.
True False

A

T

70
Q

The greater the dominance of commercial banks in an economy, the less regulation required.
True False

A

F

71
Q

Banks obtain funds from many areas. These sources of funds appear as liabilities on a bank’s balance
sheet.
True False

A

T

72
Q

Liability management is where banks actively manage their liabilities in order to meet future loan
demand.
True False

A

T

73
Q

Call deposits are funds lodged in a bank account for a specified short-term period.
True False

A

F

74
Q

A bank may either issue a negotiable certificate of deposit directly into the money markets or place it
directly with another bank with surplus funds.
True False

A

F

75
Q

As the majority of banks’ assets are short-term loans, they are active in the money markets in order to
fund part of their lending.
True False

A

F

76
Q

A bank may seek to obtain funds by issuing unsecured notes with a collaterised floating charge over its
deposits.
True False

A

F

77
Q

Foreign currency liabilities are debt instruments issued into another country but not denominated in the
currency of that country.
True False

A

F

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