Chapter 02 Testbank: of Mcgraw-Hill Education

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Chapter 02 Testbank

1. The changes to the regulations for the banking industry under deregulation in the mid-1980s
have resulted in _______ the growth of Australian banking sector.
A. decreasing
B. increasing
C. not altering
D. dramatically decreasing

2. Which of the following statements concerning banks is NOT correct?
A. In Australia, banks currently 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 per cent of the capital requirement must be in the form of Tier 1 capital under
Basel II.
D. The Reserve Bank of Australia monitors capital adequacy requirements for banks.

3. 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.

4. The level of banks' share of assets of all Australian financial institutions since the
implementation of deregulation in the 1980s:
A. increased.
B. decreased.
C. remained stable.
D. cannot be determined.

5. 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.

6. The major roles of banks include:
A. channelling funds to finance productive investment.
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B. accepting deposits and providing loans of different types including mortgage loans, personal
loans and commercial loans.
C. offering a form of liquidity services to depositors.
D. all of the given answers.

7. Which of the following features 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

8. There are four primary roles of a bank:
A. asset management, liability management, capital adequacy management and liquidity
management.
B. asset management, foreign exchange management, funds management and determining the
interest rates.
C. asset management, retirement and saving planning, stocks broking and controlling the
inflation.
D. both A and B are correct.

9. Banks have gradually moved to liability management in the management of their balance
sheets since the period of deregulation introduced in 1980s. 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 central bank standards.

10. For banks, asset management 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 based on available deposit base.
D. protecting the deposits by using derivatives.

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

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12. The following statements are true for banks’ off-balance sheet transactions:
A. assets and liability are yet to be recorded in the balance sheet.
B. they represent an important source of banks’ income.
C. they are a significant part of a bank’s business (estimated to be about five to six times more
than balance sheet business)

13. Off-balance-sheet business for a bank refers to:
A. a bank's income.
B. a bank's contingent liabilities.
C. assets that will appear on the forthcoming balance sheet.
D. transactions recorded on the previous balance sheet.

14. Off-balance sheet transactions do NOT include:
A. direct credit substitute.
B. commitments.
C. extension of loans to existing customers

15. Which of the following statements about a bank's activities is NOT correct?
A. A bank's loans are its assets.
B. Off-balance-sheet business items are contingent liabilities.
C. Liability management is the management of a bank's loans.
D. All big four banks offer some form of fund management service.

16. The assets on a bank's balance sheet 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.

17. The liabilities on a bank's balance sheet are:
C. the different types of loans the bank offers.
D. equal to the assets of the banks.

18. Each of the following balance sheet portfolio items are liabilities of a bank, except:
A. term deposits.
B. bill acceptance facilities.
C. certificates of deposit.
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D. overdrafts.

19. Each of the following balance sheet portfolio items are sources of funds for a bank, except:
A. term deposits.
D. overdrafts.

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

21. 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 mostly negligible interest.

22. The following statements are true about a bank’s current accounts except
A. it is generally used for commercial purposes.
B. Current accounts today pay interest but it is generally insignificant.
C. There are no limit of transaction on current accounts
D. A Bank’s current account is similar with a country’s current account.

23. 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.

24. 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.

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

26. 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

27. The negotiable certificate of deposits are issued by:
A. large banks.
B. large business corporations.
C. private equity firms
D. stock exchanges.

28. The term ‘negotiable' in relation to a security means:
A. its price can be bargained for when sold.
B. it can be sold and transferred easily in the secondary market.
C. its buyer can negotiate its price when buying.
D. it is reasonably illiquid and will drop in price when sold.

29. Which statement is NOT true for negotiable certificates of deposits?
A. They are a discount security issued by large banks into the money market.
B. They are a long-term financial instrument often traded at the stock exchange.
C. They can be bought and sold in the secondary market before the maturity.
D. The negotiable status of the security makes them highly liquid.

30. Which of the following statements 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 because 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.

31. The advantage/s of a certificate of deposit (CD) to a bank is/are:
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 choices.

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32. 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. a certificate of deposit does not pay interest until maturity.
C. a certificate of deposit is illiquid when compared with a term deposit.
D. a certificate of deposit is a high-credit-risk instrument when compared with a term deposit.

33. Which of the following statements about certificates of deposit (CDs) is NOT correct?
A. CDs are issued directly into the money markets.
B. CDs don't include interest until maturity.
C. CDs are called discount securities.
D. CDs are issued by large, creditworthy companies.

34. With regard to bank bills, the bill is sold at a discount:
A. because the bank needs to replace 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.

35. 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.

36. 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. Banks take primary responsibility to pay the face value of the funds to the holder at maturity.

37. Which of the following statements is NOT correct in relation to bill financing?
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.

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


39. Which of the following statements about bill acceptance facilities is NOT correct?
A. When a bank discounts a bill for the issuer, it buys it.
B. When a bank holds a bill, the bank will most likely sell it into the money market.
C. When a bank acts as an acceptor, it will pay the face value of the bill to the holder at maturity.
D. If interest rates change before a bank bill matures, the bank can change the interest rate on it.

40. 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.

41. Foreign currency liabilities have increased in importance as a source of funds for Australian
banks. Which of the following statements is NOT a major reason?
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. v
B. ii
C. i
D. All of the given answers.

42. 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.

43. The following balance sheet portfolio items are all assets of a bank, except:
A. overdrafts.
B. lease finance.
D. credit card draw-downs.

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44. A short-term discount security issued by a drawer at a discount, with the promise to repay the
face value at maturity, is called:
A. a commercial paper.
B. a commercial bill.
C. a certificate of deposit.

45. Which of the following statements regarding the foreign currency liabilities of a bank is NOT
correct?
A. The large international markets are important sources of funds for commercial banks.
B. Australian banks occasionally issue debt securities into the international financial markets to
raise sums ranging from $20 million to $50 million.
C. Foreign currency liabilities issued into the euromarkets are typically denominated in US
dollars.
D. After deregulation of the banking industry, commercial banks were able to expand their
international funding sources.

46. All of the following financial securities are considered ‘uses of funds' by banks except:
A. commercial bills.
B. credit cards.
D. overdrafts.

47. Which one of the following statements is/are true about the impact of deregulation on
housing lending in 1980s?
A. There had been increased home equity loans, which allowed households to borrow against
existing equity.
B. Household borrowing had been supported by increases in house prices.
C. The banking industry faced intense competition from lowering the lending standard in early
1990s.
D. All of the given answers describe the impact of deregulation on housing lending.

48. 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.

49. The bank bill swap rate (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.
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D. the bank bill security rate.

50. 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.

51. Which of the following statements about commercial lending is NOT correct?
A. The term loan is the main type of lending provided by banks to firms.
B. Typically, term loans are for maturities ranging from 5 to 15 years.
C. To extend commercial bill financing a bank may provide the firm with a rollover facility.
D. Banks can provide flexible funding called an overdraft to firms.

52. Which of the following statements about bank lending to government is NOT correct?
A. Securities issued by governments are usually regarded as low risk.
B. Banks invest in government securities because they are a source of liquidity.
C. Banks invest in T-notes because they provide short-term income streams.
D. Government securities enable a bank to manage the maturity structure of its balance sheet.

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.

54. 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.

55. In recent times, there has been a substantial expansion in fee-related income for banks. What
is the principal reason for this?
A. Increased confidence in banks by individual investors
B. Increased off-sheet business (OBS) for banks
C. Reduced guidelines by Australian bank supervisor APRA
D. Increased deposits in banks

56. Which of the following statements is true for off-balance-sheet business for banks?
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A. Off-balance-sheet business is a small part of a bank's income.

B. Off-balance-sheet business is recorded on a bank's statement of income and expense.
C. Off-balance-sheet business represents fee-based income.
D. Off-balance-sheet business records deposits that do not fit on the balance sheet.

57. Which of the following statements about market-rate-related items such as forward-rate
agreements (FRAs), foreign exchange contracts and interest rate swaps is NOT correct?
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' off-balance sheet business.

58. Which of the following categories 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

59. Which of the following categories 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

60. 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.

61. Which of the following statements about direct credit substitutes provided by a commercial
bank is NOT correct?
A. They are provided to support a client's financial obligations.
B. An example of a direct credit substitute is a bank guarantee.
C. The bank provides funding to a third party instead of the client providing the funding.
D. With a direct credit substitute a bank's client can raise funds directly from the financial
markets.

62. Off-balance-sheet business is usually divided into four major categories:
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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.

63. 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.

64. Which of the following is NOT a commitment by a bank?
A. Outright forward purchase agreement
B. Underwriting facilities
C. Credit card limit approvals unused by cardholder
D. Currency swap

65. Which of the following is NOT associated with the purpose of regulating financial
institutions?
A. Providing stability of the money supply
B. Directing flow of funds to priority areas
C. Maintaining the soundness and stability of the financial system
D. Lowering the cost of funds

66. The Australian institution APRA is responsible for the regulatory supervision of financial
institutions such as banks and credit unions. APRA stands for:
A. Australian Practice and Regulatory Association.
B. Australian Prudential Regulation Authority.
C. Australian Prudential Rule Authority.
D. Australian Practice and Regulatory Authority.

67. Which of the following institutions are supervised by APRA?
A. Building societies
B. Commercial banks
C. Credit unions
D. All of the given answers

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68. Within the context of the Corporations Law in Australia, the supervision of financial market
integrity and consumer protection is done by:
A. Australian Prudential Regulation Authority (APRA).
B. Australian Securities and Investments Commission (ASIC).
C. Reserve Bank of Australia (RBA).
D. Australian Competition and Consumer Commission (ACCC).

69. The requirement and observation of standards designed to ensure the stability and soundness
of a financial system is called:
A. fiscal policy.
B. monetary policy.
C. prudential supervision.
D. the Basel accord.

70. 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.

71. 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.

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

73. Under Basel II prudential standards, an institution is required to maintain a risk-based capital
ratio of _____ of total-risk-weighted assets.
A. 2.00 per cent
B. 4.00 per cent
C. 8.00 per cent
D. 10.00 per cent

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74. The Pillar 1 approach of Basel II capital adequacy incorporates the following 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.

75. Which of the following statements regarding capital adequacy requirements is NOT correct?
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 per cent of a bank's capital base.
D. Tier 2 capital is divided into upper and lower Tier 2 parts.

76. 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 per cent 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 per cent to the loan to determine the total capital requirement.

77. 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 per cent.
B. 50 per cent.
C. 100 per cent.
D. 150 per cent.

78. 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.

79. 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

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80. 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 per cent.
A. $6 400
B. $16 000
C. $160 000
D. $240 000

81. If a bank’s risk-weighted assets equal $50 000 000, the bank’s common equity requirement
in dollar value according to Basel III is:
A. $2 250 000
B. $5 000 000
C. $4 000 000
D. $1 000 000

82. A bank’s common equity requirement for the capital conservation buffer under Basel III with
a risk-weighted asset of $50 000 000 is equal to:
A. $1 250 000
B. $1 000 000
C. $1 000 000
D. $1 000 000

83. 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

84. Under Basel II capital accord, the approach to credit risk that requires a bank to assign risk
weights given by the prudential supervisor is called:
A. an advanced approach.
B. a foundation approach.
C. a standardised approach.
D. advanced-internal ratings.

85. The risk that arises from chance of loss as a result of inadequate internal bank processes is
called:
A. default risk.
B. interest rate risk.
C. market risk.
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D. operational risk.

86. The minimum total capital required under the Basel III guideline is:
A. 8 per cent of risk-weighted assets.
B. 9 per cent of risk-weighted assets.
C. 10 per cent of risk-weighted assets.
D. 50 per cent of risk-weighted assets.

87. Which of the following statements about recently adopted guidelines covering capital
requirements for market risk that banks are required to perform is NOT correct?
A. Banks use a risk measurement model based on a VaR approach.
B. Banks estimate the sensitivity of portfolio components to small changes in prices.
C. Banks must hold capital against risk of loss from changes in interest rates.
D. Banks hold a fixed allocation of funds between various balance sheet assets and off-balance-
sheet business.

88. For a commercial bank operating 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.

89. For a commercial bank's normal day-to-day business, the capital adequacy guidelines for the
operational risk it is exposed to fall under:
A. Pillar 1.
B. Pillar 2.
C. Pillar 3.
D. Pillar 4.

90. For a commercial bank's market discipline, the capital adequacy guidelines for its disclosure
and transparency requirements fall under:
A. Pillar 1.
B. Pillar 2.
C. Pillar 3.
D. Pillar 4.

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

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

93. In relation to a bank, ‘liquidity management’ means:
A. the bank's ability to quickly convert deposits into loans.
B. the bank's ability to onsell its loans.
C. the bank's ability to have funds available when depositors' funds mature.
D. the bank's policies and practices in identifying and managing its loans portfolios.

94. Which statement best describes and defines a bank?
A. Banks engage in financial transactions.
B. Banks accept deposits and make loans.
C. Some of a bank's business is not shown on its balance sheet.
D. Banks compete in the global capital markets.

95. Sally has an account that pays interest at a stated rate for a finite period of time. Most likely
this account is known as a:
A. negotiable certificate of deposit.
B. bank capital.
C. term deposit.
D. bill of exchange.

96. An amortised loan pays:
A. interest only.
B. principal only.
C. interest and principal so that the total paid each period is the same.
D. constant interest and decreasing principal.

97. The basic idea of capital is that it is:
A. equity value.
B. the long-term funds of a business.
C. a measuring device for banks.
D. an amount that cannot decrease through a firm's operations.

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98. The notional value of off-balance sheet activities of banks in Australia _____. The largest
single activity concerns _____.
A. is about equal to the value of total bank assets; foreign exchange
B. exceeds the value of total bank assets; foreign exchange
C. is about equal to the value of total bank assets; interest rates
D. exceeds the value of total bank assets; interest rates

99. Value-at-risk models:
A. estimate possible losses on a bank's portfolio and show a bank how it can avoid the riskiest
markets.
B. are predicated on the assumption that the future will resemble an historical period.
C. compute the expected loss for the next two to five years.
D. stress test a portfolio for the most likely outcome in various markets.

100. The fundamental characteristics of high-quality assets described in the liquidity coverage
ratios meet the following criteria except:
A. assets should be liquid in markets during a time of stress.
B. assets are considered to be high-quality liquid assets if they can be easily and immediately
converted into cash at little or no loss of value.
C. assets are exposed to low credit and market risk.
D. it can be easily traded in the financial markets with a huge discount.

101. A bank's need for liquidity arises from the fact that its sources of funds are _____ and its
earning assets are typically _____. In assessing liquidity we should include _____.
A. short-term; long-term; bank capital
B. short-term; long-term; assets that trade in active secondary markets
C. long-term; short-term; assets that trade in active secondary markets
D. long-term; short-term; bank capital

102. To be listed on the ASX, firms must:
A. adhere to the Corporate Governance Principles and Recommendations.
B. disclose whether they adhere to the Corporate Governance Principles and Recommendations.
C. disclose whether they adhere to the Corporate Governance Principles and Recommendations
and if not, explain why not.
D. conduct their business in an ethical and responsible manner.

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

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

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

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

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

108. 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

109. There is an inverse relationship between bank exposure to level of credit risk and amount of
capital required under Basel II.
True False

110. A capital buffer was introduced under Basel III to promote the conservation of capital above
minimum requirements that can be used to absorb losses during periods of financial and
economic stress.
True False

111. One of the important attributes of certificates of deposit (CDs) for a bank is the ability to
adjust the yields on new issues.
True False

112. According to banks’ liability management principle, commercial banks now actively
manage their sources of funds (liabilities) in order to ensure they have sufficient funds available
to meet loan demand and other commitments.
True False

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113. For bills of exchange, a commercial bank serves as an acceptor to the bill. The acceptor, on
behalf of the issuer, will repay the face value of the bill to the holder at maturity, will repay the
face value of the bill to the holder at maturity.
True False

114. One of the major advantages of an overdraft facility is that it allows a business to place its
operating account into debit up to an agreed amount to counter cash flow mismatch.
True False

115. 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

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

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

118. Briefly discuss the sources of funds for a commercial bank.
______________________________________________________________________________

119. Describe how a bill acceptance facility works.
______________________________________________________________________________

120. Discuss the main features of housing finance.
______________________________________________________________________________

121. Discuss the main features of a bank's commercial lending.
______________________________________________________________________________

122. Within the context of off-balance-sheet business, explain direct credit substitutes, trade- and
performance-related items and any differences between these items.
______________________________________________________________________________

123. In two or three sentences indicate what Basel is and why there are three versions.
20
______________________________________________________________________________

124. What is the LVR and how do banks use it in assessing risk?
______________________________________________________________________________

125. Discuss the major improvement in Basel III as compared with Basel II.
______________________________________________________________________________
21
Chapter 02 Testbank Key

1. The changes to the regulations for the banking industry under deregulation in the mid-1980s
have resulted in _______ the growth of Australian banking sector.
A. decreasing
B. increasing
C. not altering
D. dramatically decreasing
Ans: B
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 2.01 Evaluate the functions and activities of commercial banks within the financial system.
Section: Introduction
Topic: Introduction

2. Which of the following statements concerning banks is NOT correct?
A. In Australia, banks currently 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 per cent of the capital requirement must be in the form of Tier 1 capital under
Basel II.
D. The Reserve Bank of Australia monitors capital adequacy requirements for banks.
Ans: D
Bloom's: Comprehension
Difficulty: Easy
Est time: <1 minute
Topic: Introduction

3. 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.
Ans: D
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
22
4. The level of banks' share of assets of all Australian financial institutions since the
implementation of deregulation in the 1980s:
A. increased.
B. decreased.
C. remained stable.
D. cannot be determined.
Ans: A
AACSB: Diverse and multicultural
Bloom's: Evaluation
Difficulty: Hard
Est time: <1 minute
Topic: Introduction

5. 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.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Introduction

6. The major roles of banks include:
A. channelling funds to finance productive investment.
B. accepting deposits and providing loans of different types including mortgage loans, personal
loans and commercial loans.
C. offering a form of liquidity services to depositors.
Ans: D
Bloom's: Evaluation
Difficulty: Easy
Est time: <1 minute
Section: 2.01 The main activities of commercial banking
Topic: The main activities of commercial banking

7. Which of the following features 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
23
C. Facilitating the flow of funds from savers to borrowers

D. Managing the level of interest rates
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Introduction

8. There are four primary roles of a bank:
A. asset management, liability management, capital adequacy management and liquidity
management.
B. asset management, foreign exchange management, funds management and determining the
interest rates.
C. asset management, retirement and saving planning, stocks broking and controlling the
inflation.
D. both A and B are correct.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

9. Banks have gradually moved to liability management in the management of their balance
sheets since the period of deregulation introduced in 1980s. 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 central bank standards.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

10. For banks, asset management 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 based on available deposit base.
24
D. protecting the deposits by using derivatives.

Ans: C
Bloom's: Evaluation
Difficulty: Easy
Est time: <1 minute

11. When a bank raises funds in the international financial markets to fund new lending growth,
it is involved in:
A. asset management.
B. off-balance-sheet business.
C. liability management.
D. derivative management.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

12. The following statements are true for banks’ off-balance sheet transactions:
A. assets and liability are yet to be recorded in the balance sheet.
B. they represent an important source of banks’ income.
C. they are a significant part of a bank’s business (estimated to be about five to six times more
than balance sheet business)
Ans: D
Difficulty: Medium
Est time: <1 minute

A. a bank's income.
B. a bank's contingent liabilities.
C. assets that will appear on the forthcoming balance sheet.
D. transactions recorded on the previous balance sheet.
Ans: B
25
Difficulty: Medium
Est time: <1 minute

14. Off-balance sheet transactions do NOT include:
A. direct credit substitute.
B. commitments.
C. extension of loans to existing customers
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

15. Which of the following statements about a bank's activities is NOT correct?
A. A bank's loans are its assets.
B. Off-balance-sheet business items are contingent liabilities.
C. Liability management is the management of a bank's loans.
D. All big four banks offer some form of fund management service.
Ans: C
Difficulty: Medium
Est time: <1 minute

16. The assets on a bank's balance sheet are:
C. the different types of deposits the bank offers.
D. equal to the liabilities of the banks.
Ans: B
Difficulty: Medium
Est time: <1 minute
Learning Objective: 2.02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term
deposits, negotiable certificates of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Section: 2.02 Sources of funds
Topic: Sources of funds
26

17. The liabilities on a bank's balance sheet are:
C. the different types of loans the bank offers.
D. equal to the assets of the banks.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

18. Each of the following balance sheet portfolio items are liabilities of a bank, except:
A. term deposits.
D. overdrafts.
Ans: D
AACSB: Reflective thinking
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

19. Each of the following balance sheet portfolio items are sources of funds for a bank, except:
A. term deposits.
D. overdrafts.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

20. Which of the following is a bank liability?
A. Consumer loans
B. Lease finance
27
C. Bills receivable
D. Certificates of deposit
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

21. 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 mostly negligible interest.
Ans: D
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

22. The following statements are true about a bank’s current accounts except
A. it is generally used for commercial purposes.
B. Current accounts today pay interest but it is generally insignificant.
C. There are no limit of transaction on current accounts
D. A Bank’s current account is similar with a country’s current account.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

23. 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.
Ans: D
28

Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute

24. 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.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

25. 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.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

26. 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
Ans: D
29

Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

27. The negotiable certificate of deposits are issued by:
A. large banks.
B. large business corporations.
C. private equity firms
D. stock exchanges.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

28. The term ‘negotiable' in relation to a security means:
A. its price can be bargained for when sold.
B. it can be sold and transferred easily in the secondary market.
C. its buyer can negotiate its price when buying.
D. it is reasonably illiquid and will drop in price when sold.
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

29. Which statement is NOT true for negotiable certificates of deposits?
A. They are a discount security issued by large banks into the money market.
B. They are a long-term financial instrument often traded at the stock exchange.
C. They can be bought and sold in the secondary market before the maturity.
D. The negotiable status of the security makes them highly liquid.
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
30

30. Which of the following statements 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 because 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.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

31. The advantage/s of a certificate of deposit (CD) to a bank is/are:
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 choices.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

32. 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. a certificate of deposit does not pay interest until maturity.
C. a certificate of deposit is illiquid when compared with a term deposit.
D. a certificate of deposit is a high-credit-risk instrument when compared with a term deposit.
Ans: B
AACSB: Ethical
Difficulty: Medium
Est time: <1 minute

33. Which of the following statements about certificates of deposit (CDs) is NOT correct?
A. CDs are issued directly into the money markets.
B. CDs don't include interest until maturity.
31
C. CDs are called discount securities.

D. CDs are issued by large, creditworthy companies.
Ans: D
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute

34. With regard to bank bills, the bill is sold at a discount:
A. because the bank needs to replace 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.
Ans: C
Bloom's: Evaluation
Difficulty: Hard
Est time: <1 minute

35. 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.
Ans: C
Bloom's: Evaluation
Difficulty: Hard
Est time: <1 minute

36. 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. Banks take primary responsibility to pay the face value of the funds to the holder at maturity.
Ans: D
32
Difficulty: Hard
Est time: <1 minute

37. Which of the following statements is NOT correct in relation to bill financing?
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.
Ans: C
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

38. For a bank, an advantage of bill financing is:
A. the bank earns income from accepting bills.
B. the bank doesn't necessarily have to use its own funds.
C. interest rates on bill funding can be adjusted rapidly.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

39. Which of the following statements about bill acceptance facilities is NOT correct?
A. When a bank discounts a bill for the issuer, it buys it.
B. When a bank holds a bill, the bank will most likely sell it into the money market.
C. When a bank acts as an acceptor, it will pay the face value of the bill to the holder at maturity.
D. If interest rates change before a bank bill matures, the bank can change the interest rate on it.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
33

40. 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.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

41. Foreign currency liabilities have increased in importance as a source of funds for Australian
banks. Which of the following statements is NOT a major reason?
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. v
B. ii
C. i
D. All of the given answers.
Ans: A
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

42. 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.
Ans: D
34

Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

43. The following balance sheet portfolio items are all assets of a bank, except:
A. overdrafts.
B. lease finance.
D. credit card draw-downs.
Ans: C
Difficulty: Medium
Est time: <1 minute

44. A short-term discount security issued by a drawer at a discount, with the promise to repay the
face value at maturity, is called:
A. a commercial paper.
B. a commercial bill.
C. a certificate of deposit.
Ans: D
Difficulty: Medium
Est time: <1 minute

45. Which of the following statements regarding the foreign currency liabilities of a bank is NOT
correct?
A. The large international markets are important sources of funds for commercial banks.
B. Australian banks occasionally issue debt securities into the international financial markets to
raise sums ranging from $20 million to $50 million.
C. Foreign currency liabilities issued into the euromarkets are typically denominated in US
dollars.
D. After deregulation of the banking industry, commercial banks were able to expand their
international funding sources.
Ans: B
35
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

46. All of the following financial securities are considered ‘uses of funds' by banks except:
A. commercial bills.
B. credit cards.
D. overdrafts.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 2.03 Identify the main uses of funds by commercial banks, including personal and housing lending, commercial
lending, lending to government and other bank assets.
Section: 2.03 Uses of funds
Topic: Uses of funds

47. Which one of the following statements is/are true about the impact of deregulation on
housing lending in 1980s?
A. There had been increased home equity loans, which allowed households to borrow against
existing equity.
B. Household borrowing had been supported by increases in house prices.
C. The banking industry faced intense competition from lowering the lending standard in early
1990s.
D. All of the given answers describe the impact of deregulation on housing lending.
Ans: D
AACSB: Comprehension
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

48. 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.
Ans: B
36
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

49. The bank bill swap rate (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.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

50. 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.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

51. Which of the following statements about commercial lending is NOT correct?
A. The term loan is the main type of lending provided by banks to firms.
B. Typically, term loans are for maturities ranging from 5 to 15 years.
C. To extend commercial bill financing a bank may provide the firm with a rollover facility.
D. Banks can provide flexible funding called an overdraft to firms.
Ans: B
37

Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

52. Which of the following statements about bank lending to government is NOT correct?
A. Securities issued by governments are usually regarded as low risk.
B. Banks invest in government securities because they are a source of liquidity.
C. Banks invest in T-notes because they provide short-term income streams.
D. Government securities enable a bank to manage the maturity structure of its balance sheet.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

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.
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 2.04 Outline the nature and importance of banks’ off-balance-sheet business, including direct credit substitutes,
trade- and performance-related items, commitments and market-rate-related contracts.
Section: 2.04 Off-balance-sheet business
Topic: Off-balance-sheet business

54. 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.
Ans: D
38

Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

55. In recent times, there has been a substantial expansion in fee-related income for banks. What
is the principal reason for this?
A. Increased confidence in banks by individual investors
B. Increased off-sheet business (OBS) for banks
C. Reduced guidelines by Australian bank supervisor APRA
D. Increased deposits in banks
Ans: B
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

56. Which of the following statements is true for off-balance-sheet business for banks?
A. Off-balance-sheet business is a small part of a bank's income.
B. Off-balance-sheet business is recorded on a bank's statement of income and expense.
C. Off-balance-sheet business represents fee-based income.
D. Off-balance-sheet business records deposits that do not fit on the balance sheet.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

57. Which of the following statements about market-rate-related items such as forward-rate
agreements (FRAs), foreign exchange contracts and interest rate swaps is NOT correct?
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' off-balance sheet business.
Ans: D
39

Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

58. Which of the following categories 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
Ans: D
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

59. Which of the following categories 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
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

60. 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.
Ans: D
40

Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

61. Which of the following statements about direct credit substitutes provided by a commercial
bank is NOT correct?
A. They are provided to support a client's financial obligations.
B. An example of a direct credit substitute is a bank guarantee.
C. The bank provides funding to a third party instead of the client providing the funding.
D. With a direct credit substitute a bank's client can raise funds directly from the financial
markets.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

62. 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.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

63. 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.
41
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

64. Which of the following is NOT a commitment by a bank?
A. Outright forward purchase agreement
B. Underwriting facilities
C. Credit card limit approvals unused by cardholder
D. Currency swap
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

65. Which of the following is NOT associated with the purpose of regulating financial
institutions?
A. Providing stability of the money supply
B. Directing flow of funds to priority areas
C. Maintaining the soundness and stability of the financial system
D. Lowering the cost of funds
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 2.05 Consider the regulation and prudential supervision of banks.
Section: 2.05 Regulation and prudential supervision of commercial banks
Topic: Regulation and prudential supervision of commercial banks

66. The Australian institution APRA is responsible for the regulatory supervision of financial
institutions such as banks and credit unions. APRA stands for:
A. Australian Practice and Regulatory Association.
B. Australian Prudential Regulation Authority.
C. Australian Prudential Rule Authority.
D. Australian Practice and Regulatory Authority.
Ans: B
42
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

67. Which of the following institutions are supervised by APRA?
A. Building societies
B. Commercial banks
C. Credit unions
D. All of the given answers
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

68. Within the context of the Corporations Law in Australia, the supervision of financial market
integrity and consumer protection is done by:
A. Australian Prudential Regulation Authority (APRA).
B. Australian Securities and Investments Commission (ASIC).
C. Reserve Bank of Australia (RBA).
D. Australian Competition and Consumer Commission (ACCC).
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

69. The requirement and observation of standards designed to ensure the stability and soundness
of a financial system is called:
A. fiscal policy.
B. monetary policy.
C. prudential supervision.
D. the Basel accord.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Section: 2.06 A background to the capital adequacy standards
Topic: A background to the capital adequacy standards
43

70. 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.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 2.06 Understand the background and application of Basel III.

71. 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.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Section: 2.07 The Basel Accords: evolution from Basel I to Basel III
Topic: The Basel Accords: evolution from Basel II to Basel III

72. Which of the following does NOT apply to Tier 1 capital?
A. Tier 1 capital is described as ‘core capital'.
B. Tier 1 capital must constitute at least 50 per cent of a bank's capital base.
C. Paid-up ordinary shares can be included in Tier 1 capital.
D. Cumulative irredeemable APRA-approved preference shares can be included in Tier 1 capital.
Ans: D
Difficulty: Hard
Est time: <1 minute

73. Under Basel II prudential standards, an institution is required to maintain a risk-based capital
ratio of _____ of total-risk-weighted assets.
A. 2.00 per cent
B. 4.00 per cent
44
C. 8.00 per cent

D. 10.00 per cent
Ans: C
Difficulty: Easy
Est time: <1 minute

74. The Pillar 1 approach of Basel II capital adequacy incorporates the following 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.
Ans: C
Difficulty: Medium
Est time: <1 minute

75. Which of the following statements regarding capital adequacy requirements is NOT correct?
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 per cent of a bank's capital base.
D. Tier 2 capital is divided into upper and lower Tier 2 parts.
Ans: C
Difficulty: Medium
Est time: <1 minute

76. 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 per cent 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 per cent to the loan to determine the total capital requirement.
Ans: A
45
AACSB: Analysis
Bloom's: Application
Difficulty: Hard
Est time: <1 minute
Learning Objective: 2.08 Understand the standardised approach to credit risk and compute the capital requirements for particular
transactions.
Section: Extended learning A
Topic: Extended learning A

77. 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 per cent.
B. 50 per cent.
C. 100 per cent.
D. 150 per cent.
Ans: D
AACSB: Analysis
Difficulty: Hard
Est time: <1 minute
transactions.

78. 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.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
transactions.

79. 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
Ans: B
46
AACSB: Analysis
Difficulty: Hard
Est time: <1 minute
transactions.

80. 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 per cent.
A. $6 400
B. $16 000
C. $160 000
D. $240 000
Ans: B
AACSB: Analysis
Difficulty: Hard
Est time: <1 minute
transactions.

81. If a bank’s risk-weighted assets equal $50 000 000, the bank’s common equity requirement
in dollar value according to Basel III is:
A. $2 250 000
B. $5 000 000
C. $4 000 000
D. $1 000 000
Ans: A
AACSB: Analysis
Difficulty: Hard
Est time: <1 minute
transactions.

82. A bank’s common equity requirement for the capital conservation buffer under Basel III with
a risk-weighted asset of $50 000 000 is equal to:
A. $1 250 000
B. $1 000 000
C. $1 000 000
D. $1 000 000
Ans: A
47
AACSB: Analysis
Difficulty: Hard
Est time: <1 minute
transactions.

83. 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
Ans: A
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

84. Under Basel II capital accord, the approach to credit risk that requires a bank to assign risk
weights given by the prudential supervisor is called:
A. an advanced approach.
B. a foundation approach.
C. a standardised approach.
D. advanced-internal ratings.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

85. The risk that arises from chance of loss as a result of inadequate internal bank processes is
called:
A. default risk.
B. interest rate risk.
C. market risk.
D. operational risk.
Ans: D
48
Difficulty: Medium
Est time: <1 minute

86. The minimum total capital required under the Basel III guideline is:
A. 8 per cent of risk-weighted assets.
B. 9 per cent of risk-weighted assets.
C. 10 per cent of risk-weighted assets.
D. 50 per cent of risk-weighted assets.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

87. Which of the following statements about recently adopted guidelines covering capital
requirements for market risk that banks are required to perform is NOT correct?
A. Banks use a risk measurement model based on a VaR approach.
B. Banks estimate the sensitivity of portfolio components to small changes in prices.
C. Banks must hold capital against risk of loss from changes in interest rates.
D. Banks hold a fixed allocation of funds between various balance sheet assets and off-balance-
sheet business.
Ans: D
Difficulty: Medium
Est time: <1 minute
Topic: Basel II capital accord

88. For a commercial bank operating 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.
Ans: A
49

Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

89. For a commercial bank's normal day-to-day business, the capital adequacy guidelines for the
operational risk it is exposed to fall under:
A. Pillar 1.
B. Pillar 2.
C. Pillar 3.
D. Pillar 4.
Ans: A
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

90. For a commercial bank's market discipline, the capital adequacy guidelines for its disclosure
and transparency requirements fall under:
A. Pillar 1.
B. Pillar 2.
C. Pillar 3.
D. Pillar 4.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

91. 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
Ans: D
50
Difficulty: Medium
Est time: <1 minute

92. Part of a bank's liquidity management is to hold a portfolio of:
A. term loans.
B. mortgages.
C. Commonwealth government securities.
D. credit card loans.
Ans: C
Difficulty: Medium
Est time: <1 minute

93. In relation to a bank, ‘liquidity management’ means:
A. the bank's ability to quickly convert deposits into loans.
B. the bank's ability to onsell its loans.
C. the bank's ability to have funds available when depositors' funds mature.
D. the bank's policies and practices in identifying and managing its loans portfolios.
Ans: A
Difficulty: Medium
Est time: <1 minute
Learning Objective: 2.07 Examine liquidity management and other supervisory controls applied by APRA in the context of Basel III.
Section: 2.08 Liquidity management and other supervisory controls
Topic: Liquidity management and other supervisory controls

94. Which statement best describes and defines a bank?
A. Banks engage in financial transactions.
B. Banks accept deposits and make loans.
C. Some of a bank's business is not shown on its balance sheet.
D. Banks compete in the global capital markets.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
51
95. Sally has an account that pays interest at a stated rate for a finite period of time. Most likely
this account is known as a:
A. negotiable certificate of deposit.
B. bank capital.
C. term deposit.
D. bill of exchange.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Sources of Funds

96. An amortised loan pays:
A. interest only.
B. principal only.
C. interest and principal so that the total paid each period is the same.
D. constant interest and decreasing principal.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Uses of Funds

97. The basic idea of capital is that it is:
A. equity value.
B. the long-term funds of a business.
C. a measuring device for banks.
D. an amount that cannot decrease through a firm's operations.
Ans: B
Difficulty: Medium
Est time: <1 minute

98. The notional value of off-balance sheet activities of banks in Australia _____. The largest
single activity concerns _____.
A. is about equal to the value of total bank assets; foreign exchange
B. exceeds the value of total bank assets; foreign exchange
C. is about equal to the value of total bank assets; interest rates
52
D. exceeds the value of total bank assets; interest rates

Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

99. Value-at-risk models:
A. estimate possible losses on a bank's portfolio and show a bank how it can avoid the riskiest
markets.
B. are predicated on the assumption that the future will resemble an historical period.
C. compute the expected loss for the next two to five years.
D. stress test a portfolio for the most likely outcome in various markets.
Ans: B
Difficulty: Hard
Est time: <1 minute

100. The fundamental characteristics of high-quality assets described in the liquidity coverage
ratios meet the following criteria except:
A. assets should be liquid in markets during a time of stress.
B. assets are considered to be high-quality liquid assets if they can be easily and immediately
converted into cash at little or no loss of value.
C. assets are exposed to low credit and market risk.
D. it can be easily traded in the financial markets with a huge discount.
Ans: D
Difficulty: Hard
Est time: <1 minute

101. A bank's need for liquidity arises from the fact that its sources of funds are _____ and its
earning assets are typically _____. In assessing liquidity we should include _____.
A. short-term; long-term; bank capital
B. short-term; long-term; assets that trade in active secondary markets
C. long-term; short-term; assets that trade in active secondary markets
D. long-term; short-term; bank capital
Ans: B
53
Difficulty: Medium
Est time: <1 minute

102. To be listed on the ASX, firms must:
A. adhere to the Corporate Governance Principles and Recommendations.
B. disclose whether they adhere to the Corporate Governance Principles and Recommendations.
C. disclose whether they adhere to the Corporate Governance Principles and Recommendations
and if not, explain why not.
D. conduct their business in an ethical and responsible manner.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 2.10 Discuss the importance of corporate governance and ethics in the context of Australian financial
institutions.
Section: Extended Learning C
Topic: Corporate governance and ethics

103. Commercial banks are the main type of financial institution in a financial system because
they hold the largest amounts of financial assets.
Ans: True
Feedback: Banks have long been the dominant type of financial institution, although in recent
years managed funds have close to having the same amount of financial assets under
management.
Difficulty: Easy
Est time: <1 minute
Topic: Introduction

104. The greater the dominance of commercial banks in an economy, the less regulation
required.
Ans: False
Feedback: Because of the dominance of banks and the correlation between their business and a
country's economy, there are strong arguments for regulation to constrain a bank's business.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
54

105. Banks obtain funds from many areas. These sources of funds appear as liabilities on a
bank's balance sheet.
Ans: True
Feedback: Deposits are a major part of a bank's sources of funds and a bank needs to pay interest
expenses.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

106. Liability management is where banks actively manage their liabilities in order to meet
future loan demand.
Ans: True
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

107. Call deposits are funds lodged in a bank account for a specified short-term period.
Ans: False
Bloom's: Evaluation
Difficulty: Easy
Est time: <1 minute

108. 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.
Ans: False
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute

109. There is an inverse relationship between bank exposure to level of credit risk and amount of
capital required under Basel II.
Ans: False
55
Feedback: As a bank’s exposure to counter-party risk is higher, there is a likely chance that the
borrowers will default on the payment of interest and principal; therefore, the prudential
supervisor may impose high level of capital requirement for this sort of bank exposure.
Difficulty: Hard
Est time: <1 minute

110. A capital buffer was introduced under Basel III to promote the conservation of capital above
minimum requirements that can be used to absorb losses during periods of financial and
economic stress.
Ans: True
Feedback: In line with the guideline based on Basel accord, APRA introduced a capital
conservation buffer, applicable at all times and equal to 2.5 per cent of risk-weighted assets
(unless determined otherwise by APRA). The role of the buffer was to ensure that capital
requirement takes into account the macro-financial environment.
Difficulty: Hard
Est time: <1 minute

111. One of the important attributes of certificates of deposit (CDs) for a bank is the ability to
adjust the yields on new issues.
Ans: True
Feedback: The yield on a CD cannot be adjusted until it reaches maturity and a new CD is
issued.
Bloom's: Evaluation
Difficulty: Easy
Est time: <1 minute

112. According to banks’ liability management principle, commercial banks now actively
manage their sources of funds (liabilities) in order to ensure they have sufficient funds available
to meet loan demand and other commitments.
Ans: True
Feedback: If loan demand is forecast to increase, banks enter the capital markets and borrow the
necessary funds required to meet their forecast loan demand.
56

Difficulty: Hard
Est time: <1 minute

113. For bills of exchange, a commercial bank serves as an acceptor to the bill. The acceptor, on
behalf of the issuer, will repay the face value of the bill to the holder at maturity, will repay the
face value of the bill to the holder at maturity.
Ans: True
Feedback: As an acceptor of the bill, the bank becomes the primary liability holder, and thus is
required to return the face value to the holder of the security at maturity.
Difficulty: Hard
Est time: <1 minute

114. One of the major advantages of an overdraft facility is that it allows a business to place its
operating account into debit up to an agreed amount to counter cash flow mismatch.
Ans: True
Feedback: Businesses typically need to pay out funds for expenses before they receive funds
back from their business operations. Since the arrangement of additional funds through a formal
process involves times and costs, an overdraft facility becomes an easy funding alternative.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

115. 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.
Ans: False
Feedback: A normal bank acquires most of its funding from deposits.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

116. A bank may seek to obtain funds by issuing unsecured notes with a collaterised floating
charge over its deposits.
57
Ans: False
Feedback: Unsecured notes do not have any security attached.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

117. Foreign currency liabilities are debt instruments issued into another country but not
denominated in the currency of that country.
Ans: False
Feedback: Foreign currency liabilities are typically denominated in foreign currencies such as
US dollars, the yen and pound sterling.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
Topic: Introduction

118. Briefly discuss the sources of funds for a commercial bank.
Ans: Sources of funds appear on a bank's balance sheet either as liabilities or shareholders' equity
funds. The main sources of funds are primarily the more liquid funds from current account
deposits (call deposits). Next there are term deposits, negotiable certificates of deposit where a
bank may issue directly into the money market, bill acceptance liabilities, debt liabilities, foreign
currency liabilities, and loan capital and shareholders' equity.
Bloom's: Knowledge
Difficulty: Easy
Est time: 1-3 minutes

119. Describe how a bill acceptance facility works.
Ans: If a company with a good credit record is looking to raise funds through the issue of a bill
of exchange into the money markets, a bank may have the role of acceptor for the bill where the
bank agrees to pay the face value of the bill to the holder at maturity and will have a separate
arrangement to recover the funds from the issuer. The bank will earn fees for providing this
service. Alternatively, the bank may provide the funds directly for the bill by agreeing to
discount the bill and buy it from the issuer, and usually rediscount the bill subsequently.
Consequently, the bank could provide both a bill acceptance facility and a bill discount facility.
58
Bloom's: Knowledge
Difficulty: Medium

120. Discuss the main features of housing finance.
Ans: This involves the lending of long-term funds to individuals so that they can buy residential
property. As security for the loan, the bank lender registers a mortgage over the property. In
recent years commercial banks and specialist mortgage lenders have used securitisation to
refinance their lending.
Difficulty: Medium

121. Discuss the main features of a bank's commercial lending.
Ans: Commercial lending is when banks lend to the business sector and other financial
institutions. This is considered essential if economic growth is to be achieved within a country.
Commercial banks offer borrowers both short-term and long-term loans of various types such as
overdraft facilities.
Difficulty: Easy

122. Within the context of off-balance-sheet business, explain direct credit substitutes, trade- and
performance-related items and any differences between these items.
Ans: Direct credit substitutes are where a bank supports a client's financial obligation such as
providing a ‘standby letter of credit' so that a company may raise funds directly in the market
place. Trade- and performance-related items are when a bank offers guarantees to support a
client's non-financial obligations. Both of these items are not recorded on a bank's balance sheet.
Bloom's: Evaluation
Difficulty: Medium
59

123. In two or three sentences indicate what Basel is and why there are three versions.
Ans: The Bank for International Settlements promulgated capital standards for banks and this
became known as Basel I. The complex nature of modern banking led to the revised capital
standards of Basel II that could reflect more accurately risk Basel III was primarily adopted a
response to the GFC but it has been revised and enhanced since then. The main objective of
Basel III is to increase bank liquidity and decrease bank leverage in order to support financial
system stability. The focus of the three versions of Basel has remained on the capital adequacy of
financial institutions.
Difficulty: Hard

124. What is the LVR and how do banks use it in assessing risk?
Ans: LVR = loan-to-valuation ratio. For each residential mortgage the bank would calculate the
loan amount as a percentage of the value of the mortgaged property. One minus this ratio equals
equity as a percentage of the value. The higher the LVR, the more risky the loan is as there is
less equity or cushion and less incentive for the homeowner to make good on the loan. Thus, as
LVR increases, risk weighting in a step-wise manner increases. Mortgage insurance decreases
the risk weighting, especially at high levels of LVR.
Difficulty: Medium
transactions.
Section: Extended Learning
Topic: The standardised approach to credit risk

125. Discuss the major improvement in Basel III as compared with Basel II.
Ans: Basel II forms the foundation for Basel III, which strengthens the ‘three pillars’ of Basel II.
The most important changes to the three pillars are concerned with enhancing the capital
requirements (the first pillar of Basel II). Basel III introduces a new minimum Tier 1 capital
requirement of 6.00 per cent, up from 4.00 per cent. Within Tier 1, Basel III introduces a new
common equity Tier 1 requirement (CET1) that sets a minimum of 4.50 per cent as the
proportion of Tier 1 that must be common equity, the highest quality form of capital. In effect,
CET1 will be set at a minimum of 7.00 per cent because Basel III also introduces an additional
‘capital conservation buffer’ of 2.50 per cent, which must consist of common equity.
Difficulty: Medium
Est time: <1 minute
60
Chapter 02 Testbank Summary

# of
Category Questions
AACSB: Analysis 6
AACSB: Communication 61
AACSB: Comprehension 1
AACSB: Diverse and multicultural 16
AACSB: Ethical 1
AACSB: Reflective thinking 40
Bloom's: Application 6
Bloom's: Comprehension 33
Bloom's: Evaluation 11
Bloom's: Knowledge 37
Bloom's: Synthesis 38
Difficulty: Easy 29
Difficulty: Hard 23
Difficulty: Medium 73
Est time: 1-3 minutes 5
Est time: 2-3 minutes 2
Est time: <1 minute 118
Learning Objective: 2.01 Evaluate the functions and activities of commercial 26
banks within the financial system.
Learning Objective: 2.02 Identify the main sources of funds of commercial 34
banks, including current deposits, demand deposits, term deposits, negotiable
certificates of deposit, bill acceptance liabilities, debt liabilities, foreign currency
liabilities and loan capital.
Learning Objective: 2.03 Identify the main uses of funds by commercial banks, 8
including personal and housing lending, commercial lending, lending to
government and other bank assets.
Learning Objective: 2.04 Outline the nature and importance of banks’ off- 14
balance-sheet business, including direct credit substitutes, trade- and
performance-related items, commitments and market-rate-related contracts.
Learning Objective: 2.05 Consider the regulation and prudential supervision of 6
banks.
Learning Objective: 2.06 Understand the background and application of Basel 21
III.
Learning Objective: 2.07 Examine liquidity management and other supervisory 3
controls applied by APRA in the context of Basel III.
Learning Objective: 2.08 Understand the standardised approach to credit risk and 8
compute the capital requirements for particular transactions.
Learning Objective: 2.10 Discuss the importance of corporate governance and 1
ethics in the context of Australian financial institutions.
Section: 2.01 The main activities of commercial banking 17
Section: 2.02 Sources of funds 34
61
Section: 2.03 Uses of funds 11

Section: 2.04 Off-balance-sheet business 14
Section: 2.05 Regulation and prudential supervision of commercial banks 5
Section: 2.06 A background to the capital adequacy standards 9
Section: 2.07 The Basel Accords: evolution from Basel I to Basel III 16
Section: 2.08 Liquidity management and other supervisory controls 1
Section: Extended Learning 1
Section: Extended Learning C 1
Section: Extended learning A 7
Section: Introduction 9
Topic: A background to the capital adequacy standards 9
Topic: Basel II capital accord 6
Topic: Corporate governance and ethics 1
Topic: Extended learning A 7
Topic: Introduction 9
Topic: Liquidity management and other supervisory controls 1
Topic: Off-balance-sheet business 14
Topic: Regulation and prudential supervision of commercial banks 5
Topic: Sources of Funds 1
Topic: Sources of funds 33
Topic: The Basel Accords: evolution from Basel II to Basel III 10
Topic: The main activities of commercial banking 17
Topic: The standardised approach to credit risk 1
Topic: Uses of Funds 1
Topic: Uses of funds 10

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1

C. interest rates on bill funding can be adjusted rapidly.

D. the bank bill security rate.

A. Off-balance-sheet business is a small part of a bank's income.

Chapter 02 Testbank Key

C. Facilitating the flow of funds from savers to borrowers

D. protecting the deposits by using derivatives.

AACSB: Diverse and multicultural

AACSB: Reflective thinking

C. CDs are called discount securities.

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

C. 8.00 per cent

AACSB: Reflective thinking

D. exceeds the value of total bank assets; interest rates

AACSB: Diverse and multicultural

Chapter 02 Testbank Summary

Section: 2.03 Uses of funds 11

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