Commercial Bank Flashcards
7 cards from real Banking Exam practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Commercial Bank flashcards as text
A commercial bank's 'spread' in lending refers to:
Answer: The difference between the interest rate charged on loans and the cost of funds
The lending spread is the margin between what the bank charges borrowers and what it pays depositors or for borrowed funds.
What is a 'standby letter of credit' issued by a commercial bank?
Answer: A guarantee that the bank will pay a beneficiary if the bank's customer fails to meet a contractual obligation
A standby letter of credit is a payment guarantee; the bank pays the beneficiary only if the applicant (customer) defaults on an obligation.
Which of the following best describes 'asset-liability management' (ALM) at a commercial bank?
Answer: Coordinating a bank's assets and liabilities to maximize profitability while managing interest rate and liquidity risk
ALM involves strategically balancing assets (loans, investments) and liabilities (deposits, borrowings) to optimize the bank's net interest margin while controlling risk.
What is a 'loan-to-value' (LTV) ratio used to assess in commercial banking?
Answer: The risk of a secured loan by comparing the loan amount to the appraised value of the collateral
LTV measures collateral coverage; a higher LTV means more risk for the lender because there is less cushion if the borrower defaults and the collateral must be liquidated.
In the U.S., which federal agency primarily charters and supervises national commercial banks?
Answer: Office of the Comptroller of the Currency (OCC)
The OCC charters, regulates, and supervises all national banks and federal savings associations.
What is the purpose of a commercial bank's 'allowance for loan and lease losses' (ALLL)?
Answer: An accounting reserve representing estimated losses on loans that have not yet been charged off
The ALLL is a contra-asset account that reduces the gross loan portfolio to its estimated net realizable value by reserving for expected credit losses.
Which of the following is an example of 'off-balance-sheet' activity by a commercial bank?
Answer: Issuing loan commitments and letters of credit not yet funded
Loan commitments and letters of credit create contingent liabilities that do not appear on the balance sheet until drawn upon.