Core Banking Operations Flashcards

In lending, what is the debt-to-income (DTI) ratio used to evaluate?

Answer: A borrower's monthly debt payments relative to gross monthly income

DTI measures a borrower's ability to manage monthly payments by comparing total debt obligations to gross income.

Which of the following best describes a standby letter of credit?

Answer: A document guaranteeing payment if the primary obligor fails to perform

A standby letter of credit is a bank guarantee that pays the beneficiary if the customer fails to fulfill a contractual obligation.

The prime rate is best described as:

Answer: The benchmark interest rate banks use for their most creditworthy commercial customers

The prime rate is the baseline interest rate commercial banks charge their most creditworthy business customers, typically set 3% above the federal funds rate.

A customer requests a stop payment on a personal check. Under the UCC, how long is a stop payment order valid if given orally?

Answer: 14 calendar days

Under UCC Article 4, an oral stop payment order is effective for 14 calendar days unless confirmed in writing.

Which risk type describes the potential loss a bank faces when a borrower fails to repay a loan?

Answer: Credit risk

Credit risk is the risk of financial loss resulting from a borrower's failure to meet their debt obligations.

What is the purpose of a bank's loan loss reserve (allowance for credit losses)?

Answer: To set aside capital anticipating potential loan defaults

The allowance for credit losses is a contra-asset account estimating expected losses from loans that may not be fully repaid.

A bank's liquidity ratio measures its ability to:

Answer: Meet short-term obligations with readily available assets

Liquidity ratios assess whether a bank has enough liquid assets to cover immediate and near-term financial obligations.