Banking Exam Awareness 3 — Questions and Answers
Question 1: What is a 'currency transaction report' (CTR) in U.S. banking?
- A report filed when a customer exchanges foreign currency
- A mandatory report for cash transactions exceeding $10,000 (Correct answer)
- A daily summary of teller drawer counts
- A report of suspected counterfeit currency
Correct answer: A mandatory report for cash transactions exceeding $10,000
Banks must file a CTR with FinCEN for any cash transaction exceeding $10,000, whether a deposit, withdrawal, or exchange.
Question 2: Which of the following best describes 'Basel III' in banking?
- A U.S. domestic consumer protection law
- An international framework for bank capital adequacy, stress testing, and liquidity (Correct answer)
- A European Central Bank monetary policy directive
- A standard for electronic interbank payments
Correct answer: An international framework for bank capital adequacy, stress testing, and liquidity
Basel III is an international regulatory framework developed by the Basel Committee to strengthen bank capital requirements and reduce risk.
Question 3: What is 'loan-to-value ratio' (LTV) used to assess?
- A borrower's ability to repay based on income
- The risk of a mortgage loan relative to the property's appraised value (Correct answer)
- The interest rate spread between prime and subprime loans
- The percentage of a bank's loans that are non-performing
Correct answer: The risk of a mortgage loan relative to the property's appraised value
LTV compares the loan amount to the appraised property value; a higher LTV signals greater risk for the lender.
Question 4: What is the primary role of the Federal Open Market Committee (FOMC)?
- Supervising state-chartered banks
- Setting the federal funds rate and conducting open market operations (Correct answer)
- Insuring bank deposits
- Enforcing consumer protection laws
Correct answer: Setting the federal funds rate and conducting open market operations
The FOMC directs U.S. monetary policy, including setting the target federal funds rate and managing the Fed's securities portfolio.
Question 5: Which type of bank account typically earns higher interest but restricts the number of monthly withdrawals?
- Checking account
- Savings account (Correct answer)
- Demand deposit account
- NOW account
Correct answer: Savings account
Savings accounts earn interest but historically limited withdrawals to six per month under Regulation D (though the Fed suspended this limit in 2020).
Question 6: What is 'subprime lending'?
- Lending at rates below the prime rate to preferred customers
- Extending credit to borrowers with poor or limited credit histories at higher rates (Correct answer)
- Short-term overnight loans between banks
- Government-backed loans for first-time homebuyers
Correct answer: Extending credit to borrowers with poor or limited credit histories at higher rates
Subprime lending targets borrowers with low credit scores or limited credit history, typically charging higher interest rates to offset greater default risk.
Question 7: What is the purpose of a 'stress test' conducted by the Federal Reserve on large banks?
- To evaluate employee performance under high workloads
- To assess whether banks have enough capital to survive a severe economic downturn (Correct answer)
- To test new digital banking infrastructure for vulnerabilities
- To measure how quickly a bank can process a surge in transactions
Correct answer: To assess whether banks have enough capital to survive a severe economic downturn
The Fed's stress tests (DFAST/CCAR) simulate adverse economic scenarios to determine if large banks hold sufficient capital buffers.
Banking Exam Awareness 3
What is a 'currency transaction report' (CTR) in U.S. banking?