Banking Exam Commercial Bank 4 — Questions and Answers
Question 1: What distinguishes a 'revolving credit facility' from a term loan at a commercial bank?
- A revolving facility has a fixed repayment schedule; a term loan can be redrawn
- A revolving facility allows the borrower to draw down, repay, and redraw funds up to a set limit; a term loan disburses funds once and requires scheduled repayment (Correct answer)
- A revolving facility is always secured; a term loan is always unsecured
- A revolving facility is only available to retail customers; a term loan is for businesses
Correct answer: A revolving facility allows the borrower to draw down, repay, and redraw funds up to a set limit; a term loan disburses funds once and requires scheduled repayment
Revolving facilities provide flexible access to funds up to a credit limit, unlike term loans, which have a fixed draw and repayment schedule.
Question 2: What is the 'federal funds rate' and how does it affect commercial banks?
- The rate commercial banks charge their best corporate customers, which sets a floor for other lending rates
- The overnight rate at which banks lend reserve balances to each other, influencing the cost of funds across the banking system (Correct answer)
- The rate the Federal Reserve pays on required reserves held by banks
- The minimum interest rate commercial banks must offer on savings accounts
Correct answer: The overnight rate at which banks lend reserve balances to each other, influencing the cost of funds across the banking system
The federal funds rate is the overnight interbank lending rate set as a target by the FOMC; it ripples through the entire banking system, affecting deposit rates, loan rates, and bank profitability.
Question 3: What is 'credit scoring' used for in commercial bank retail lending?
- Measuring a bank's overall portfolio risk for regulatory reporting
- Statistically quantifying an individual borrower's creditworthiness to predict the likelihood of loan repayment (Correct answer)
- Assigning risk weights to different categories of bank assets
- Evaluating a commercial borrower's business plan before approving a line of credit
Correct answer: Statistically quantifying an individual borrower's creditworthiness to predict the likelihood of loan repayment
Credit scoring uses statistical models (like FICO scores) to evaluate a retail borrower's credit history and predict repayment probability.
Question 4: A commercial bank that holds too many long-term fixed-rate loans while funding them with short-term deposits is exposed to:
- Credit risk
- Operational risk
- Interest rate risk (specifically, repricing risk) (Correct answer)
- Sovereign risk
Correct answer: Interest rate risk (specifically, repricing risk)
When rates rise, the cost of short-term deposit funding increases faster than the yield on fixed-rate long-term loans, compressing net interest margin—this is repricing risk.
Question 5: In commercial banking, what is a 'troubled debt restructuring' (TDR)?
- A bank's internal program to eliminate inefficient business units
- A concession granted by a bank to a borrower experiencing financial difficulty, such as a reduced interest rate or extended maturity (Correct answer)
- A regulatory process for winding down an insolvent bank
- A type of loan sold at a discount to a third party
Correct answer: A concession granted by a bank to a borrower experiencing financial difficulty, such as a reduced interest rate or extended maturity
A TDR occurs when a bank modifies loan terms for a financially distressed borrower in ways it would not otherwise consider, such as lowering the interest rate or extending the repayment period.
Question 6: Which of the following transactions would be reported under the Bank Secrecy Act (BSA)?
- A customer depositing $5,000 in cash
- A business depositing $12,000 in cash, triggering a Currency Transaction Report (CTR) (Correct answer)
- A wire transfer of $500 between two domestic banks
- A customer purchasing a $1,000 cashier's check
Correct answer: A business depositing $12,000 in cash, triggering a Currency Transaction Report (CTR)
The BSA requires banks to file a Currency Transaction Report (CTR) for any cash transaction exceeding $10,000.
Question 7: What is 'tiered pricing' in commercial bank deposit products?
- Charging different fees based on a customer's account age
- Offering higher interest rates to depositors who maintain larger balances (Correct answer)
- Setting loan rates based on a borrower's credit tier
- Pricing loans differently for retail versus commercial customers
Correct answer: Offering higher interest rates to depositors who maintain larger balances
Tiered pricing rewards larger depositors with progressively higher interest rates as balance thresholds are met.
Banking Exam Commercial Bank 4
What distinguishes a 'revolving credit facility' from a term loan at a commercial bank?