Banking Exam Retail and Corporate Banking 5 — Questions and Answers
Question 1: A retail bank customer applies for a mortgage and the bank's underwriter calculates a debt-to-income (DTI) ratio of 46%. Under conventional lending standards, this result most likely means:
- The application will be automatically approved as DTI is below 50%
- The application may face challenges, as most conventional guidelines prefer DTI at or below 43–45% (Correct answer)
- The bank must refer the loan to FHA regardless of credit score
- DTI is irrelevant for mortgage approval under current US law
Correct answer: The application may face challenges, as most conventional guidelines prefer DTI at or below 43–45%
Conventional guidelines from Fannie Mae typically cap DTI around 45% (with strong compensating factors up to 50%), so 46% puts this borrower at or beyond the limit.
Question 2: What is the primary difference between a commercial bank and an investment bank?
- Commercial banks operate nationally while investment banks are state-chartered only
- Commercial banks accept deposits and make loans; investment banks primarily raise capital and advise on transactions (Correct answer)
- Investment banks are FDIC-insured while commercial banks are not
- Commercial banks cannot hold equity securities under any circumstances
Correct answer: Commercial banks accept deposits and make loans; investment banks primarily raise capital and advise on transactions
Commercial banks take deposits and extend credit; investment banks focus on underwriting securities, M&A advisory, and capital markets activities.
Question 3: A corporate bank's 'middle market' segment typically refers to companies with:
- Annual revenues between $10 million and $1 billion (Correct answer)
- Market capitalizations exceeding $10 billion
- Fewer than 10 employees with startup funding needs
- Annual revenues below $1 million requiring microfinance products
Correct answer: Annual revenues between $10 million and $1 billion
Middle-market companies are generally defined as those with revenues roughly between $10 million and $1 billion, requiring more sophisticated banking than small business but less than large corporate clients.
Question 4: Under the Equal Credit Opportunity Act (ECOA), a bank must notify an applicant of an adverse action within how many days of a completed credit application?
- 7 calendar days
- 30 calendar days (Correct answer)
- 60 calendar days
- 90 calendar days
Correct answer: 30 calendar days
ECOA and Regulation B require lenders to provide adverse action notices within 30 days of receiving a completed application.
Question 5: A bank's 'funds transfer pricing' (FTP) mechanism is primarily used to:
- Set wire transfer fees charged to retail customers
- Allocate the cost and benefit of funds internally between business units (Correct answer)
- Calculate foreign exchange conversion rates for international transfers
- Determine the minimum deposit balance required to waive monthly fees
Correct answer: Allocate the cost and benefit of funds internally between business units
FTP assigns a cost to funding-consuming units (lending) and a credit to funding-generating units (deposits), enabling true profitability measurement by business line.
Question 6: Which of the following is an example of 'cross-selling' in retail banking?
- Offering a checking account customer a home equity line of credit (Correct answer)
- Charging higher rates to customers with lower credit scores
- Referring a customer to a competing bank for products the bank does not offer
- Merging two branches to reduce operating costs
Correct answer: Offering a checking account customer a home equity line of credit
Cross-selling means offering existing customers additional products, such as a HELOC to a checking account holder, increasing wallet share.
Question 7: A corporate client needs short-term financing to bridge the gap between paying suppliers and collecting from customers. The most appropriate product is:
- A 10-year term loan at a fixed rate
- A working capital line of credit (Correct answer)
- A mortgage-backed securities facility
- An equipment finance lease
Correct answer: A working capital line of credit
A working capital line of credit is designed to fund the operating cycle gap between payables and receivables, providing flexible short-term liquidity.
Banking Exam Retail and Corporate Banking 5
A retail bank customer applies for a mortgage and the bank's underwriter calculates a debt-to-income (DTI) ratio of 46%.
Under conventional lending standards, this result most likely means: