Mixed Deck — All Banking Topics Flashcards

What is a 'correspondent bank'?

Answer: A bank that provides services to another bank, typically to facilitate international transactions

Correspondent banks act as intermediaries for other financial institutions, providing services like wire transfers and foreign exchange in locations where the other bank has no presence.

Which term describes the risk that a counterparty defaults between the trade date and the settlement date of a foreign exchange transaction?

Answer: Herstatt risk (settlement risk)

Herstatt risk (also called settlement or delivery risk) arises when one party delivers currency before receiving the reciprocal payment, exposing it to counterparty default.

Which of the following is a common method banks use to verify a new customer's identity during digital onboarding?

Answer: Document scanning with AI-powered liveness detection

Modern digital KYC onboarding uses AI to scan government-issued IDs and liveness detection to confirm the person is physically present, not using a photo.

Which of the following is an example of a negative pledge covenant?

Answer: Prohibiting the borrower from pledging assets to other creditors

A negative pledge covenant prevents the borrower from using assets as collateral for other debt, protecting the existing lender's security position.

In Incoterms, what does 'CIF' (Cost, Insurance, and Freight) mean?

Answer: The seller pays for shipping and insurance to the destination port; risk transfers when goods are loaded onto the vessel

Under CIF, the seller arranges and pays for freight and insurance to the named destination port, but risk transfers to the buyer once goods are loaded on the ship at the origin port.

What is the value of continuing education in credit analysis for Banking professionals?

Answer: It keeps professionals current with evolving standards and practices

Continuing education ensures professionals stay current with the latest developments, standards, and best practices in their field.

A customer asks for their account number over the phone. What must the representative do BEFORE sharing any account information?

Answer: Verify the caller's identity using established authentication procedures

Identity verification before disclosing any account information is mandatory regardless of who initiates the call, protecting against social engineering fraud.

What is a 'syndicated loan'?

Answer: A large loan provided by a group of lenders acting together to share the risk

A syndicated loan involves multiple lenders pooling funds to provide a single large loan to one borrower, spreading the credit risk among participants.

A customer is 55 years old and wants to draw income from their annuity immediately. Which type should they select?

Answer: Immediate annuity

An immediate annuity begins making income payments shortly after a lump-sum premium is paid, making it suitable for customers who need income now.

A customer wants overdraft protection linked to a savings account rather than a credit line. What is one potential downside of this arrangement?

Answer: Overdraft transfers may deplete the savings account balance

When overdraft protection is linked to a savings account, repeated overdrafts can drain the savings balance, eliminating the financial safety net.

What is a 'roadshow' in the context of an IPO?

Answer: A bank's marketing tour to pitch shares to institutional investors before pricing

During a roadshow, company executives and investment bankers travel to meet institutional investors to generate interest and gauge demand before setting the IPO price.

What is the Community Reinvestment Act (CRA) designed to encourage?

Answer: Banks to meet the credit needs of all segments of their communities, including low- and moderate-income areas

The CRA requires federal financial regulators to assess how well banks serve the credit needs of their entire communities, particularly low- and moderate-income neighborhoods.

What does 'open account' trading mean in international trade?

Answer: The seller ships goods and invoices the buyer to pay later, bearing the credit risk

In open account trading, the exporter ships goods and sends an invoice, trusting the importer to pay on the agreed future date — the seller bears significant credit risk.

What is a 'hostile takeover'?

Answer: A merger where the target's board rejects the bid and the acquirer pursues shareholders directly

In a hostile takeover, the acquirer bypasses the target's management and board — who have rejected the offer — and approaches shareholders directly via a tender offer or proxy fight.

A customer presents a check made payable to 'John or Jane Smith.' Who may endorse and deposit this check?

Answer: Either John or Jane Smith alone

When a check uses 'or' between payees, either party may independently endorse and deposit the check.

A customer purchases a $1,000 face-value bond at a discount for $950. If held to maturity, the extra $50 earned is called:

Answer: Accretion

When a bond purchased at a discount is held to maturity, the gradual increase in value toward face value is called accretion.

What does LTV (Loan-to-Value ratio) measure?

Answer: The loan amount divided by the appraised value of the property

LTV is calculated by dividing the loan amount by the appraised or purchase price of the property and is expressed as a percentage.

What does the term 'risk-weighted assets' (RWA) mean in the context of bank capital requirements?

Answer: Bank assets multiplied by risk weights reflecting each asset's credit risk

RWA is calculated by multiplying each asset by a regulatory risk weight (e.g., 0% for government bonds, 100% for corporate loans) to reflect credit risk in capital ratios.

A corporate treasurer observes that the three-month SOFR futures rate is trading below the expected spot SOFR. This difference is known as:

Answer: Convexity adjustment

Because futures are marked to market daily while FRAs settle once, a convexity adjustment is needed to reconcile the futures-implied rate with the true forward rate.

What is a 'cross-collateralization' clause in a loan agreement?

Answer: A clause that uses multiple assets as collateral to secure a single loan or multiple loans with the same lender

Cross-collateralization allows a lender to secure additional loans with the same collateral, meaning a default on one loan can put all related collateral at risk.