Banking Ethics in Banking 4 — Questions and Answers
Question 1: A senior banker receives an expensive gift from a corporate client seeking a favorable loan decision. Accepting the gift most directly violates:
- Anti-money laundering rules
- Anti-bribery and gift policies (Correct answer)
- Capital allocation rules
- Credit risk management standards
Correct answer: Anti-bribery and gift policies
Accepting gifts from clients in connection with business decisions violates anti-bribery policies and can constitute commercial bribery under state law.
Question 2: What does the fiduciary standard require of a bank's trust department when managing a client's assets?
- To maximize returns regardless of risk
- To act solely in the best interest of the beneficiary (Correct answer)
- To align investments with the bank's proprietary products
- To follow the client's instructions even if harmful
Correct answer: To act solely in the best interest of the beneficiary
A fiduciary must put the beneficiary's interests first, which is a higher standard than the suitability standard applied to general investment advisors.
Question 3: Which of the following scenarios best illustrates 'churning' in a banking or investment context?
- Rolling over a CD at maturity
- Excessively trading a client's account to generate commissions (Correct answer)
- Rebalancing a portfolio annually per the investment policy statement
- Moving client funds to a higher-yield money market account
Correct answer: Excessively trading a client's account to generate commissions
Churning involves excessive trading in a client's account to generate commissions for the advisor rather than to benefit the client.
Question 4: A community bank's board of directors approves executive bonuses tied to short-term loan volume, which incentivizes approving risky loans. This is an example of a failure in:
- Anti-fraud controls
- Corporate governance and incentive structure design (Correct answer)
- Mortgage underwriting guidelines
- Capital reserve compliance
Correct answer: Corporate governance and incentive structure design
Poor incentive structures that reward short-term risk-taking over long-term stability represent a fundamental corporate governance failure.
Question 5: Under U.S. banking ethics standards, what is 'predatory lending'?
- Aggressively marketing loans to creditworthy borrowers
- Imposing unfair, deceptive, or abusive loan terms on vulnerable borrowers (Correct answer)
- Offering variable-rate mortgages to first-time buyers
- Requiring collateral for unsecured personal loans
Correct answer: Imposing unfair, deceptive, or abusive loan terms on vulnerable borrowers
Predatory lending involves exploiting borrowers—often the elderly, low-income, or financially unsophisticated—with unfair terms designed to extract fees rather than serve the borrower's interests.
Question 6: When a bank employee faces a conflict between following a manager's unethical instruction and complying with the law, the ethical course of action is to:
- Follow the manager's instruction since they are responsible
- Comply with legal and regulatory requirements and escalate through proper channels (Correct answer)
- Resign immediately without reporting the issue
- Follow the instruction and document it for personal protection
Correct answer: Comply with legal and regulatory requirements and escalate through proper channels
Employees have both an ethical duty and, in many cases, a legal obligation to comply with the law and report misconduct through available channels.
Question 7: Which practice violates fair lending laws when applied inconsistently across protected classes of borrowers?
- Requiring a credit report for all applicants
- Negotiating loan pricing differently based on race (Correct answer)
- Denying a loan due to insufficient income
- Requiring employment verification for self-employed applicants
Correct answer: Negotiating loan pricing differently based on race
Applying different pricing, terms, or standards based on a borrower's race, national origin, or other protected class violates the Fair Housing Act and ECOA.
Banking Ethics in Banking 4
A senior banker receives an expensive gift from a corporate client seeking a favorable loan decision.
Accepting the gift most directly violates: