BMO Foundational Concepts & Principles 3 — Questions and Answers
Question 1: A BMO relationship manager discovers a long-time client is structuring cash deposits just below the $10,000 FINTRAC reporting threshold. What should the manager do?
- Ignore it since each deposit is below the threshold
- File a Suspicious Transaction Report (STR) with FINTRAC (Correct answer)
- Close the account immediately without reporting
- Notify the client that their transactions are being watched
Correct answer: File a Suspicious Transaction Report (STR) with FINTRAC
Deliberately keeping deposits below reporting thresholds (structuring) is a red flag for money laundering and must be reported to FINTRAC as a suspicious transaction.
Question 2: Which Basel III capital requirement specifically addresses a bank's ability to survive a 30-day stress scenario using liquid assets?
- Net Stable Funding Ratio (NSFR)
- Liquidity Coverage Ratio (LCR) (Correct answer)
- Common Equity Tier 1 ratio
- Leverage ratio
Correct answer: Liquidity Coverage Ratio (LCR)
The LCR requires banks to hold enough high-quality liquid assets (HQLA) to cover net cash outflows over a 30-day stress period.
Question 3: In the context of BMO's credit risk framework, what does 'probability of default (PD)' measure?
- The percentage of loan value lost if a borrower defaults
- The likelihood a borrower will fail to meet obligations within a given period (Correct answer)
- The total exposure at the time of default
- The cost of recovering a defaulted loan
Correct answer: The likelihood a borrower will fail to meet obligations within a given period
PD is the statistical estimate of how likely a borrower is to default on their obligations within a specified time horizon, typically one year.
Question 4: A BMO teller receives a cheque made out to 'cash.' What is the correct handling procedure?
- Deposit it to any account without ID since it requires no payee
- Treat it like a cash transaction, verify the presenter's ID, and apply cash reporting rules (Correct answer)
- Return it as cheques to 'cash' are invalid instruments
- Process it automatically through the ATM deposit system
Correct answer: Treat it like a cash transaction, verify the presenter's ID, and apply cash reporting rules
Cheques payable to 'cash' are bearer instruments; the bank must verify the presenter's identity and follow cash transaction reporting rules.
Question 5: Which of the following best describes the concept of 'net interest margin (NIM)' for BMO?
- The difference between total revenue and operating expenses
- The spread between interest earned on assets and interest paid on liabilities, as a percentage of assets (Correct answer)
- The ratio of non-interest income to total income
- The margin between BMO's lending rate and the overnight rate
Correct answer: The spread between interest earned on assets and interest paid on liabilities, as a percentage of assets
NIM is calculated as (interest income minus interest expense) divided by average earning assets, reflecting core banking profitability.
Question 6: BMO's Code of Conduct prohibits employees from accepting gifts above a certain value from clients. What is the primary reason for this policy?
- To comply with gift tax regulations
- To prevent conflicts of interest that could compromise objective judgment (Correct answer)
- To ensure equal treatment of all gift-giving clients
- To reduce the bank's taxable income
Correct answer: To prevent conflicts of interest that could compromise objective judgment
Gift limits exist to prevent conflicts of interest where an employee's decisions might be unduly influenced by personal benefits received from clients.
Question 7: What does a 'fiduciary duty' mean in the context of a BMO wealth management advisor?
- An obligation to maximize the bank's fee revenue from the client
- A legal and ethical duty to act in the client's best interest above all others (Correct answer)
- A requirement to report all client activities to regulators
- An obligation to follow only provincial securities laws
Correct answer: A legal and ethical duty to act in the client's best interest above all others
A fiduciary duty requires the advisor to prioritize the client's interests over their own or the firm's interests when providing advice or managing assets.
BMO Foundational Concepts & Principles 3
A BMO relationship manager discovers a long-time client is structuring cash deposits just below the $10,000 FINTRAC reporting threshold.
What should the manager do?