CBP Banking Fundamentals 2 — Questions and Answers
Question 1: Which federal agency provides deposit insurance for credit unions in the United States?
- FDIC
- NCUA (Correct answer)
- OCC
- CFPB
Correct answer: NCUA
The National Credit Union Administration (NCUA) insures deposits at federally insured credit unions up to $250,000 per depositor.
Question 2: What is the primary purpose of the Federal Funds Rate?
- Set the rate banks charge consumers for mortgages
- Determine the interest rate banks charge each other for overnight lending of reserves (Correct answer)
- Establish the minimum interest rate for savings accounts
- Fix the rate the Fed charges member banks for discount window borrowing
Correct answer: Determine the interest rate banks charge each other for overnight lending of reserves
The Federal Funds Rate is the target interest rate at which commercial banks lend reserve balances to each other on an overnight basis.
Question 3: A bank's net interest margin (NIM) is best described as:
- Total interest income divided by total assets
- The difference between interest earned on assets and interest paid on liabilities, expressed as a percentage of earning assets (Correct answer)
- Net income divided by total equity
- The spread between the prime rate and the federal funds rate
Correct answer: The difference between interest earned on assets and interest paid on liabilities, expressed as a percentage of earning assets
NIM measures how much a bank earns from its interest-bearing activities relative to its earning assets, reflecting core profitability.
Question 4: Under the Basel III framework, what does the Liquidity Coverage Ratio (LCR) require banks to maintain?
- Sufficient capital to cover credit losses over a 1-year horizon
- Enough high-quality liquid assets to survive a 30-day stress scenario (Correct answer)
- A leverage ratio of at least 3% of total exposures
- Stable funding for assets held over a 1-year period
Correct answer: Enough high-quality liquid assets to survive a 30-day stress scenario
The LCR requires banks to hold high-quality liquid assets equal to or greater than projected net cash outflows over a 30-day stress period.
Question 5: Which of the following best defines a correspondent bank relationship?
- A bank that accepts deposits exclusively from foreign governments
- A financial institution that provides services to another bank that lacks the resources or access to perform them directly (Correct answer)
- A bank that only issues letters of credit for international trade
- A central bank subsidiary that handles domestic wire transfers
Correct answer: A financial institution that provides services to another bank that lacks the resources or access to perform them directly
Correspondent banking allows smaller or foreign banks to access financial services such as wire transfers, currency exchange, and check clearing through a larger bank.
Question 6: What is the key distinction between a commercial bank and an investment bank?
- Commercial banks are publicly traded; investment banks are private
- Commercial banks accept deposits and make loans; investment banks facilitate capital markets activities (Correct answer)
- Commercial banks only serve businesses; investment banks serve individuals
- Commercial banks are regulated by the OCC; investment banks are unregulated
Correct answer: Commercial banks accept deposits and make loans; investment banks facilitate capital markets activities
Commercial banks focus on deposit-taking and lending, while investment banks specialize in underwriting securities, M&A advisory, and capital market transactions.
Question 7: The reserve requirement ratio requires banks to:
- Hold a percentage of deposits as vault cash or central bank reserves (Correct answer)
- Maintain capital equal to a percentage of risk-weighted assets
- Keep a minimum ratio of liquid assets to total liabilities
- Set aside a portion of profits for future dividend payments
Correct answer: Hold a percentage of deposits as vault cash or central bank reserves
Reserve requirements mandate that banks hold a specified fraction of deposit liabilities as reserves, either in their vault or on deposit at the Federal Reserve.
CBP Banking Fundamentals 2
Which federal agency provides deposit insurance for credit unions in the United States?