CBP Banking Fundamentals 3

Question 1

Which of the following is an example of off-balance-sheet activity for a bank?

Accepted Answer

Issuing a standby letter of credit

Answer

Standby letters of credit represent contingent liabilities that do not appear on the balance sheet until triggered, making them a classic off-balance-sheet item.

Question 2

When a central bank conducts an open market purchase of government securities, the immediate effect is:

Accepted Answer

An increase in bank reserves and an expansion of the money supply

Answer

Buying securities injects reserves into the banking system, increasing bank lending capacity and expanding the money supply.

Question 3

The primary regulatory objective of Know Your Customer (KYC) procedures is to:

Accepted Answer

Identify and verify customer identity to prevent money laundering and financial crime

Answer

KYC is an anti-money laundering (AML) requirement that obligates banks to verify customer identities and assess the risk of illegal activity.

Question 4

A bank that is 'asset sensitive' will most likely benefit from:

Accepted Answer

A rising interest rate environment

Answer

An asset-sensitive bank has more rate-sensitive assets than liabilities, so rising rates increase interest income more than interest expense, boosting NIM.

Question 5

What does the term 'fractional reserve banking' mean?

Accepted Answer

Banks keep only a fraction of deposits in reserve and lend out the rest

Answer

In fractional reserve banking, banks hold a fraction of deposits as reserves while lending the remainder, which enables credit creation and money supply expansion.

(CBP) Certified Banking Professional Practice Test

(CBP) Certified Banking Professional Practice Test

CBP Banking Fundamentals 3