CBP Banking Operations and Services 3 — Questions and Answers
Question 1: What is the primary purpose of a bank's asset-liability committee (ALCO)?
- To approve all commercial loan applications
- To manage interest rate risk and liquidity across the balance sheet (Correct answer)
- To oversee branch operations and staffing
- To review compliance with consumer protection laws
Correct answer: To manage interest rate risk and liquidity across the balance sheet
ALCO monitors and manages the balance sheet's exposure to interest rate risk and ensures adequate liquidity.
Question 2: Which of the following best describes a revolving line of credit?
- A one-time loan disbursed in full at closing
- A commitment allowing repeated borrowing up to an approved limit (Correct answer)
- A loan tied to a specific asset as collateral
- A fixed-term loan with equal monthly payments
Correct answer: A commitment allowing repeated borrowing up to an approved limit
A revolving line lets borrowers draw, repay, and redraw funds repeatedly up to an established credit limit.
Question 3: In the context of check processing, an MICR line contains:
- The account holder's signature and identification number
- Routing number, account number, and check number encoded in magnetic ink (Correct answer)
- The check's expiration date and issuing bank branch
- A digital watermark for fraud prevention
Correct answer: Routing number, account number, and check number encoded in magnetic ink
MICR (Magnetic Ink Character Recognition) encodes routing, account, and check numbers at the bottom of each check for automated processing.
Question 4: A bank issues a cashier's check. The primary obligor on this instrument is:
- The customer who purchased it
- The payee named on the check
- The issuing bank itself (Correct answer)
- The Federal Reserve Bank
Correct answer: The issuing bank itself
A cashier's check is a direct obligation of the issuing bank, making it more secure than a personal check.
Question 5: Which ratio measures a bank's ability to cover short-term liquidity needs using high-quality liquid assets?
- Capital adequacy ratio
- Liquidity coverage ratio (LCR) (Correct answer)
- Loan-to-deposit ratio
- Return on equity (ROE)
Correct answer: Liquidity coverage ratio (LCR)
The LCR requires banks to hold enough high-quality liquid assets to survive a 30-day stress scenario under Basel III.
Question 6: A sweep account automatically transfers funds between a checking account and an investment account primarily to:
- Avoid overdraft fees by maintaining a minimum balance
- Maximize interest earnings on idle balances (Correct answer)
- Consolidate multiple accounts into one statement
- Comply with Regulation D deposit limits
Correct answer: Maximize interest earnings on idle balances
Sweep accounts move excess balances into higher-yielding instruments overnight, optimizing return on idle cash.
Question 7: Which document governs the terms and conditions of a commercial checking account relationship?
- Deposit account agreement (Correct answer)
- Loan agreement
- Prospectus
- Articles of incorporation
Correct answer: Deposit account agreement
The deposit account agreement is the contract between the bank and customer that outlines fees, rights, and obligations for the account.
CBP Banking Operations and Services 3
What is the primary purpose of a bank's asset-liability committee (ALCO)?