Banking Fundamentals Flashcards
7 cards from real CBP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Banking Fundamentals flashcards as text
Under the Community Reinvestment Act (CRA), banks are evaluated on their:
Answer: Efforts to meet the credit needs of all segments of their communities, including low- and moderate-income areas
CRA requires federal regulators to assess how well banks serve the credit needs of the communities in which they operate, with particular focus on low- and moderate-income areas.
The money multiplier effect in banking refers to:
Answer: The process by which an initial deposit creates a larger increase in total bank deposits through repeated lending
Each deposit allows a bank to make loans, which become deposits elsewhere, enabling the banking system to create multiple times the initial deposit as money.
Which document governs the terms of a syndicated loan, setting out rights and obligations of all lenders and the borrower?
Answer: Credit agreement (loan agreement)
In a syndicated loan, the credit agreement is the master document that details the terms, covenants, repayment schedule, and the roles of the agent bank and participating lenders.
What is the purpose of a bank's Asset-Liability Committee (ALCO)?
Answer: To manage the bank's balance sheet structure, interest rate risk, and liquidity risk
ALCO is responsible for managing the relationship between assets and liabilities to optimize net interest income while controlling interest rate and liquidity risks.
A bank's Tier 1 Capital under Basel III primarily consists of:
Answer: Common Equity Tier 1 (CET1) capital, including common stock and retained earnings
Tier 1 Capital is the core measure of a bank's financial strength and is dominated by CET1, which includes paid-in common equity, additional paid-in capital, and retained earnings.
In the context of bank lending, what is a 'covenant' in a loan agreement?
Answer: A contractual condition the borrower must satisfy during the life of the loan
Covenants are conditions in a loan agreement—such as maintaining minimum financial ratios or restricting dividends—that protect the lender by monitoring borrower behavior.
Which of the following best describes 'moral hazard' in the context of deposit insurance?
Answer: The tendency of insured depositors and banks to take on greater risk because losses are partially covered by insurance
Moral hazard arises because deposit insurance reduces depositors' incentive to monitor bank risk-taking, potentially encouraging banks to pursue riskier strategies.