CFE Financial Institution Operations & Management 3

Question 1

A financial institution discovers that an employee has been processing fictitious loan payments to cover embezzlement. This type of fraud is BEST categorized under which risk category in the Basel II/III framework?

Accepted Answer

Operational risk

Answer

Internal fraud by employees is classified as operational risk, which covers losses from inadequate or failed internal processes, people, and systems.

Question 2

Under the Community Reinvestment Act (CRA), large retail banks are evaluated on which three performance tests?

Accepted Answer

Lending, investment, and service tests

Answer

Large banks are evaluated under CRA's lending test (credit extension to LMI borrowers), investment test (qualified investments), and service test (branch access and community development services).

Question 3

Which scenario BEST describes a 'classic' run on a financial institution?

Accepted Answer

Mass depositor withdrawals triggered by fear of insolvency, creating a self-fulfilling liquidity crisis

Answer

A bank run occurs when depositors collectively withdraw funds out of fear the institution will fail, draining liquidity and potentially causing the very failure they feared.

Question 4

In a financial institution's internal controls framework, the concept of 'segregation of duties' is designed to prevent:

Accepted Answer

Any single employee from controlling all phases of a transaction

Answer

Segregation of duties requires that no single employee can initiate, approve, record, and reconcile transactions, limiting opportunities for undetected fraud or error.

Question 5

The Dodd-Frank Act's Volcker Rule primarily restricts federally insured depository institutions from:

Accepted Answer

Engaging in proprietary trading and owning certain hedge/private equity funds

Answer

The Volcker Rule prohibits banks from engaging in short-term proprietary trading of securities and from acquiring or retaining interests in hedge funds and private equity funds.

(CFE) Certified Financial Examiner Practice Test

(CFE) Certified Financial Examiner Practice Test

CFE Financial Institution Operations & Management 3