Commercial Banking Quizzes: Liquidity, Capital, Securities, and Credit Risk

Vocabulary flashcards covering bank liquidity management, regulatory capital ratios, securities portfolio risks, and credit risk evaluation based on Chapters 6, 7, 8, and 9.

Past-Due Loan (30–89 Days)

A bank loan classification applied when payments are two months past due, but the bank expects the borrower will resume making required interest payments in the near future.

Nonperforming Loan

A bank loan that is $90$ days or more past due or placed in nonaccrual status.

Nonperforming Loan Ratio

A credit risk metric that serves as a better indicator of future bank chargeoffs than the net chargeoff ratio.

Screening

A bank's process of assessing the ability of a prospective borrower to repay a loan prior to extending credit.

Legal Reserves

The vault cash and deposits held at the Federal Reserve that a bank uses to satisfy central bank regulatory reserve requirements.

Liquidity Coverage Ratio (LCR)

A regulatory liquidity standard that must equal or exceed $1$; it increases when a bank replaces lower-quality liquid assets like mortgage-backed securities with U.S. Treasuries.

Brokered Deposits

Bank deposits gathered through a third-party intermediary; they are mostly FDIC insured (which enhances moral hazard incentives) and are often viewed with regulatory suspicion.

Asset-Side Liquidity Management

A liquidity management practice that relies on storing liquid assets directly on the balance sheet, such as holding cash and easily marketable securities.

Low Liquidity Risk Bank

An institution that employs a carefully planned mix of stored and purchased liquidity, obtains cash quickly at a reasonable cost, and uses adverse scenario analysis to anticipate liquidity pressures.

Accumulated Other Comprehensive Income (AOCI)

The bank equity component through which unrealized gains and losses on available-for-sale (AFS) securities flow into regulatory capital.

Common Equity Tier 1 (CET1) Capital

The highest quality tier of regulatory bank capital, consisting predominantly of common stock and retained earnings.

Creditor Priority in Bank Failure

The legal priority order for settling claims against a failed bank's assets: $1$ is secured creditors, $2$ is depositors, $3$ is subordinated obligations, and $4$ is shareholder claims.

Prompt Corrective Action (PCA)

A statutory framework requiring bank regulators to implement increasingly stringent interventions as an institution's capital ratios fall into progressively lower capital zones.

Call Risk

The risk that a bond with a high yield (e.g., $5\%$) is redeemed early by the issuer when interest rates drop.

Liquidity Risk (Securities)

The risk that a bond or security cannot be sold quickly without substantial price concession because few market buyers can be found.

Inflation Risk

The risk that the real purchasing power of a fixed-income security erodes over time due to a decline in the purchasing power of the dollar.

Prepayment Risk

The risk that the principal on a mortgage-backed security is paid back earlier than expected as homeowners accelerate mortgage refinancing.

Residential Mortgage-Backed Securities (RMBS)

The single most common type of U.S. Government obligations held in the investment portfolios of commercial banks.

Yield to Maturity (YTM)

The discount interest rate that equates the present value of all expected future cash flows from a bond to its current market price.

Tax-Free Municipal Bond Pricing

The market principle stating that, all else equal, the price of a tax-exempt municipal bond must be higher than the price of an equivalent taxable bond to equate their after-tax yields.

Securities Pledging

The utilization of investment securities as collateral to secure transactions, such as selling them to another bank under a repurchase agreement with the commitment to repurchase them the next day.

Rate Expectations Maturity Strategy

A bond portfolio management strategy that requires active management based on interest rate forecasts rather than following passive rule-based allocation frameworks.