Midterm 2 - Banking(MC)

Multiple Choice

which of the following best explains why banks are more heavily regulated than most industries?

they face unique fragility from maturity mismatch and systemic contagion

Which agency supervises state-chartered non-member banks?

Federal Deposit Insurance Corporation (FDIC)

If a Utah-chartered industrial bank engages in high-risk fintech lending, which regulators would have primary supervisory authority?

Utah Department of Financial Institutions(DFI) and FDIC

Which Agency is primarily responsible for consumer financial protection in the U.S

CFPB (Consumer Financial protection Bureau)

In the Lincoln Savings & Loan case, which product was sold to depositors under misleading claims of safety?

ACC Corporate bonds

Which quote best represents Ronald Reagan’s deregulatory philosophy in the 1980s?

“The nine most terrifying words in the English Language are: I’m from the government, and I’m here to help.”

Regulatory capture is most likely to occur when:

Regulators rely on the industry for expertise, jobs, or political donations

Which of the following regulators would primarily intervene in a case of discriminatory mortgage lending in Utah?

DOJ (Department of Justice) and CFPB

Which of the following is an example of regulatory failure linked to political influence?

Keating Five intervention in the 1980s

Which of the following best describes a thrift (Saving & Loan)?

A financial institution created to promote homeownership through mortgages

Which of the following best highlights a key difference between thrifts and commercial banks (historically)?

Thrifts primarily made long-term, fixed rate home mortgages; commercial banks offered a wider range of business and consumer loans

Which of the following best describes systemic risk in banking?

The risk that distress at one bank triggers widespread panic and failures across the financial system

The main problem with Regulation Q (before DIDMCA) was:

It capped interest rates on deposits, causing funds to flow to money market funds

The Garn-St Germain Act of 1982:

Expanded thrift powers into commercial real estate and consumer lending

Prompt Corrective Action (PCA), introduced by FDICIA, was designed to

Require regulators to intervene earlier as bank capital declined

Under the CAMELS framework, which category evaluates the quality of a bank’s board and risk controls?

Management

As of mid-2007, IndyMac’s funding was characterized by:

heavy reliance on brokered deposits and Federal Home Loan Bank advances

Basel I required banks to hold:

8% capital relative to risk-weighted assets

Basel II was criticized because:

It outlawed derivatives

Basel III introduced all of the following EXCEPT:

Prompt Corrective Action (PCA)

The creation of the CFPB was part of which law?

Dodd-Frank Act (2010)

Which of the following is TRUE about Utah Industrial Banks (IBs)?

they allow commercial firms and fintechs to own banks

Basel I’s 8% capital requirement applied to which measure?

Risk-weighted assets (RWA)

Which weakness of Basel I most directly led to Basel II?

It treated all corporate loans as equally risky regardless of credit quality

Under Basel II, the “Three Pillars” included:

Minimum capital requirements, supervisory review, market discipline

Which of the following was a major criticism of Basel II in the Global Financial Crisis?

It allowed reliance on credit rating agencies and banks’ internal risk models

Basel III introduced which new regulatory concepts for the first time?

Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR)

The purpose of the Countercyclical capital buffer (under Basel III) is to:

Force banks to hold extra capital during credit booms

which of the following best describes the “Eight is Great” initiative?

A campaign encouraging eight cross-sold products per household

which of the following BEST explains why Wells Fargo’s misconduct became systemic rather than isolated?

Toxic sales incentives combined with normalized misconduct

Which corner of the Fraud Triangle is best illustrated by daily “Motivator Calls” and threats of firing for missing sales goals?

Pressure

Which U.S regulatory body was part of the $185 million settlement announced in September 2016?

OCC(Office of the comptroller of the currency)

Senator Elizabeth Warren’s questioning of John Stumpf in 2016 most forcefully accused him of:

Gutless leadership and failure to resign or claw back pay

In 2018, the Federal Reserves imposed a sanction unique in U.S banking history on Wells Fargo. what was it?

Capping total assets in 2017 levels until reforms were complete

which of the following was NOT an action Wells Fargo took in response to the scandal?

Complete replacement of the entire board of directors in 2016

Compared to other banks (Citi, U.S Bank, Fifth Third), wells Fargo was unique in that:

It faced the largest scale of fake accounts and a Federal Reserve asset cap

which wells Fargo CEO resigned in March 2019 under regulatory and political pressure?

Tim Sloan

In Simons’ Levers of Control framework, Wells Fargo’s obsessive focus on cross-sell metrics illustrated failures in which lever?

diagnostic Controls

The Wells Fargo board’s HR/Compensation Committee failed primarily by:

Approving incentive plans that rewarded aggressive cross-selling

At Wells Fargo, customers were harmed by the fake accounts scandal primarily through:

Unauthorized fees and damage to credit scores

Wells Fargo Launched advertising campaigns like “Re-Established. 1852” after the scandal. Which critique best fits?

PR Campaigns alone cannot rebuild trust without substantive reforms

Which statement best reflects the challenge of restoring trust once lost?

Reputational damage often lingers for years, even after reform

Why did Wells Fargo become the most prominent example of fake account scandals, even through peers like Citi and Fifth Third had smaller cases?

Its scale (millions of accounts), systemic culture, and visibility made it a symbol

Which of the following best describes why bank liabilities are unique compared to corporate liabilities?

They are the raw material that funds earning assets

which of the following would appear as a liability on a bank’s balance sheet?

Core deposits

Which of the following securities classifications impact equity through OCI when market values change?

Available-for-sale

Which Funding source is considered a carry stigma and be used as a last resort?

Discount window borrowing

which of the following would be deducted from Common Equity Tier 1 (CET1) Capital?

Goodwill

Which of the following is most likely to generate fee income rather than interest income?

Loan commitments

Why might a bank’s reported balance sheet understate the true scale of its activities?

Because off-balance sheet exposures like commitments and derivatives are not fully recognized

Which of the following best explains why provisions for credit losses can swing bank earnings dramatically?

they are linked to forward-looking estimates of lifetime loan losses

which of the following best explains how off-balance sheet items eventually affect the balance sheet?

They crystallize into assets or liabilities when exercised or triggered

Which type of income is more likely to diversify a bank’s earnings away from interest rate sensitivity?

Trading and investment banking fees

why might analysts emphasize return on Tangible Equity (ROTE) over ROE for some banks?

It removed goodwill and intangibles to focus on true loss-absorbing capital

why are banks cash flow statements often less intuitive than those of corporates?

Deposit inflows/outflows show up in financing instead of operating

why is the statement of changes in shareholders’ equity critical for bank analysis?

It tracks how net income, dividends, buybacks, and OCI affects capital

Which of the following is an implication of the modern view of money creation/

Loans create deposits, expanding both sides of the balance sheet instantly

why is noninterest expense such a key focus in bank analysis?

It is dominated by controllable categories like salaries, technology, and compiance

Why might the traditional “money multiplier” model persist in textbooks despite being outdated?

It is simpler, elegant, and easy for teachers to demonstrate

Why does Mr. Clarkson need to borrow money to support a profitable business?

because Rapid growth ties up cash in receivables and inventory faster than it is collected

Which combination of factors explains Clarkson’s appetite for external finance?

Rapid sales growth long cash cycle low profit retention

why does rapid sales growth potentially weaken Clarkson’s financial condition?

growth forces larger investments in receivables and inventory creating liquidity strain

The 2% discount offered by suppliers 2/10 net 50 is equivalent to what annualized cost of not paying early?

21% per year

Which of the following best reflects a banker’s concern in the Clarkson case?

The financing gap grows with sales growth requiring more debt despite profitability

Which of the following loan structures would be most appropriate for a banker concerned about Clarkson’s liquidity risk?

Approve partial increase secured by receivables and inventory with financial covenants

Which covenant would not be typical for a short-term working capital loan like Clarkson’s line of credit?

Covenant requiring the company to expand into new geographic markets

If the bank imposes a borrowing base covenant what does this mean?

The borrowing limit is tied to the value of current assets such a receivables and inventory

Which of the following covenants would most directly protect the bank from excessive short-term liquidity risk?

minimum Current ratio requirement

What is another name for tier 2 capital

Supplemental capital

The ratio of core capital to average total assets is called the…

Leverage ratio

Federal regulators have initiated a concept called PCA in the evaluation of adequate capital coverage. What does PCA stand for, AND what is one of the restrictions the regulator can impose to restrict certain activities?

prompt corrective action; Paying dividends and other capital distributions

The Federal Reserve Bank requires that member banks maintain, on deposit, a sufficient amount of funds or reserve. The bank cannot use these funds for investment purposes. Generally, what is the percentage that must be maintained at the Fed?

10$ over $127.5 million, +3% between $16.9 million and $127.5 million

The risk that a financial institution may be forced to borrow emergency funds to cover its immediate cash needs is known as…

Liquidity risk

Which of the following is not a demand for cash?

The bank sells one of its properties that is repossessed

What is the major difference between Tier 1 and tier 2 capital?

long-term debt

What is the primary difference between the Tier 1 capital ratio and the leverage ratio?

Risk-weighted assets

What was the primary focus(es) of Basel III?

Capital and liquidity

What are the components of the net liquidity position calculation?

Cash inflows - cash outflows

A bank is asset-sensitive if its….

Interest-sensitive assets exceed its interest-sensitive liabilities

An advantage of interest rate swaps is that…

it can help protect from interest rate fluctuations, achieve lower borrowing costs, closely match the maturities of assets and liabilities, transform actual cash flows to more closely match desired cash flow patterns

What will be the result to Net Interest Margin if the yield curve is upward sloping?

Positive

What type of yield curve is characterized by short-term rates being higher than long-term rates?

Abnormal or inverted curve

The issuance of loans to borrowers is considered a…

Purchase Treasury securities

Which of the following would be considered a risk mitigation tool that could be used to minimize interest rate risk?

Loan sale

What is the primary comparative interest rate metric used to manage interest rate performance?

Interest sensitivity Gap Ratio

which of the following best describes a liability-sensitive bank?

It has more rate-sensitive liabilities than rate-sensitive assets

Which of the following is an example of using derivatives to hedge interest rate risk?

Entering into a swap to pay fixed and receive floating when the bank has many floating-rate loans

Changes in interest rates can affect not just earnings but also the market value of a bank’s equity. This long-term perspective on interest rate risk is best captured by analyzing…

Economic value of equity (EVE)

which measure is most focused on short-term earnings sensitivity rather than long-term capital value?

Earnings-at-Risk

Which of the following best illustrates optionality embedded in a bank’s balance sheet?

Borrowers refinancing fixed-rate mortgage when rates fall

Which of the following governance tools is most commonly used by bank boards and ALCOs (Asset-Liability committees) to control interest rate risk?

Setting internal gap limits and running stress scenarios