Banking Exam Commercial Bank 2 — Questions and Answers
Question 1: Which regulatory ratio requires U.S. commercial banks to hold a minimum percentage of deposits as reserves at the Federal Reserve?
- Capital adequacy ratio
- Reserve requirement ratio (Correct answer)
- Loan-to-deposit ratio
- Liquidity coverage ratio
Correct answer: Reserve requirement ratio
The reserve requirement ratio mandates that banks keep a specified percentage of deposits either in their vaults or on deposit at the Federal Reserve.
Question 2: What is a 'certificate of deposit' (CD) issued by a commercial bank?
- A bond issued to raise long-term capital
- A time deposit that pays a fixed interest rate until a specified maturity date (Correct answer)
- A government-guaranteed savings instrument
- A negotiable instrument used in interbank lending
Correct answer: A time deposit that pays a fixed interest rate until a specified maturity date
A CD is a time deposit product where customers deposit funds for a fixed term at a specified interest rate, typically penalizing early withdrawal.
Question 3: In commercial banking, what does 'net interest margin' (NIM) measure?
- The bank's total profit after taxes
- The difference between interest earned on loans and interest paid on deposits, divided by earning assets (Correct answer)
- The ratio of non-performing loans to total loans
- The bank's return on equity
Correct answer: The difference between interest earned on loans and interest paid on deposits, divided by earning assets
NIM measures a bank's profitability by comparing the net interest income (interest earned minus interest paid) to its average earning assets.
Question 4: What is the primary function of a commercial bank's trust department?
- Approving commercial loan applications
- Managing assets on behalf of individuals, estates, and institutions (Correct answer)
- Issuing new stock to raise capital
- Processing interbank wire transfers
Correct answer: Managing assets on behalf of individuals, estates, and institutions
A trust department manages financial assets, estates, and trusts on behalf of clients, acting as a fiduciary.
Question 5: Which type of commercial bank account allows unlimited check writing and is designed for everyday business transactions?
- Money market account
- Demand deposit account (DDA) (Correct answer)
- Time deposit account
- Sweep account
Correct answer: Demand deposit account (DDA)
A demand deposit account (DDA) allows account holders to withdraw funds or write checks at any time without advance notice.
Question 6: What does the term 'correspondent banking' refer to?
- A bank serving only corporate clients
- An arrangement where one bank provides services to another bank in a different geographic area (Correct answer)
- A bank that lends exclusively to other banks
- A regulatory relationship between a bank and the Federal Reserve
Correct answer: An arrangement where one bank provides services to another bank in a different geographic area
Correspondent banking involves one bank (the correspondent) providing services such as wire transfers, foreign exchange, and check clearing to another bank (the respondent) that lacks direct access to those services.
Question 7: Under Basel III rules, what is the purpose of the Liquidity Coverage Ratio (LCR)?
- Ensure banks maintain enough equity capital to absorb losses
- Require banks to hold sufficient high-quality liquid assets to survive a 30-day stress scenario (Correct answer)
- Limit the amount of loans a bank can make relative to its deposits
- Set a maximum leverage ratio for large commercial banks
Correct answer: Require banks to hold sufficient high-quality liquid assets to survive a 30-day stress scenario
The LCR requires banks to hold enough high-quality liquid assets (HQLA) to cover net cash outflows over a 30-day stress period.
Banking Exam Commercial Bank 2
Which regulatory ratio requires U.S. commercial banks to hold a minimum percentage of deposits as reserves at the Federal Reserve?