Banking Exam Treasury Management 2 — Questions and Answers
Question 1: Which metric measures the sensitivity of a bank's net interest income to changes in interest rates?
- Tier 1 Capital Ratio
- Interest Rate Sensitivity Gap (Correct answer)
- Loan-to-Value Ratio
- Return on Equity
Correct answer: Interest Rate Sensitivity Gap
The interest rate sensitivity gap measures the difference between rate-sensitive assets and rate-sensitive liabilities, indicating how NII will change when rates move.
Question 2: The Federal Open Market Committee (FOMC) primarily influences bank treasury operations by:
- Setting reserve requirements for all US banks
- Setting the federal funds rate target (Correct answer)
- Approving bank mergers and acquisitions
- Auditing bank financial statements quarterly
Correct answer: Setting the federal funds rate target
The FOMC sets the federal funds rate target, which directly drives short-term borrowing costs and the broader interest rate environment that bank treasuries must navigate.
Question 3: In treasury management, 'duration' is best defined as:
- The length of time a bank has been in operation
- A measure of a bond's price sensitivity to interest rate changes (Correct answer)
- The average maturity of a bank's entire loan portfolio
- The time required to process an international wire transfer
Correct answer: A measure of a bond's price sensitivity to interest rate changes
Duration quantifies how much a bond's price will change for a given change in interest rates, serving as the primary risk metric for managing fixed-income portfolios.
Question 4: Which of the following qualifies as a Level 1 High-Quality Liquid Asset (HQLA) under Basel III?
- Commercial real estate loans
- U.S. Treasury securities (Correct answer)
- Subordinated corporate bonds rated BB+
- Private equity fund investments
Correct answer: U.S. Treasury securities
U.S. Treasury securities are Level 1 HQLA under Basel III because they can be quickly converted to cash with minimal loss of value even under stressed market conditions.
Question 5: A bank with more rate-sensitive liabilities than rate-sensitive assets is described as:
- Positively gapped
- Duration neutral
- Negatively gapped (liability-sensitive) (Correct answer)
- Overcapitalized
Correct answer: Negatively gapped (liability-sensitive)
A liability-sensitive or negative gap position means liabilities reprice faster than assets, so rising interest rates will compress net interest income.
Question 6: The primary purpose of the Net Stable Funding Ratio (NSFR) under Basel III is to:
- Ensure banks maintain adequate capital against credit losses
- Require banks to fund long-term assets with stable, long-term funding sources (Correct answer)
- Limit the size of a bank's derivatives portfolio
- Regulate interest rates offered on consumer deposits
Correct answer: Require banks to fund long-term assets with stable, long-term funding sources
The NSFR requires banks to maintain a stable funding profile relative to their asset composition over a one-year horizon, reducing structural liquidity risk.
Question 7: What is the primary purpose of a bank's investment securities portfolio in treasury management?
- To provide unsecured credit to large corporations
- To generate fee income from trade finance activities
- To provide liquidity, earn interest income, and manage interest rate risk (Correct answer)
- To fund the bank's overseas expansion plans
Correct answer: To provide liquidity, earn interest income, and manage interest rate risk
Banks hold investment securities as a secondary liquidity reserve, to earn interest income, and to adjust the overall duration and interest rate sensitivity of the balance sheet.
Banking Exam Treasury Management 2
Which metric measures the sensitivity of a bank's net interest income to changes in interest rates?