CBP International Banking Practices 2 — Questions and Answers
Question 1: Which international body sets the Basel III capital adequacy standards for banks?
- International Monetary Fund
- Bank for International Settlements (Correct answer)
- World Bank
- Financial Stability Board
Correct answer: Bank for International Settlements
The Basel III framework was developed by the Basel Committee on Banking Supervision, which operates under the Bank for International Settlements (BIS).
Question 2: A US bank receives a demand deposit from a foreign national who is a Politically Exposed Person (PEP). What is the MOST critical immediate step?
- Refuse the deposit outright
- Apply enhanced due diligence procedures (Correct answer)
- Report to FinCEN immediately
- Freeze the funds pending review
Correct answer: Apply enhanced due diligence procedures
BSA/AML regulations require enhanced due diligence (EDD) for PEPs, not automatic refusal or immediate reporting unless suspicious activity is identified.
Question 3: Under a Confirmed Irrevocable Letter of Credit, who bears the payment obligation if the issuing bank defaults?
- The applicant (buyer)
- The beneficiary (seller)
- The confirming bank (Correct answer)
- The correspondent bank
Correct answer: The confirming bank
In a confirmed LC, the confirming bank adds its own independent payment guarantee, so it must pay even if the issuing bank fails.
Question 4: Which SWIFT message type is used for interbank funds transfers (cover payments)?
- MT 103
- MT 202 (Correct answer)
- MT 700
- MT 300
Correct answer: MT 202
MT 202 is the SWIFT General Financial Institution Transfer used for bank-to-bank (cover) payments, while MT 103 handles customer credit transfers.
Question 5: What is 'transfer pricing' in the context of international banking?
- The exchange rate used to convert foreign profits
- The internal rate charged between subsidiaries within a multinational banking group (Correct answer)
- The fee charged for SWIFT wire transfers
- The spread between bid and ask rates on foreign exchange
Correct answer: The internal rate charged between subsidiaries within a multinational banking group
Transfer pricing refers to the internal rates that different entities within the same banking group charge each other for funds or services, subject to arm's-length standards.
Question 6: A documentary collection under URC 522 is best described as:
- A bank guarantee issued on behalf of an importer
- A bank's conditional commitment to pay upon presentation of compliant documents
- A bank acting as intermediary to transmit documents against payment or acceptance (Correct answer)
- An open account arrangement with credit insurance
Correct answer: A bank acting as intermediary to transmit documents against payment or acceptance
Under the ICC's URC 522 rules, documentary collections involve banks transmitting shipping documents to the buyer's bank for release against payment (D/P) or acceptance (D/A), without the bank's own payment guarantee.
Question 7: Which term describes the risk that a counterparty in a foreign exchange transaction will fail to deliver the currency sold after the other party has already delivered?
- Settlement risk (Herstatt risk) (Correct answer)
- Translation risk
- Economic exposure
- Basis risk
Correct answer: Settlement risk (Herstatt risk)
Herstatt risk (or settlement risk) arises from time-zone differences in FX settlement, famously illustrated by the 1974 collapse of Bankhaus Herstatt.
CBP International Banking Practices 2
Which international body sets the Basel III capital adequacy standards for banks?