Banking Fundamentals Flashcards
7 cards from real CBP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Banking Fundamentals flashcards as text
What is the main function of a clearinghouse in the banking system?
Answer: To act as an intermediary that nets and settles transactions between banks, reducing settlement risk
Clearinghouses facilitate the settlement of interbank transactions by netting obligations and guaranteeing trade completion, significantly reducing counterparty and systemic risk.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) primarily responded to:
Answer: The 2007-2008 global financial crisis and its systemic risk revelations
Dodd-Frank was enacted in direct response to the 2008 financial crisis, creating new oversight bodies like the FSOC and CFPB while expanding regulation of systemically important financial institutions.
A bank issues a $10 million letter of credit (LC) on behalf of an importer. This transaction primarily protects the:
Answer: Exporter (beneficiary) by guaranteeing payment if the importer meets the LC conditions
A letter of credit guarantees that the exporter will receive payment from the issuing bank as long as the required documents proving shipment are presented.
Which risk category encompasses the potential loss from failures in internal processes, people, systems, or external events?
Answer: Operational risk
Operational risk covers losses from inadequate or failed internal processes, human errors, system failures, and external events such as fraud, natural disasters, or cyber attacks.
When a bank securitizes a pool of mortgage loans, the primary goal is to:
Answer: Convert illiquid loan assets into marketable securities to free up capital and funding
Securitization allows banks to package loans into securities sold to investors, removing assets from the balance sheet, improving liquidity, and generating fee income.
The 'lender of last resort' function of a central bank refers to its role in:
Answer: Lending to solvent but illiquid banks during financial stress to prevent systemic collapse
As lender of last resort, the central bank provides emergency liquidity to financially sound institutions facing temporary funding shortages to prevent bank runs from spreading.
In a bank's income statement, 'provision for credit losses' represents:
Answer: An expense charged to income to build reserves against anticipated future loan defaults
The provision for credit losses is a non-cash expense that increases the allowance for loan losses on the balance sheet to reflect management's estimate of probable future defaults.