Financial Institution Operations & Management Flashcards

A financial institution discovers that an employee has been processing fictitious loan payments to cover embezzlement. This type of fraud is BEST categorized under which risk category in the Basel II/III framework?

Answer: Operational risk

Internal fraud by employees is classified as operational risk, which covers losses from inadequate or failed internal processes, people, and systems.

Under the Community Reinvestment Act (CRA), large retail banks are evaluated on which three performance tests?

Answer: Lending, investment, and service tests

Large banks are evaluated under CRA's lending test (credit extension to LMI borrowers), investment test (qualified investments), and service test (branch access and community development services).

Which scenario BEST describes a 'classic' run on a financial institution?

Answer: Mass depositor withdrawals triggered by fear of insolvency, creating a self-fulfilling liquidity crisis

A bank run occurs when depositors collectively withdraw funds out of fear the institution will fail, draining liquidity and potentially causing the very failure they feared.

In a financial institution's internal controls framework, the concept of 'segregation of duties' is designed to prevent:

Answer: Any single employee from controlling all phases of a transaction

Segregation of duties requires that no single employee can initiate, approve, record, and reconcile transactions, limiting opportunities for undetected fraud or error.

The Dodd-Frank Act's Volcker Rule primarily restricts federally insured depository institutions from:

Answer: Engaging in proprietary trading and owning certain hedge/private equity funds

The Volcker Rule prohibits banks from engaging in short-term proprietary trading of securities and from acquiring or retaining interests in hedge funds and private equity funds.

When conducting a board-level review of a financial institution's strategic plan, directors should PRIMARILY evaluate:

Answer: Whether the plan's risk appetite aligns with capital adequacy and long-term sustainability

Directors must assess whether strategic goals are achievable within the institution's risk appetite and capital base, ensuring long-term viability.

A financial institution's 'net interest margin' (NIM) is BEST defined as:

Answer: The difference between interest income and interest expense, divided by average earning assets

NIM measures the profitability of the institution's lending activities by comparing net interest income to its average interest-earning assets.