Question 1

Selling loans without recourse is a way for FIs to remove loans from their balance sheet for the purpose of reducing the cost associated with reserve requirements.

Accepted Answer

A) True 
 B)False

Question 2

Currently, this basic type of loan sale contracts comprises the bulk of loan sales trading.

Accepted Answer

A) Participations. 
B) Originations. 
C) Syndications. 
D) Assignments. 
E) Transfers. 
A) Participations. 
B) Originations. 
C) Syndications. 
D) Assignments. 
E) Transfers.

Question 3

The growth of the commercial paper market has hurt the market for loan sales by

Accepted Answer

A) offering some borrowers alternatives to bank loans. 
B) underpricing the banks that sell loans. 
C) fostering the credit crunch. 
D) adding another regulatory layer since the SEC requires shelf registration of new issues. 
E) increasing moral hazard concerns in the market. 
A) offering some borrowers alternatives to bank loans. 
B) underpricing the banks that sell loans. 
C) fostering the credit crunch. 
D) adding another regulatory layer since the SEC requires shelf registration of new issues. 
E) increasing moral hazard concerns in the market.

Question 4

Which of the following refers to a period when a borrower is unable to meet a payment obligation to lenders and other creditors?

Accepted Answer

A) Window. 
B) Financial distress. 
C) Foreclosure. 
D) Recession. 
E) Assignment. 
A) Window. 
B) Financial distress. 
C) Foreclosure. 
D) Recession. 
E) Assignment.

Question 5

Loan participations are typically sold to correspondent banks because

Accepted Answer

A) they are insiders and can be trusted. 
B) they offer the best prices. 
C) the ongoing relationship offers the greatest monitoring opportunities. 
D) it is a regulatory requirement. 
E) correspondent banks are captive customers. 
A) they are insiders and can be trusted. 
B) they offer the best prices. 
C) the ongoing relationship offers the greatest monitoring opportunities. 
D) it is a regulatory requirement. 
E) correspondent banks are captive customers.

Question 6

Which of the following is NOT a reason for a FI to sell loans with recourse?

Accepted Answer

A) To reduce capital requirements. 
B) To avoid credit risk exposure. 
C) To control interest rate risk exposure. 
D) To avoid regulatory scrutiny. 
E) To make it possible to lend large amounts to an individual borrower. 
A) To reduce capital requirements. 
B) To avoid credit risk exposure. 
C) To control interest rate risk exposure. 
D) To avoid regulatory scrutiny. 
E) To make it possible to lend large amounts to an individual borrower.

Question 7

Which of the following is NOT a reason for using a bad bank as a vehicle to add value in the loan sale process?

Accepted Answer

A) Contracts for managers can be created to maximize the incentives to generate enhanced values from loan sales. 
B) The bad bank enables bad assets to be managed by loan workout specialists. 
C) The bad bank does not need to be concerned about liquidity needs since it does not have any deposits. 
D) Moving the bad loans off the balance sheet of the good bank will improve the markets perception, and thus performance, of the good bank. 
E) The good bank-bad bank structure increases information asymmetries regarding the value of the good bank's assets. 
A) Contracts for managers can be created to maximize the incentives to generate enhanced values from loan sales. 
B) The bad bank enables bad assets to be managed by loan workout specialists. 
C) The bad bank does not need to be concerned about liquidity needs since it does not have any deposits. 
D) Moving the bad loans off the balance sheet of the good bank will improve the markets perception, and thus performance, of the good bank. 
E) The good bank-bad bank structure increases information asymmetries regarding the value of the good bank's assets.

Question 8

A buyer of a loan participation is exposed to

Accepted Answer

A) risk exposure to the original borrower defaulting. 
B) risk exposure to the failure of the selling bank. 
C) moral hazard problems because the borrower is no longer monitored by the seller. 
D) risk exposure to the original borrower defaulting and risk exposure to the failure of the selling bank. 
E) risk exposure to the original borrower defaulting and moral hazard problems because the borrower is no longer monitored by the seller. 
A) risk exposure to the original borrower defaulting. 
B) risk exposure to the failure of the selling bank. 
C) moral hazard problems because the borrower is no longer monitored by the seller. 
D) risk exposure to the original borrower defaulting and risk exposure to the failure of the selling bank. 
E) risk exposure to the original borrower defaulting and moral hazard problems because the borrower is no longer monitored by the seller.

Question 9

A distinction between distressed and non-distressed is usually made when selling highly leveraged transactions loans (HLTs).

Accepted Answer

A) True 
 B)False

Question 10

Some corporate customers that rely on bank loans may see the sale of one of its loan by the bank as an adverse event in the customer-bank relationship.

Accepted Answer

A) True 
 B)False

Question 11

Loan sales by foreign banks

Accepted Answer

A) are forbidden in the U.S.domestic market. 
B) must be of a certain size to be purchased by a domestic FI. 
C) are allowed to be purchased by domestic FIs if the loan is to a highly-rated company. 
D) must be of a certain duration, and be sold without recourse in order to be purchased by a domestic FI. 
E) have no restrictions placed on them. 
A) are forbidden in the U.S.domestic market. 
B) must be of a certain size to be purchased by a domestic FI. 
C) are allowed to be purchased by domestic FIs if the loan is to a highly-rated company. 
D) must be of a certain duration, and be sold without recourse in order to be purchased by a domestic FI. 
E) have no restrictions placed on them.

Question 12

Vulture funds are

Accepted Answer

A) management consulting firms that employ turn-around specialists. 
B) portfolios consisting of stakes in distressed companies. 
C) mutual funds that grow by acquiring their competitors. 
D) mutual funds that invest only in highly-leveraged transactions. 
E) companies offering burial insurance contracts. 
A) management consulting firms that employ turn-around specialists. 
B) portfolios consisting of stakes in distressed companies. 
C) mutual funds that grow by acquiring their competitors. 
D) mutual funds that invest only in highly-leveraged transactions. 
E) companies offering burial insurance contracts.

Question 13

Which of the following is NOT a factor that may tend to increase loan sales in the future?

Accepted Answer

A) There is an increased trend to apply credit ratings to loans offered for sale, increasing the attractiveness to secondary market purchasers. 
B) The federal government takeover of Fannie Mae and Freddie Mac means that the loans held by these agencies can never be sold to other entities. 
C) Because of their special credit monitoring skills, FIs have a comparative advantage in making loans to below-investment grade companies and then selling the loan. 
D) The trend toward marked-to-market accounting for assets makes bank loans more like securities so they may be easier to sell. 
E) The risk-based capital requirements of the Bank for International Settlements give banks a strong incentive to sell commercial loans to decrease their amount of risky assets. 
A) There is an increased trend to apply credit ratings to loans offered for sale, increasing the attractiveness to secondary market purchasers. 
B) The federal government takeover of Fannie Mae and Freddie Mac means that the loans held by these agencies can never be sold to other entities. 
C) Because of their special credit monitoring skills, FIs have a comparative advantage in making loans to below-investment grade companies and then selling the loan. 
D) The trend toward marked-to-market accounting for assets makes bank loans more like securities so they may be easier to sell. 
E) The risk-based capital requirements of the Bank for International Settlements give banks a strong incentive to sell commercial loans to decrease their amount of risky assets.

Question 14

Which of the following rely on non-distressed HLT loan purchases as a means of diversifying without the high cost of developing costly nationwide banking networks?

Accepted Answer

A) Bank loan mutual funds. 
B) Credit unions. 
C) Foreign banks. 
D) Investment banks. 
E) Vulture funds. 
A) Bank loan mutual funds. 
B) Credit unions. 
C) Foreign banks. 
D) Investment banks. 
E) Vulture funds.

Question 15

Which of the following aided in allowing Federal Government Agencies (such as the FDIC) to sell loans of institutions for which the agency has become responsible?

Accepted Answer

A) National Banking Act. 
B) Financial Services Modernization Act. 
C) Savings Institutions Reform Act. 
D) Glass-Steagall Act. 
E) Federal Debt Collection Improvement Act. 
A) National Banking Act. 
B) Financial Services Modernization Act. 
C) Savings Institutions Reform Act. 
D) Glass-Steagall Act. 
E) Federal Debt Collection Improvement Act.

Question 16

The European Commission has warned banks they could face heightened capital requirements if they continue to hold non-performing loans following proposed revisions ot the capital requirements regulation.

Accepted Answer

A) True 
 B)False

Question 17

The sellers of domestic loans and HLT loans include all of the following EXCEPT

Accepted Answer

A) major money center banks. 
B) foreign banks. 
C) U.S.government and its agencies 
D) non-financial companies. 
E) investment banks. 
A) major money center banks. 
B) foreign banks. 
C) U.S.government and its agencies 
D) non-financial companies. 
E) investment banks.

Question 18

If an FI embraces the concept of good bank/bad bank,

Accepted Answer

A) bad bank assets are passed on to the institutions correspondent bank that is required to accept the assets. 
B) good bank assets are organized into a closed end mutual fund which then sells shares to raise funds for the bad bank. 
C) the bad bank is a special purpose vehicle (SPV) that is organized to liquidate non-performing loans. 
D) the bad bank assets are funded by FDIC insured deposits. 
E) the bad bank is placed under the supervision of the Resolution Trust Corporation. 
A) bad bank assets are passed on to the institutions correspondent bank that is required to accept the assets. 
B) good bank assets are organized into a closed end mutual fund which then sells shares to raise funds for the bad bank. 
C) the bad bank is a special purpose vehicle (SPV) that is organized to liquidate non-performing loans. 
D) the bad bank assets are funded by FDIC insured deposits. 
E) the bad bank is placed under the supervision of the Resolution Trust Corporation.

Question 19

The major buyers of U.S.domestic loans of non-distressed companies include all of the following EXCEPT

Accepted Answer

A) domestic banks. 
B) foreign banks. 
C) the Resolution Trust Corporation. 
D) non-financial companies. 
E) closed-end bank loan mutual funds. 
A) domestic banks. 
B) foreign banks. 
C) the Resolution Trust Corporation. 
D) non-financial companies. 
E) closed-end bank loan mutual funds.

Question 20

In a loan participation

Accepted Answer

A) the holder (buyer) is not a party to the underlying credit agreement, so the initial contract between the loan seller and the borrower remains in place after the sale. 
B) the holder (buyer) is a party to the underlying credit agreement, so the initial contract between the loan seller and the borrower remains in place after the sale. 
C) the holder (buyer) can vote only on material changes to the loan contract such as changes in interest rate or collateral backing the loan. 
D) the holder (buyer) is not a party to the underlying credit agreement, so the initial contract between the loan seller and the borrower remains in place after the sale and the holder (buyer) can vote only on material changes to the loan contract such as changes in interest rate or collateral backing the loan. 
E) the holder (buyer) is a party to the underlying credit agreement, so the initial contract between the loan seller and the borrower remains in place after the sale and the holder (buyer) can vote only on material changes to the loan contract such as changes in interest rate or collateral backing the loan. 
A) the holder (buyer) is not a party to the underlying credit agreement, so the initial contract between the loan seller and the borrower remains in place after the sale. 
B) the holder (buyer) is a party to the underlying credit agreement, so the initial contract between the loan seller and the borrower remains in place after the sale. 
C) the holder (buyer) can vote only on material changes to the loan contract such as changes in interest rate or collateral backing the loan. 
D) the holder (buyer) is not a party to the underlying credit agreement, so the initial contract between the loan seller and the borrower remains in place after the sale and the holder (buyer) can vote only on material changes to the loan contract such as changes in interest rate or collateral backing the loan. 
E) the holder (buyer) is a party to the underlying credit agreement, so the initial contract between the loan seller and the borrower remains in place after the sale and the holder (buyer) can vote only on material changes to the loan contract such as changes in interest rate or collateral backing the loan.

Exam 26: Loan Sales

Selling loans without recourse is a way for FIs to remove loans from their balance sheet for the purpose of reducing the cost associated with reserve requirements.

Currently, this basic type of loan sale contracts comprises the bulk of loan sales trading.

The growth of the commercial paper market has hurt the market for loan sales by

Which of the following refers to a period when a borrower is unable to meet a payment obligation to lenders and other creditors?

Loan participations are typically sold to correspondent banks because

Which of the following is NOT a reason for a FI to sell loans with recourse?

Which of the following is NOT a reason for using a bad bank as a vehicle to add value in the loan sale process?

A buyer of a loan participation is exposed to

A distinction between distressed and non-distressed is usually made when selling highly leveraged transactions loans (HLTs).

Some corporate customers that rely on bank loans may see the sale of one of its loan by the bank as an adverse event in the customer-bank relationship.

Loan sales by foreign banks

Vulture funds are

Which of the following is NOT a factor that may tend to increase loan sales in the future?

Which of the following rely on non-distressed HLT loan purchases as a means of diversifying without the high cost of developing costly nationwide banking networks?

Which of the following aided in allowing Federal Government Agencies (such as the FDIC) to sell loans of institutions for which the agency has become responsible?

The European Commission has warned banks they could face heightened capital requirements if they continue to hold non-performing loans following proposed revisions ot the capital requirements regulation.

The sellers of domestic loans and HLT loans include all of the following EXCEPT

If an FI embraces the concept of good bank/bad bank,

The major buyers of U.S.domestic loans of non-distressed companies include all of the following EXCEPT

In a loan participation

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Fintech Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Securitization

Filters