Exam 7: Risks of Financial Institutions

Which term refers to the risk that interest income will decrease as maturing assets are replaced with new, more current assets?

The relationship of a limited or fixed upside return with a high probability and the potential large downside loss with a small probability is an example of an asset's credit risk to an FI.

An FI is exposed to reinvestment risk by holding longer-term assets relative to liabilities.

Unanticipated withdrawals by liability holders are a major part of liquidity risk.

Credit risk stems from non-repayment or delays in repayment of either principal or interest on FI assets.

Firm-specific credit risk can be reduced by diversification.

As commercial banks move from their traditional banking activities of deposit taking and lending and shift more of their activities to trading, they are more subject to

Contingent claims are assets and liabilities that will come into existence at a future time often due to a customer's action...

What type of risk focuses upon future contingencies?

A mortgage loan officer is found to have provided false documentation that resulted in a lower interest rate on a loan approved for one of her friends.The loan was subsequently added to a loan pool, securitized and sold.Which of the following risks applies to the false documentation by the employee?

The risk that an investor will be forced to place earnings from a loan or security into a lower yielding investment is known as

Bank of the Atlantic has liabilities of $4 million with an average maturity of two years paying interest rates of 4.0 percent annually.It has assets of $5 million with an average maturity of 5 years earning interest rates of 6.0 percent annually.What is the bank's net interest income in dollars in year 3, if it refinances all of its liabilities at a rate of 8.0 percent?

Funding a portion of assets with equity capital means that hedging risk does not require perfect matching of the assets and liabilities.

With regard to market value risk, rising interest rates

During a liquidity crisis assets might be sold at a loss because of the rising interest rates caused by financial institutions attempting to raise funds.

"Matching the book" or trying to match the maturities of assets and liabilities is intended to protect the FI from

A U.S.bank has €40 million in assets and €50 million in CDs.All other assets and liabilities are in U.S.dollars.This bank is

The asymmetric return distribution (relatively high probability of anticipated return; lower probability of default) on risky debt exposes the FI to

Economies of scope involve the ability to lower the average cost of operations by expanding the output of financial services.

Managerial monitoring efficiency and credit risk management strategies affect the risk of the loan portfolio.