Question 1

Which of the following observations concerning concentration limits is not true?

Accepted Answer

A) Limits are set by assessing the borrower's current portfolio, its operating unit's business plans, its economists' economic projections, and its strategic plans. 
B) FIs set concentration limits to reduce exposures to certain industries and increase exposures to others. 
C) When two industry groups' performances are highly correlated, an FI may set an aggregate limit of less than the sum of the two individual industry limits. 
D) FIs may set aggregate portfolio limits or combinations of industry and geographic limits. 
E) Bank regulators in recent years have limited loan concentrations to individual borrowers to a maximum of 30 percent of a bank's capital. 
A) Limits are set by assessing the borrower's current portfolio, its operating unit's business plans, its economists' economic projections, and its strategic plans. 
B) FIs set concentration limits to reduce exposures to certain industries and increase exposures to others. 
C) When two industry groups' performances are highly correlated, an FI may set an aggregate limit of less than the sum of the two individual industry limits. 
D) FIs may set aggregate portfolio limits or combinations of industry and geographic limits. 
E) Bank regulators in recent years have limited loan concentrations to individual borrowers to a maximum of 30 percent of a bank's capital.

Question 2

Banks whose loan portfolio composition deviates from the national benchmark should immediately implement policies to move toward benchmark alignment.

Accepted Answer

A) True 
 B)False

Question 3

If a bank's concentration limit (as a percentage of capital) is 25.0 percent, and it does not permit a loss of any loan to impact more than 10 percent of its capital, what is the expected recovery on loans that are defaulted?

Accepted Answer

A) 20 percent. 
B) 30 percent. 
C) 40 percent. 
D) 50 percent. 
E) 60 percent. 
A) 20 percent. 
B) 30 percent. 
C) 40 percent. 
D) 50 percent. 
E) 60 percent.

Question 4

The concentration limit method of managing credit risk concentration involves estimating the minimum loan amount to a single customer as a percent of capital.

Accepted Answer

A) True 
 B)False

Question 5

A regression of sectoral loan losses against total loans losses, both measured as a percentage of total loans, of a bank results in the following beta coefficients for the real estate (RE) and commercial (CL) loan variables: bRE = 1.2, bCL = 1.6. The intercept for both regressions is zero. The results can be interpreted as

Accepted Answer

A) If the total loan losses of the bank measured as a percentage of total loans is 2 percent, the losses in the real estate sector, measured as a percentage of total loans, is 1.2 percent. 
B) If the total loan losses of the bank measured as a percentage of total loans is 2 percent, the losses in the commercial sector, measured as a percentage of total loans, is 3.2 percent. 
C) If the total loan losses of the bank measured as a percentage of total loans is 2 percent, the losses in the commercial sector, measured as a percentage of total loans, is 6.4 percent. 
D) If the total loan losses of the bank measured as a percentage of total loans is 3 percent, the losses in the commercial sector, measured as a percentage of total loans, is 5.2 percent. 
E) If the total loan losses of the bank measured as a percentage of total loans is 3 percent, the losses in the real estate sector, measured as a percentage of total loans, is 4 percent. 
A) If the total loan losses of the bank measured as a percentage of total loans is 2 percent, the losses in the real estate sector, measured as a percentage of total loans, is 1.2 percent. 
B) If the total loan losses of the bank measured as a percentage of total loans is 2 percent, the losses in the commercial sector, measured as a percentage of total loans, is 3.2 percent. 
C) If the total loan losses of the bank measured as a percentage of total loans is 2 percent, the losses in the commercial sector, measured as a percentage of total loans, is 6.4 percent. 
D) If the total loan losses of the bank measured as a percentage of total loans is 3 percent, the losses in the commercial sector, measured as a percentage of total loans, is 5.2 percent. 
E) If the total loan losses of the bank measured as a percentage of total loans is 3 percent, the losses in the real estate sector, measured as a percentage of total loans, is 4 percent.

Question 6

Migration analysis is a tool to measure credit concentration risk and refers to

Accepted Answer

A) the identification of problem loans in sectors by observing periodic migration of industries. 
B) the identification of credit concentration by observing trends in market borrowing by different sectors of the industry. 
C) the identification of credit concentration by observing the downgrading or upgrading of credit ratings on securities in different sectors of industry by public rating agencies. 
D) the identification of borrowing patterns such as long or short term debt by different sectors of industry. 
E) the identification of shifts in debt/asset ratios of firms in specific industries. 
A) the identification of problem loans in sectors by observing periodic migration of industries. 
B) the identification of credit concentration by observing trends in market borrowing by different sectors of the industry. 
C) the identification of credit concentration by observing the downgrading or upgrading of credit ratings on securities in different sectors of industry by public rating agencies. 
D) the identification of borrowing patterns such as long or short term debt by different sectors of industry. 
E) the identification of shifts in debt/asset ratios of firms in specific industries.

Question 7

LNW Bank is charging a 12 percent interest rate on a $5,000,000 loan. The bank also charged $100,000 in fees to originate the loan. The bank has a cost of funds of 8 percent. The borrower has a five percent chance of default, and if default occurs, the bank expects to recover 90 percent of the principal and interest. What is the risk of the loan using the Moody's Analytics model?

Accepted Answer

A) 4.75 percent. 
B) 0.48 percent. 
C) 6.89 percent. 
D) 2.18 percent. 
E) 1.50 percent. 
A) 4.75 percent. 
B) 0.48 percent. 
C) 6.89 percent. 
D) 2.18 percent. 
E) 1.50 percent.

Question 8

Regina Bank has a policy of limiting their loans to any single customer so that the maximum loss as a percent of capital will not exceed 20 percent for both secured and unsecured loans. The limit has been adopted under the assumption that if the unsecured loan is defaulted, there will be no recovery of interest or principal payments. For loans that are secured (collateralized), it is expected that 40 percent of interest and principal will be collected. What is the concentration limit (as a percent of capital) for unsecured loans made by Kansas Bank?

Accepted Answer

A) 5 percent. 
B) 10 percent. 
C) 15 percent. 
D) 20 percent. 
E) 25 percent. 
A) 5 percent. 
B) 10 percent. 
C) 15 percent. 
D) 20 percent. 
E) 25 percent.

Question 9

Loan loss ratio models are based on historical loan loss ratios of specific sectors relative to the historic loan loss ratios of the FI's entire loan portfolio.

Accepted Answer

A) True 
 B)False

Question 10

A regression of sectoral loan losses against total loans losses, both measured as a percentage of total loans, of a bank results in the following beta coefficients for the real estate (RE) and commercial (CL) loan variables: bRE = 1.2, bCL = 1.6. The intercept for both regressions is zero. The results indicate that for the bank

Accepted Answer

A) the real estate loan losses were systematically lower than the total loan losses. 
B) the real estate loan losses were systematically higher than the total loan losses. 
C) the commercial loan losses are systematically higher than the total loan losses. 
D) the real estate loan losses were systematically lower than the total loan losses, and the commercial loan losses are systematically higher than the total loan losses. 
E) the real estate loan losses were systematically higher than the total loan losses, and the commercial loan losses are systematically higher than the total loan losses. 
A) the real estate loan losses were systematically lower than the total loan losses. 
B) the real estate loan losses were systematically higher than the total loan losses. 
C) the commercial loan losses are systematically higher than the total loan losses. 
D) the real estate loan losses were systematically lower than the total loan losses, and the commercial loan losses are systematically higher than the total loan losses. 
E) the real estate loan losses were systematically higher than the total loan losses, and the commercial loan losses are systematically higher than the total loan losses.

Question 11

As part of measuring unobservable default risk between borrowers, the Moody's Analytics model decomposes asset returns into

Accepted Answer

A) credit risk and market risk. 
B) systematic risk and unsystematic risk. 
C) market risk and sovereign risk. 
D) regional risk and maturity risk. 
E) systematic risk and default risk. 
A) credit risk and market risk. 
B) systematic risk and unsystematic risk. 
C) market risk and sovereign risk. 
D) regional risk and maturity risk. 
E) systematic risk and default risk.

Which of the following observations concerning concentration limits is not true?

Banks whose loan portfolio composition deviates from the national benchmark should immediately implement policies to move toward benchmark alignment.

If a bank's concentration limit (as a percentage of capital) is 25.0 percent, and it does not permit a loss of any loan to impact more than 10 percent of its capital, what is the expected recovery on loans that are defaulted?

The concentration limit method of managing credit risk concentration involves estimating the minimum loan amount to a single customer as a percent of capital.

Migration analysis is a tool to measure credit concentration risk and refers to

Loan loss ratio models are based on historical loan loss ratios of specific sectors relative to the historic loan loss ratios of the FI's entire loan portfolio.

As part of measuring unobservable default risk between borrowers, the Moody's Analytics model decomposes asset returns into

Why Are Financial Institutions Special

Deposit-Taking Institutions

Finance Companies

Securities, Brokerage, and Investment Banking

Mutual Funds, Hedge Funds, and Pension Funds

Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loans

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational 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

Loan Sales

Securitization Index

Filters

Exam 11: Credit Risk: Loan Portfolio and Concentration Risk

Which of the following observations concerning concentration limits is not true?

Banks whose loan portfolio composition deviates from the national benchmark should immediately implement policies to move toward benchmark alignment.

If a bank's concentration limit (as a percentage of capital) is 25.0 percent, and it does not permit a loss of any loan to impact more than 10 percent of its capital, what is the expected recovery on loans that are defaulted?

The concentration limit method of managing credit risk concentration involves estimating the minimum loan amount to a single customer as a percent of capital.

Migration analysis is a tool to measure credit concentration risk and refers to

Loan loss ratio models are based on historical loan loss ratios of specific sectors relative to the historic loan loss ratios of the FI's entire loan portfolio.

As part of measuring unobservable default risk between borrowers, the Moody's Analytics model decomposes asset returns into

Why Are Financial Institutions Special

Deposit-Taking Institutions

Finance Companies

Securities, Brokerage, and Investment Banking

Mutual Funds, Hedge Funds, and Pension Funds

Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loans

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational 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

Loan Sales

Securitization Index

Filters