Exam 7: Risks of Financial Institutions

An FI that is short-funded faces the risk that the return of reinvesting assets could exceed the cost of funding those assets.

The risk that many borrowers in a particular country fail to repay their loans as a result of a recession in that country relates to

To be immunized against foreign currency and foreign interest rate risk, an FI should match both the size and maturities of its foreign assets and foreign liabilities.

Firm-specific credit risk can be eliminated by diversification.

Credit risk exposes the lender to the uncertainty that only interest payments may not be received.

The major source of risk exposure resulting from issuance of standby letters of credit is

Foreign exchange rate risk occurs because foreign exchange rates are volatile and can impact banks with exposed foreign assets and/or liabilities.

If the loans in the bank's portfolio are all negatively correlated, what will be the impact on the bank's credit risk exposure?

The risk that borrowers are unable to repay their loans on time is

FIs that make loans or buy bonds with long maturity liabilities are more exposed to interest rate risk than FIs that make loans or buy bonds with short maturity liabilities.