Exam 4: Risk of Financial Institutions

An FI that invests $100 million into corporate bonds is exposed to the following risks:

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.

The potential exercise of unanticipated contingencies can result in:

The BIS definition 'the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events' encompasses which of the following risks?

The market risk of an FI increases with:

Based on the case of Indymac Bank, explain how liquidity risk and insolvency risk caused a bank failure despite deposit insurance. Outline the chain of events that led to this financial institution's illiquidity and eventual closure.

The increased opportunity for a bank to securitise loans into liquid and tradable assets is likely to affect which type of risk?

A bank has liabilities of $4 million with an average maturity of two years paying interest rates of 4 per cent annually. It has assets of $5 million with an average maturity of 5 years earning interest rates of 6 per cent annually. To what risk is the bank exposed?

Market risk is defined as the risk:

A 'fire-sale' means that an FI increases its liquidity position by selling part of its assets at the assets' fair market values.

An FI with a low level of leverage, such as a high level of capitalisation:

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, securitised and sold. Which of the following risks applies to the false documentation by the employee?

What type of risk focuses upon future contingencies?

An FI that finances a German euro loan with US dollar deposits is exposed to:

The major difference between firm-specific credit risk and systematic credit risk is that:

Many of the various risks, such as interest rate risk, market risk, credit risk and off-balance-sheet risk, faced by an FI often are interrelated with each other.

What does systematic credit risk mean?

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

An Australian FI that holds a net short asset position in $US is exposed to foreign exchange rate risk if the $US appreciates against the $A over the investment period.

An FI that holds more short-term assets relative to long-term liabilities is: