6.

The market structure of the banking sector has changed since deregulation of the financial system during
the 1980s. Which statement most closely reflects the current structure of the banking sector in Australia?
Chapter 02 - Test Bank

A. Foreign banks dominate in number and share of total assets.

Multiple Choice Questions B. Major Australian banks no longer hold the largest share of total assets.
C. Total assets are fairly evenly distributed between the major, regional and foreign banks.
D. Major banks maintain the highest percentage of branches and share of total assets.
1. Deregulation of the banking sector throughout the late 1970s and the 1980s sought to:
7. Which of the following features is a role of a bank?

A. reduce the reliance of major Australian companies on international capital markets.

B. reduce the excess profits of banks. A. Attracting funds from the capital markets to facilitate borrowing by the household sector
C. reduce the discrimination against banks owing to direct controls on them only. B. Facilitating the flow of funds from borrowers to lenders
D. provide reduced control on the money supply. C. Facilitating the flow of funds from savers to borrowers
D. Managing the level of interest rates
2. The changes to the regulations for the banking industry under deregulation in the mid 1980s have resulted
in _______ the growth of bank sector. 8. Banks have gradually moved to liability management in the management of their balance sheets. Which
statement best describes liability management?

A. decreasing
B. increasing A. The loan portfolio is tailored to match the available deposit base.
C. not altering B. The deposit base and other funding sources are managed in order to fund loan and other commitments.
D. dramatically decreasing C. The ratio of debt to equity is managed to meet capital adequacy requirements.
D. The liability to assets ratio is maintained within central bank standards.
3. Which of the following statements concerning banks is incorrect?
9. For banks, asset management refers to:

A. In Australia, banks currently account for the largest share of assets of all financial institutions.
B. Bank loans and commitments must be supported by a minimum specified amount of capital. A. managing the assets of the banks; that is, their deposits.
C. At least 50% of the capital requirement must be in the form of Tier 1 capital. B. managing the real assets, the bank buildings.
D. The Australian Reserve Bank monitors capital adequacy requirements for banks. C. managing the loans portfolio.
D. protecting the deposits by using derivatives.
4. Unlike most other businesses, a bank's balance sheet is made up mainly of:
10. For banks, liability management refers to:

A. real assets and financial liabilities.

B. real liabilities and financial liabilities. A. managing the liabilities of the banks; that is, the loans.
C. real assets and real liabilities. B. banks ensuring they have sufficient funds by managing their deposit base.
D. financial assets and liabilities. C. managing the real assets, the bank buildings.
D. protecting the loans and other commitments by using derivatives.
5. The level of banks' share of assets of all Australian financial institutions from the 1950s onwards first
_______, then in the 1980s _______ and recently has _______ owing to banks forming consolidated 11. When a bank raises funds in the international markets to fund new lending growth, it is involved in:
corporate entities.

A. asset management.
A. increased; decreased; increased B. off-balance-sheet business.
B. increased; decreased; remained stable C. liability management.
C. decreased; increased; decreased D. derivative management.
D. decreased; increased; remained stable
12. Off-balance-sheet business for a bank refers to: 18. Which of the following is a bank liability?

A. a bank's income. A. Consumer loans

B. a bank's contingent liabilities. B. Lease finance
C. assets that will appear on the forthcoming balance sheet. C. Bills receivable
D. transactions recorded on the previous balance sheet. D. Certificates of deposit
13. Which of the following about a bank's activities is incorrect? 19. Which of the following statements about deposits is correct?

A. A bank's loans are its assets. A. Call accounts represent a fluctuating source of funds for banks.
B. Off-balance-sheet business items are contingent liabilities. B. Term deposits are funds lodged with a bank for longer than two weeks.
C. Liability management is the management of a bank's loans. C. As current accounts are highly liquid, they form an unstable source of funds for a bank.
D. Banks typically have high credit ratings. D. A cheque account may pay interest.
14. The assets on a bank's balance sheet are: 20. Which of the following statements about banks' current accounts is incorrect?

A. the sources of funds. A. Current accounts today generally pay interest.

B. the uses of funds. B. Current accounts are a relatively stable source of bank funds.
C. the different types of deposits the bank offers. C. Deregulation had a major impact on current accounts.
D. equal to the liabilities of the banks. D. Current accounts form an increasingly important type of asset for banks.

15. The liabilities on a bank's balance sheet are: 21. Which of the following statements is NOT true of term deposits?

A. the sources of funds. A. They are less liquid than a current deposit.
B. the uses of funds. B. They usually offer a higher return than a current deposit.
C. the different types of loans the bank offers. C. They are attractive to investors who expect interest rates to fall.
D. equal to the assets of the banks. D. They are generally negotiable instruments.

16. Each of the following balance sheet portfolio items are liabilities of a bank, except: 22. As a depositor shifts funds from current deposits to term deposits in a bank, generally the depositor’s:

A. term deposits. A. liquidity increases and credit risk increases.

B. bill acceptance facilities. B. liquidity decreases and interest income increases.
C. certificates of deposit. C. liquidity decreases and interest income decreases.
D. overdrafts. D. implicit interest increases and explicit interest decreases.

17. Each of the following balance sheet portfolio items are sources of funds for a bank, except: 23. If a bank required more short-term funding, it would issue:

A. term deposits. A. a certificate of deposit.

B. bill acceptance facilities. B. a debenture.
C. certificates of deposit. C. an unsecured note.
D. overdrafts. D. preference shares.
24. Which of the following is generally a highly liquid instrument? 30. With regard to bank bills, the bill is sold at a discount:

A. A bank bill A. because the bank needs to find a buyer.

B. A certificate of deposit B. to encourage buyers.
C. Neither a bank bill nor a certificate of deposit C. because the difference between the initial price and the final sale price is the return to the holder.
D. Both bank bills and certificates of deposit are liquid instruments D. because the bank pays the face value of the funds to the borrower at maturity.
25. The term ‘negotiable' in relation to a security means: 31. With regard to bank bills, the expression ‘the issuer sells the bill at the best discount’ means the issuer:

A. its price can be bargained for when sold. A. is providing the funding.
B. it can be sold easily. B. is acting as mediator between the borrower and the bank.
C. its buyer can negotiate its price when buying. C. is selling the bill into the market at the lowest yield.
D. it is reasonably illiquid and will drop in price when sold. D. pays the lowest face value of the funds to the holder at maturity.
26. Which of the following regarding certificates of deposit (CDs) is correct? 32. With regard to bank bills, the actual role of the acceptor is to:

A. CDs pay daily interest instead of monthly as for ordinary deposits. A. provide the initial funding.
B. CDs generally pay higher interest because they are not liquid. B. act as mediator between the borrower and bank.
C. The rate of interest on a CD can be adjusted quickly. C. issue the bank bill.
D. CDs with a face value of more than $100 000 are non-negotiable. D. pay the face value of the funds to the holder at maturity.

27. The advantage of a CD to a bank is/are: 33. Which of the following is incorrect in relation to bill financing?

A. its rate of interest may be adjusted quickly. A. The drawer is the party seeking the funds.
B. it can be sold quickly in the money market for cash. B. If a bank accepts the bill this enhances its credit quality.
C. it is a negotiable instrument. C. An issuer will seek to sell the bill in the market at the highest yield.
D. all of the given choices. D. Bills are sold at a discount to face value.

28. A major difference between a bank's term deposit and a certificate of deposit is: 34. For a bank, an advantage of bill financing is:

A. a term deposit represents an asset for a bank, while a certificate of deposit is a liability. A. the bank earns income from accepting bills.
B. a certificate of deposit does not pay interest until maturity. B. the bank doesn't necessarily have to use its own funds.
C. a certificate of deposit is illiquid when compared with a term deposit. C. interest rates on bill funding can be adjusted rapidly.
D. a certificate of deposit is a high-credit-risk instrument when compared with a term deposit. D. all of the given answers.

29. Which of the following about CDs is incorrect? 35. Which of the following statements about bill acceptance facilities is incorrect?

A. CDs are issued directly into the money markets. A. When a bank discounts a bill for the issuer, it buys it.
B. CDs don't include interest until maturity. B. When a bank that holds a bill rediscounts it the bank onsells it.
C. CDs are called discount securities. C. When a bank acts as an acceptor it will pay the face value of the bill to the holder at maturity.
D. CDs are issued by large, creditworthy companies. D. If interest rates change before a bank bill matures, the bank can change the interest rate on it.
36. Commercial banks take part in the money markets as: 41. Which of the following statements regarding the foreign currency liabilities of a bank is incorrect?

A. lenders of funds only. A. The large international markets are important sources of funds for commercial banks.
B. borrowers of funds only. B. Australian banks occasionally issue debt securities into the international markets to raise sums ranging
C. both lenders and borrowers of funds. from $20 million to $50 million.
D. underwriters only. C. Foreign currency liabilities issued into the euromarkets are typically denominated in US dollars.
D. After deregulation commercial banks were able to expand their international funding sources.
37. Foreign currency liabilities have increased in importance as a source of funds for Australian banks. Which
of the following statements is NOT a major reason? 42. All of the following financial securities are considered ‘uses of funds' by banks except:
i. deregulation of the foreign exchange market
ii. diversification of funding sources
iii. demand from multinational corporate clients A. commercial bills.
iv. internationalisation of global financial markets B. credit cards.
v. avoidance of the non-callable deposit prudential requirement C. certificates of deposit.
vi. expansion of banks' asset-base denominated in foreign currencies D. overdrafts.

43. If you take out a mortgage from a bank, the mortgage is a/an:
A. v
B. ii
C. i A. liability to the bank and an asset to you.
D. All of the given answers are correct. B. liability to you and an asset to the bank.
C. liability to both you and the bank.
38. Alternatives to the usual source of long-term bank funds that have the characteristics of both debt and D. asset to both you and the bank.
equity are called:
44. The interest rate BBSW refers to:

A. secured debentures.
B. transferable certificates of deposit. A. the reference rate for medium-term funding.
C. promissory notes. B. a rate calculated each day from the offer rate of the last daily sale in the bank bill market.
D. subordinated notes. C. the average mid-point of the bid and offer rates in the bank bill market.
D. the bank bill security rate.
39. The following balance sheet portfolio items are all assets of a bank, except:
45. Banks invest in government securities because:

A. overdrafts.
B. lease finance. A. they offer high yield owing to their risk.
C. certificates of deposit. B. they offer a low yield owing to their illiquidity.
D. credit card draw-downs. C. all government bonds offer protection against inflation risk.
D. they can be used as security against banks' borrowing.
40. A short-term discount security issued by a drawer at a discount, with the promise to repay the face value at
maturity, is called: 46. Which of the following statements about commercial lending is incorrect?

A. a commercial paper. A. The term loan is the main type of lending provided by banks to firms.
B. a commercial bill. B. Typically, term loans are for maturities ranging from 5 to 15 years.
C. a certificate of deposit. C. To extend commercial bill financing a bank may provide the firm with a rollover facility.
D. all of the given answers. D. Banks can provide flexible funding called an overdraft to firms.
47. Which of the following about bank lending to government is incorrect? 53. Which of the following categories represents the most significant proportion of total off-balance-sheet
business of the banks?

A. Securities issued by governments are usually regarded as low risk.

B. Banks invest in government securities because they are a source of liquidity. A. Direct credit substitutes
C. Banks invest in T-notes because they provide short-term income streams. B. Trade and performance-related items
D. Government securities enable a bank to manage the maturity structure of its balance sheet. C. Commitments
D. Market-rate-related transactions
48. Off-balance-sheet business for a bank refers to:
54. Which of the following categories represents the most significant proportion of total market-rate-related
off-balance-sheet business of the banks?
A. deposits and loans longer than one year.
B. transactions that are currently only a contingent liability.
C. call deposits that may be withdrawn on demand. A. Currency swap agreements
D. consumer loans that are in default. B. Foreign exchange contracts
C. Interest rate swaps
49. All of the following are off-balance-sheet transactions of a bank except: D. Interest rate futures
55. An example of an ‘off-sheet business' transaction that banks are generally involved in is:
A. documentary letters of credit.
B. performance guarantees.
C. underwriting facilities. A. providing a ‘standby letter of credit'.
D. bills receivable. B. providing a note issuance facility.
C. providing a short-term, self-liquidating trade contingency.
50. In recent times, there had been a substantial expansion in fee-related income for banks. What is the D. all of the given answers.
principal reason for this?
56. Which of the following statements about direct credit substitutes provided by a commercial bank is
incorrect?
A. Increased confidence in banks by individual investors
B. Increased off-sheet business (OBS) for banks
C. Reduced guidelines by Australian bank supervisor APRA A. They are provided to support a client's financial obligations.
D. Increased deposits in banks B. An example of a direct credit substitute is a bank guarantee.
C. The bank provides funding to a third party instead of the client providing the funding.
51. Which of the following statements is true for off-balance-sheet business for banks? D. With a direct credit substitute a bank's client can raise funds directly from the financial markets.
57. Off-balance-sheet business is usually divided into four major categories:
A. Off-balance-sheet business is a small part of a bank's income.
B. Off-balance-sheet business is recorded on a bank's statement of income and expense.
C. Off-balance-sheet business represents fee-based income. A. Direct credit substitutes, trade and performance-related items, commitments and trade guarantees.
D. Off-balance-sheet business records deposits that do not fit on the balance sheet. B. Direct credit substitutes, trade and performance-related items, commitments and market-related
transactions.
52. Which of the following statements about market-rate-related items such as forward-rate agreements is C. Direct credit substitutes, trade and performance-related items, commitments and underwriting facilities.
incorrect? D. Direct credit substitutes, ‘standby letters of credit', commitments and market-related transactions.

58. A ‘commitment’ by a bank is:

A. They are generally called off-balance-sheet items.
B. They are liabilities that may require an outflow of funds for a bank.
C. They are included in the BIS capital-adequacy guidelines. A. a form of swap.
D. They form a small part of banks' OBS business. B. a promise by a large depositor to provide extra funds to the bank.
C. the unused balance on a bank credit card.
D. an undertaking to advance funds or to acquire an asset in the future.
59. Which of the following is not a commitment by a bank? 65. The requirement and observation of standards designed to ensure the stability and soundness of a financial
system is called:

A. Outright forward purchase agreement

B. Underwriting facilities A. fiscal policy.
C. Credit card limit approvals unused by cardholder B. monetary policy.
D. Currency swap C. prudential supervision.
D. the Basel accord.
60. Which of the following is NOT an argument for some form of government regulation of the banking
system? 66. The Basel capital adequacy requirements apply to:

A. The money-creation role of banks A. all financial institutions.

B. A major source of funds to the banks comes from households who need their savings protected B. banks, investment banks and merchant banks only.
C. The excess return on assets that banks have been making in recent years C. all financial institutions supervised by ASIC.
D. Maintaining confidence in the financial system D. all banks registered with APRA and some other financial institutions.

61. Which of the following is NOT associated with the purpose of regulating financial institutions? 67. Some of the elements in assessing capital adequacy requirements for banks under the Basel II capital
accord are:

A. Providing stability of the money supply

B. Directing flow of funds to priority areas A. credit risk, liquidity risk and interest rate risk.
C. Maintaining the soundness and stability of the financial system B. credit risk, market risk and type of capital held.
D. Lowering the cost of funds C. default risk, interest rate risk and market risk.
D. default risk, liquidity risk and type of capital held.
62. The Australian institution APRA is responsible for the regulatory supervision of financial institutions such
as banks and credit unions. APRA stands for: 68. According to the textbook, the Basel II approach to capital adequacy for banks involves ____ main
elements.

A. Australian Practice and Regulatory Association.

B. Australian Prudential Regulation Authority. A. three
C. Australian Prudential Rule Authority. B. four
D. Australian Practice and Regulatory Authority. C. five
D. six
63. Which of the following institutions are supervised by APRA?
69. Which of the following does NOT apply to Tier 1 capital?

A. Building societies
B. Commercial banks A. Tier 1 capital is described as ‘core capital'.
C. Credit unions B. Tier 1 capital must constitute at least 50% of a bank's capital base.
D. All of the given answers C. Paid-up ordinary shares can be included in Tier 1 capital.
D. Cumulative irredeemable APRA-approved preference shares can be included in Tier 1 capital.
64. Within the context of the Corporations Law in Australia, the supervision of financial market integrity and
consumer protection is done by: 70. Under Basel II prudential standards, an institution is required to maintain a risk-based capital ratio of _____
of total-risk-weighted assets.

A. APRA.
B. ASIC. A. 2.00 percent
C. RBA. B. 4.00 percent
D. ACCC. C. 8.00 percent
D. 10.00 percent
71. Which of the following statements about regulatory capital is false? 76. The Basel II risk weighting factor for a bank loan to an Australian company with a Moody's Investors
Service rating of C is:

A. Tier 1 capital includes paid-up ordinary shares, retained earnings, non-cumulative irredeemable
preference shares and general reserves. A. 20%.
B. Tier 2 capital includes general provision for doubtful debts, revaluation reserves of premises, mandatory B. 50%.
convertible notes and approved perpetual subordinated debt. C. 100%.
C. Tier 1 capital is core capital, including paid-up ordinary shares, non-cumulative irredeemable preference D. 150%.
shares and general reserves.
D. Tier 2 capital includes general reserves for doubtful debts, asset revaluation reserves of premises, other 77. Under Pillar 1 of the Basel II framework, the risk weight for a residential housing loan is determined by
preference shares, mandatory convertible notes, cumulative redeemable preference shares and perpetual the:
subordinated debt.

72. The Pillar 1 approach of Basel II capital adequacy incorporates the following three risk components: A. amount borrowed.
B. level of mortgage insurance.
C. house valuation.
A. credit risk, interest-rate risk and market risk. D. all of the given answers.
B. default risk, interest-rate risk and operational risk.
C. credit risk, market risk and operational risk. 78. A bank provides a loan of $1 million to a company that has an A rating. Calculate the dollar value of
D. default risk, foreign exchange risk and operational risk. capital required under the capital adequacy requirements to support the facility.

73. Which of the following statements regarding capital adequacy requirements is incorrect?
A. $16 000
B. $40 000
A. Existing credit-risk guidelines are extended to include market risk arising from a bank's trading C. $80 000
activities. D. $120 000
B. Regulators focus on credit risk, market risks, operational risk and type of capital held.
C. Eligible Tier 1 capital must constitute at least 70% of a bank's capital base. 79. A bank provides documentary letters of credit for a company that has a credit rating of A+. The face value
D. Tier 2 capital is divided into upper and lower Tier 2 parts. of contracts outstanding is $2 million. Calculate the dollar value of capital required under the capital
adequacy requirements to support these facilities, given that the bank supervisor's credit conversion factor
74. Under the capital adequacy requirement for banks, in order to fund a $100 000 loan for a multinational is 20%.
corporate client with a Standard & Poor's rating of AA, a bank will:

A. $6 400
A. assign a risk-weighting of 20% for the balance. B. $16 000
B. allocate Tier 1 and Tier 2 capital to the loan according to the riskiness of the company. C. $160 000
C. seek funding in the euromarkets to minimise the capital adequacy requirements. D. $240 000
D. apply a risk weighting of 50% to the loan to determine the total capital requirement.
80. A large commercial bank operating in the international markets will generally apply to the banks'
75. In the Basel II standardised approach to external rating grades, the asset counterparty weights for capital supervisor to use the _____ to credit risk.
adequacy guidelines are:

A. advanced internal ratings-based approach

A. 10%, 20%, 50% and 100%. B. foundation external ratings-based approach
B. 10%, 50%, 100% and 150%. C. standardised approach
C. 20%, 50%, 100% and 150%. D. standardised approach with external ratings
D. 20%, 50%, 100% and 200%.
81. Under Basel II capital accord, the approach to credit risk that requires a bank to assign risk weights given 86. For a commercial bank's market discipline, the capital adequacy guidelines for its disclosure and
by the prudential supervisor is called: transparency requirements fall under:

A. an advanced approach. A. Pillar 1.

B. a foundation approach. B. Pillar 2.
C. a standardised approach. C. Pillar 3.
D. advanced-internal ratings. D. Pillar 4.

82. The risk that arises from chance of loss as a result of inadequate internal bank processes is called: 87. Under _____ of Basel II, bank supervisors should review and evaluate banks' internal capital adequacy
assessments.

A. default risk.
B. interest rate risk. A. Pillar 4
C. market risk. B. Pillar 3
D. operational risk. C. Pillar 1
D. Pillar 2
83. Which of the following statements about recently adopted guidelines covering capital requirements for
market risk that banks are required to perform is false? 88. Part of a bank's liquidity management is to hold a portfolio of:

A. Banks use a risk measurement model based on a VaR approach. A. term loans.
B. Banks estimate the sensitivity of portfolio components to small changes in prices. B. mortgages.
C. Banks must hold capital against risk of loss from changes in interest rates. C. Commonwealth government securities.
D. Banks hold a fixed allocation of funds between various balance sheet assets and off-balance-sheet D. credit card loans.
business.
89. In relation to a bank, liquidity management means:
84. For a commercial bank operating in foreign exchange, interest rate and equity markets, the capital adequacy
guidelines for the market risk it is exposed to fall under:
A. the bank's ability to quickly convert deposits into loans.
B. the bank's ability to onsell its loans.
A. Pillar 1. C. the bank's ability to have funds available when depositors' funds mature.
B. Pillar 2. D. the bank's policies and practices in identifying and managing its loans portfolios.
C. Pillar 3.
D. Pillar 4.

85. For a commercial bank's normal day-to-day business, the capital adequacy guidelines for the operational True / False Questions
risk it is exposed to fall under:

90. Commercial banks are the main type of financial institution in a financial system because they hold the
A. Pillar 1. largest amounts of financial assets.
B. Pillar 2.
C. Pillar 3. True False
D. Pillar 4.
91. The greater the dominance of commercial banks in an economy, the less regulation required.

True False

92. Banks obtain funds from many areas. These sources of funds appear as liabilities on a bank's balance sheet.

True False
93. Liability management is where banks actively manage their liabilities in order to meet future loan demand. 101. Describe how a bill acceptance facility works.

True False

94. Call deposits are funds lodged in a bank account for a specified short-term period.

True False
95. A bank may either issue a negotiable certificate of deposit directly into the money markets or place it
directly with another bank with surplus funds.

True False 102. Discuss the main features of housing finance.

96. One of the important attributes of certificates of deposit for a bank is the ability to adjust the yields on new
issues.

True False
97. As the majority of banks' assets are short-term loans, they are active in the money markets in order to fund
part of their lending.

True False

98. A bank may seek to obtain funds by issuing unsecured notes with a collaterised floating charge over its 103. Discuss the main features of a bank's commercial lending.
deposits.

True False

99. Foreign currency liabilities are debt instruments issued into another country but not denominated in the
currency of that country.

True False

104. Within the context of off-balance-sheet business, explain direct credit substitutes, trade- and performance-
Short Answer Questions related items and any differences between these items.

100. Briefly discuss the sources of funds for a commercial bank.

 Est time: <1 minute
Chapter 02 - Test Bank Key Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system.
Section: Introduction

5. The level of banks' share of assets of all Australian financial institutions from the 1950s onwards first
_______, then in the 1980s _______ and recently has _______ owing to banks forming consolidated
corporate entities.
Multiple Choice Questions

A. increased; decreased; increased

1. Deregulation of the banking sector throughout the late 1970s and the 1980s sought to:
B. increased; decreased; remained stable
C. decreased; increased; decreased
A. reduce the reliance of major Australian companies on international capital markets. D. decreased; increased; remained stable
B. reduce the excess profits of banks. Difficulty: Hard
C. reduce the discrimination against banks owing to direct controls on them only. Est time: <1 minute
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system.
D. provide reduced control on the money supply. Section: Introduction

Difficulty: Medium
Est time: <1 minute
6. The market structure of the banking sector has changed since deregulation of the financial system
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system. during the 1980s. Which statement most closely reflects the current structure of the banking sector in
Section: Introduction
Australia?
2. The changes to the regulations for the banking industry under deregulation in the mid 1980s have
resulted in _______ the growth of bank sector.
A. Foreign banks dominate in number and share of total assets.
B. Major Australian banks no longer hold the largest share of total assets.
A. decreasing C. Total assets are fairly evenly distributed between the major, regional and foreign banks.
B. increasing D. Major banks maintain the highest percentage of branches and share of total assets.
C. not altering Difficulty: Easy
D. dramatically decreasing Est time: <1 minute
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system.
Section: Introduction
Difficulty: Easy
Est time: <1 minute
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system. 7. Which of the following features is a role of a bank?
Section: Introduction

3. Which of the following statements concerning banks is incorrect?

A. Attracting funds from the capital markets to facilitate borrowing by the household sector
B. Facilitating the flow of funds from borrowers to lenders
A. In Australia, banks currently account for the largest share of assets of all financial institutions. C. Facilitating the flow of funds from savers to borrowers
B. Bank loans and commitments must be supported by a minimum specified amount of capital. D. Managing the level of interest rates
C. At least 50% of the capital requirement must be in the form of Tier 1 capital. Difficulty: Easy
D. The Australian Reserve Bank monitors capital adequacy requirements for banks. Est time: <1 minute
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system.
Section: Introduction
Difficulty: Easy
Est time: <1 minute
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system. 8. Banks have gradually moved to liability management in the management of their balance sheets. Which
Section: Introduction
statement best describes liability management?
4. Unlike most other businesses, a bank's balance sheet is made up mainly of:
A. The loan portfolio is tailored to match the available deposit base.
A. real assets and financial liabilities. B. The deposit base and other funding sources are managed in order to fund loan and other
B. real liabilities and financial liabilities. commitments.
C. real assets and real liabilities. C. The ratio of debt to equity is managed to meet capital adequacy requirements.
D. financial assets and liabilities. D. The liability to assets ratio is maintained within central bank standards.
Difficulty: Medium
Difficulty: Easy Est time: <1 minute
 Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system.
Section: 2.1 The main activities of commercial banking
13. Which of the following about a bank's activities is incorrect?

9. For banks, asset management refers to:

A. A bank's loans are its assets.
B. Off-balance-sheet business items are contingent liabilities.
A. managing the assets of the banks; that is, their deposits. C. Liability management is the management of a bank's loans.
B. managing the real assets, the bank buildings. D. Banks typically have high credit ratings.
C. managing the loans portfolio.
Difficulty: Medium
D. protecting the deposits by using derivatives. Est time: <1 minute
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system.
Difficulty: Easy Section: 2.1 The main activities of commercial banking
Est time: <1 minute
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system.
Section: 2.1 The main activities of commercial banking
14. The assets on a bank's balance sheet are:

10. For banks, liability management refers to:

A. the sources of funds.
B. the uses of funds.
A. managing the liabilities of the banks; that is, the loans. C. the different types of deposits the bank offers.
B. banks ensuring they have sufficient funds by managing their deposit base. D. equal to the liabilities of the banks.
C. managing the real assets, the bank buildings.
Difficulty: Medium
D. protecting the loans and other commitments by using derivatives. Est time: <1 minute
Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
Difficulty: Easy of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Est time: <1 minute Section: 2.2 Sources of funds
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system.
Section: 2.1 The main activities of commercial banking
15. The liabilities on a bank's balance sheet are:
11. When a bank raises funds in the international markets to fund new lending growth, it is involved in:
A. the sources of funds.
A. asset management. B. the uses of funds.
B. off-balance-sheet business. C. the different types of loans the bank offers.
C. liability management. D. equal to the assets of the banks.
D. derivative management. Difficulty: Medium
Est time: <1 minute
Difficulty: Medium Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
Est time: <1 minute of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system. Section: 2.2 Sources of funds
Section: 2.1 The main activities of commercial banking
16. Each of the following balance sheet portfolio items are liabilities of a bank, except:
12. Off-balance-sheet business for a bank refers to:

A. term deposits.
A. a bank's income. B. bill acceptance facilities.
B. a bank's contingent liabilities. C. certificates of deposit.
C. assets that will appear on the forthcoming balance sheet. D. overdrafts.
D. transactions recorded on the previous balance sheet.
Difficulty: Medium
Difficulty: Medium Est time: <1 minute
Est time: <1 minute Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system. of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Section: 2.1 The main activities of commercial banking Section: 2.2 Sources of funds
17. Each of the following balance sheet portfolio items are sources of funds for a bank, except: 21. Which of the following statements is NOT true of term deposits?

A. term deposits. A. They are less liquid than a current deposit.

B. bill acceptance facilities. B. They usually offer a higher return than a current deposit.
C. certificates of deposit. C. They are attractive to investors who expect interest rates to fall.
D. overdrafts. D. They are generally negotiable instruments.
Difficulty: Medium Difficulty: Medium
Est time: <1 minute Est time: <1 minute
Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital. of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Section: 2.2 Sources of funds Section: 2.2 Sources of funds

18. Which of the following is a bank liability? 22. As a depositor shifts funds from current deposits to term deposits in a bank, generally the depositor’s:

A. Consumer loans A. liquidity increases and credit risk increases.

B. Lease finance B. liquidity decreases and interest income increases.
C. Bills receivable C. liquidity decreases and interest income decreases.
D. Certificates of deposit D. implicit interest increases and explicit interest decreases.
Difficulty: Medium Difficulty: Medium
Est time: <1 minute Est time: <1 minute
Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital. of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Section: 2.2 Sources of funds Section: 2.2 Sources of funds

19. Which of the following statements about deposits is correct? 23. If a bank required more short-term funding, it would issue:

A. Call accounts represent a fluctuating source of funds for banks. A. a certificate of deposit.
B. Term deposits are funds lodged with a bank for longer than two weeks. B. a debenture.
C. As current accounts are highly liquid, they form an unstable source of funds for a bank. C. an unsecured note.
D. A cheque account may pay interest. D. preference shares.
Difficulty: Easy Difficulty: Medium
Est time: <1 minute Est time: <1 minute
Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital. of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Section: 2.2 Sources of funds Section: 2.2 Sources of funds

20. Which of the following statements about banks' current accounts is incorrect? 24. Which of the following is generally a highly liquid instrument?

A. Current accounts today generally pay interest. A. A bank bill

B. Current accounts are a relatively stable source of bank funds. B. A certificate of deposit
C. Deregulation had a major impact on current accounts. C. Neither a bank bill nor a certificate of deposit
D. Current accounts form an increasingly important type of asset for banks. D. Both bank bills and certificates of deposit are liquid instruments
Difficulty: Easy Difficulty: Medium
Est time: <1 minute Est time: <1 minute
Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital. of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Section: 2.2 Sources of funds Section: 2.2 Sources of funds
25. The term ‘negotiable' in relation to a security means: 29. Which of the following about CDs is incorrect?

A. its price can be bargained for when sold. A. CDs are issued directly into the money markets.
B. it can be sold easily. B. CDs don't include interest until maturity.
C. its buyer can negotiate its price when buying. C. CDs are called discount securities.
D. it is reasonably illiquid and will drop in price when sold. D. CDs are issued by large, creditworthy companies.
Difficulty: Medium Difficulty: Medium
Est time: <1 minute Est time: <1 minute
Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital. of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Section: 2.2 Sources of funds Section: 2.2 Sources of funds

26. Which of the following regarding certificates of deposit (CDs) is correct? 30. With regard to bank bills, the bill is sold at a discount:

A. CDs pay daily interest instead of monthly as for ordinary deposits. A. because the bank needs to find a buyer.
B. CDs generally pay higher interest because they are not liquid. B. to encourage buyers.
C. The rate of interest on a CD can be adjusted quickly. C. because the difference between the initial price and the final sale price is the return to the holder.
D. CDs with a face value of more than $100 000 are non-negotiable. D. because the bank pays the face value of the funds to the borrower at maturity.
Difficulty: Medium Difficulty: Hard
Est time: <1 minute Est time: <1 minute
Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital. of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Section: 2.2 Sources of funds Section: 2.2 Sources of funds

27. The advantage of a CD to a bank is/are: 31. With regard to bank bills, the expression ‘the issuer sells the bill at the best discount’ means the issuer:

A. its rate of interest may be adjusted quickly. A. is providing the funding.

B. it can be sold quickly in the money market for cash. B. is acting as mediator between the borrower and the bank.
C. it is a negotiable instrument. C. is selling the bill into the market at the lowest yield.
D. all of the given choices. D. pays the lowest face value of the funds to the holder at maturity.
Difficulty: Medium Difficulty: Hard
Est time: <1 minute Est time: <1 minute
Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital. of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Section: 2.2 Sources of funds Section: 2.2 Sources of funds

28. A major difference between a bank's term deposit and a certificate of deposit is: 32. With regard to bank bills, the actual role of the acceptor is to:

A. a term deposit represents an asset for a bank, while a certificate of deposit is a liability. A. provide the initial funding.
B. a certificate of deposit does not pay interest until maturity. B. act as mediator between the borrower and bank.
C. a certificate of deposit is illiquid when compared with a term deposit. C. issue the bank bill.
D. a certificate of deposit is a high-credit-risk instrument when compared with a term deposit. D. pay the face value of the funds to the holder at maturity.
Difficulty: Medium Difficulty: Hard
Est time: <1 minute Est time: <1 minute
Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital. of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Section: 2.2 Sources of funds Section: 2.2 Sources of funds
33. Which of the following is incorrect in relation to bill financing? 37. Foreign currency liabilities have increased in importance as a source of funds for Australian banks.
Which of the following statements is NOT a major reason?
i. deregulation of the foreign exchange market
A. The drawer is the party seeking the funds. ii. diversification of funding sources
B. If a bank accepts the bill this enhances its credit quality. iii. demand from multinational corporate clients
C. An issuer will seek to sell the bill in the market at the highest yield. iv. internationalisation of global financial markets
D. Bills are sold at a discount to face value. v. avoidance of the non-callable deposit prudential requirement
vi. expansion of banks' asset-base denominated in foreign currencies
Difficulty: Hard
Est time: <1 minute
Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Section: 2.2 Sources of funds
A. v
B. ii
34. For a bank, an advantage of bill financing is: C. i
D. All of the given answers are correct.
A. the bank earns income from accepting bills. Difficulty: Hard
Est time: <1 minute
B. the bank doesn't necessarily have to use its own funds. Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
C. interest rates on bill funding can be adjusted rapidly. Section: 2.2 Sources of funds
D. all of the given answers.
38. Alternatives to the usual source of long-term bank funds that have the characteristics of both debt and
Difficulty: Medium
Est time: <1 minute
equity are called:
Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Section: 2.2 Sources of funds
A. secured debentures.
35. Which of the following statements about bill acceptance facilities is incorrect? B. transferable certificates of deposit.
C. promissory notes.
D. subordinated notes.
A. When a bank discounts a bill for the issuer, it buys it.
Difficulty: Medium
B. When a bank that holds a bill rediscounts it the bank onsells it. Est time: <1 minute
C. When a bank acts as an acceptor it will pay the face value of the bill to the holder at maturity. Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
D. If interest rates change before a bank bill matures, the bank can change the interest rate on it. Section: 2.2 Sources of funds

Difficulty: Medium
Est time: <1 minute
39. The following balance sheet portfolio items are all assets of a bank, except:
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system.
Section: 2.1 The main activities of commercial banking

36. Commercial banks take part in the money markets as: A. overdrafts.
B. lease finance.
C. certificates of deposit.
A. lenders of funds only. D. credit card draw-downs.
B. borrowers of funds only. Difficulty: Medium
C. both lenders and borrowers of funds. Est time: <1 minute
Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
D. underwriters only. of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Section: 2.2 Sources of funds
Difficulty: Medium
Est time: <1 minute
Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Section: 2.2 Sources of funds
40. A short-term discount security issued by a drawer at a discount, with the promise to repay the face value 44. The interest rate BBSW refers to:
at maturity, is called:

A. the reference rate for medium-term funding.

A. a commercial paper. B. a rate calculated each day from the offer rate of the last daily sale in the bank bill market.
B. a commercial bill. C. the average mid-point of the bid and offer rates in the bank bill market.
C. a certificate of deposit. D. the bank bill security rate.
D. all of the given answers.
Difficulty: Medium
Est time: <1 minute
Difficulty: Medium
Learning Objective: 02-03 Identify the main uses of funds by commercial banks, including personal and housing lending, commercial lending, lending to government,
Est time: <1 minute
and other bank assets.
Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
Section: 2.3 Uses of funds
of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Section: 2.2 Sources of funds
45. Banks invest in government securities because:
41. Which of the following statements regarding the foreign currency liabilities of a bank is incorrect?

A. they offer high yield owing to their risk.

A. The large international markets are important sources of funds for commercial banks. B. they offer a low yield owing to their illiquidity.
B. Australian banks occasionally issue debt securities into the international markets to raise sums C. all government bonds offer protection against inflation risk.
ranging from $20 million to $50 million. D. they can be used as security against banks' borrowing.
C. Foreign currency liabilities issued into the euromarkets are typically denominated in US dollars.
Difficulty: Medium
D. After deregulation commercial banks were able to expand their international funding sources. Est time: <1 minute
Learning Objective: 02-03 Identify the main uses of funds by commercial banks, including personal and housing lending, commercial lending, lending to government,
Difficulty: Medium and other bank assets.
Est time: <1 minute Section: 2.3 Uses of funds
Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Section: 2.2 Sources of funds
46. Which of the following statements about commercial lending is incorrect?

42. All of the following financial securities are considered ‘uses of funds' by banks except:
A. The term loan is the main type of lending provided by banks to firms.
B. Typically, term loans are for maturities ranging from 5 to 15 years.
A. commercial bills. C. To extend commercial bill financing a bank may provide the firm with a rollover facility.
B. credit cards. D. Banks can provide flexible funding called an overdraft to firms.
C. certificates of deposit.
Difficulty: Medium
D. overdrafts. Est time: <1 minute
Learning Objective: 02-03 Identify the main uses of funds by commercial banks, including personal and housing lending, commercial lending, lending to government,
Difficulty: Medium and other bank assets.
Est time: <1 minute Section: 2.3 Uses of funds
Learning Objective: 02-03 Identify the main uses of funds by commercial banks, including personal and housing lending, commercial lending, lending to government,
and other bank assets.
Section: 2.3 Uses of funds
47. Which of the following about bank lending to government is incorrect?

43. If you take out a mortgage from a bank, the mortgage is a/an:
A. Securities issued by governments are usually regarded as low risk.
B. Banks invest in government securities because they are a source of liquidity.
A. liability to the bank and an asset to you. C. Banks invest in T-notes because they provide short-term income streams.
B. liability to you and an asset to the bank. D. Government securities enable a bank to manage the maturity structure of its balance sheet.
C. liability to both you and the bank.
Difficulty: Medium
D. asset to both you and the bank. Est time: <1 minute
Learning Objective: 02-03 Identify the main uses of funds by commercial banks, including personal and housing lending, commercial lending, lending to government,
Difficulty: Medium and other bank assets.
Est time: <1 minute Section: 2.3 Uses of funds
Learning Objective: 02-03 Identify the main uses of funds by commercial banks, including personal and housing lending, commercial lending, lending to government,
and other bank assets.
Section: 2.3 Uses of funds
48. Off-balance-sheet business for a bank refers to: 52. Which of the following statements about market-rate-related items such as forward-rate agreements is
incorrect?

A. deposits and loans longer than one year.

B. transactions that are currently only a contingent liability. A. They are generally called off-balance-sheet items.
C. call deposits that may be withdrawn on demand. B. They are liabilities that may require an outflow of funds for a bank.
D. consumer loans that are in default. C. They are included in the BIS capital-adequacy guidelines.
D. They form a small part of banks' OBS business.
Difficulty: Medium
Est time: <1 minute
Difficulty: Hard
Learning Objective: 02-04 Outline the nature and importance of banks’ off - balance-sheet business, including direct credit substitutes, trade- and performance-related
Est time: <1 minute
items, commitments and market-rate-related contracts.
Learning Objective: 02-04 Outline the nature and importance of banks’ off - balance-sheet business, including direct credit substitutes, trade- and performance-related
Section: 2.4 Off-balance-sheet business
items, commitments and market-rate-related contracts.
Section: 2.4 Off-balance-sheet business
49. All of the following are off-balance-sheet transactions of a bank except:
53. Which of the following categories represents the most significant proportion of total off-balance-sheet
business of the banks?
A. documentary letters of credit.
B. performance guarantees.
C. underwriting facilities. A. Direct credit substitutes
D. bills receivable. B. Trade and performance-related items
C. Commitments
Difficulty: Medium
Est time: <1 minute D. Market-rate-related transactions
Learning Objective: 02-04 Outline the nature and importance of banks’ off - balance-sheet business, including direct credit substitutes, trade- and performance-related
items, commitments and market-rate-related contracts. Difficulty: Hard
Section: 2.4 Off-balance-sheet business Est time: <1 minute
Learning Objective: 02-04 Outline the nature and importance of banks’ off - balance-sheet business, including direct credit substitutes, trade- and performance-related
items, commitments and market-rate-related contracts.
50. In recent times, there had been a substantial expansion in fee-related income for banks. What is the Section: 2.4 Off-balance-sheet business
principal reason for this?
54. Which of the following categories represents the most significant proportion of total market-rate-related
off-balance-sheet business of the banks?
A. Increased confidence in banks by individual investors
B. Increased off-sheet business (OBS) for banks
C. Reduced guidelines by Australian bank supervisor APRA A. Currency swap agreements
D. Increased deposits in banks B. Foreign exchange contracts
C. Interest rate swaps
Difficulty: Easy
Est time: <1 minute D. Interest rate futures
Learning Objective: 02-04 Outline the nature and importance of banks’ off - balance-sheet business, including direct credit substitutes, trade- and performance-related
items, commitments and market-rate-related contracts. Difficulty: Medium
Section: 2.4 Off-balance-sheet business Est time: <1 minute
Learning Objective: 02-04 Outline the nature and importance of banks’ off - balance-sheet business, including direct credit substitutes, trade- and performance-related
items, commitments and market-rate-related contracts.
51. Which of the following statements is true for off-balance-sheet business for banks? Section: 2.4 Off-balance-sheet business

55. An example of an ‘off-sheet business' transaction that banks are generally involved in is:
A. Off-balance-sheet business is a small part of a bank's income.
B. Off-balance-sheet business is recorded on a bank's statement of income and expense.
C. Off-balance-sheet business represents fee-based income. A. providing a ‘standby letter of credit'.
D. Off-balance-sheet business records deposits that do not fit on the balance sheet. B. providing a note issuance facility.
C. providing a short-term, self-liquidating trade contingency.
Difficulty: Medium
Est time: <1 minute D. all of the given answers.
Learning Objective: 02-04 Outline the nature and importance of banks’ off - balance-sheet business, including direct credit substitutes, trade- and performance-related
items, commitments and market-rate-related contracts. Difficulty: Medium
Section: 2.4 Off-balance-sheet business Est time: <1 minute
Learning Objective: 02-04 Outline the nature and importance of banks’ off - balance-sheet business, including direct credit substitutes, trade- and performance-related
items, commitments and market-rate-related contracts.
Section: 2.4 Off-balance-sheet business
56. Which of the following statements about direct credit substitutes provided by a commercial bank is 60. Which of the following is NOT an argument for some form of government regulation of the banking
incorrect? system?

A. They are provided to support a client's financial obligations. A. The money-creation role of banks
B. An example of a direct credit substitute is a bank guarantee. B. A major source of funds to the banks comes from households who need their savings protected
C. The bank provides funding to a third party instead of the client providing the funding. C. The excess return on assets that banks have been making in recent years
D. With a direct credit substitute a bank's client can raise funds directly from the financial markets. D. Maintaining confidence in the financial system
Difficulty: Medium Difficulty: Medium
Est time: <1 minute Est time: <1 minute
Learning Objective: 02-04 Outline the nature and importance of banks’ off - balance-sheet business, including direct credit substitutes, trade- and performance-related Learning Objective: 02-05 Consider the regulation and prudential supervision of banks.
items, commitments and market-rate-related contracts. Section: 2.5 Regulation and prudential supervision of commercial banks
Section: 2.4 Off-balance-sheet business
61. Which of the following is NOT associated with the purpose of regulating financial institutions?
57. Off-balance-sheet business is usually divided into four major categories:

A. Providing stability of the money supply

A. Direct credit substitutes, trade and performance-related items, commitments and trade guarantees. B. Directing flow of funds to priority areas
B. Direct credit substitutes, trade and performance-related items, commitments and market-related C. Maintaining the soundness and stability of the financial system
transactions.
D. Lowering the cost of funds
C. Direct credit substitutes, trade and performance-related items, commitments and underwriting
facilities. Difficulty: Medium
Est time: <1 minute
D. Direct credit substitutes, ‘standby letters of credit', commitments and market-related transactions. Learning Objective: 02-05 Consider the regulation and prudential supervision of banks.
Section: 2.5 Regulation and prudential supervision of commercial banks
Difficulty: Medium
Est time: <1 minute
Learning Objective: 02-04 Outline the nature and importance of banks’ off - balance-sheet business, including direct credit substitutes, trade- and performance-related
62. The Australian institution APRA is responsible for the regulatory supervision of financial institutions
items, commitments and market-rate-related contracts. such as banks and credit unions. APRA stands for:
Section: 2.4 Off-balance-sheet business

58. A ‘commitment’ by a bank is:

A. Australian Practice and Regulatory Association.
B. Australian Prudential Regulation Authority.
A. a form of swap. C. Australian Prudential Rule Authority.
B. a promise by a large depositor to provide extra funds to the bank. D. Australian Practice and Regulatory Authority.
C. the unused balance on a bank credit card. Difficulty: Easy
D. an undertaking to advance funds or to acquire an asset in the future. Est time: <1 minute
Learning Objective: 02-05 Consider the regulation and prudential supervision of banks.
Section: 2.5 Regulation and prudential supervision of commercial banks
Difficulty: Medium
Est time: <1 minute
Learning Objective: 02-04 Outline the nature and importance of banks’ off - balance-sheet business, including direct credit substitutes, trade- and performance-related 63. Which of the following institutions are supervised by APRA?
items, commitments and market-rate-related contracts.
Section: 2.4 Off-balance-sheet business

59. Which of the following is not a commitment by a bank? A. Building societies

B. Commercial banks
C. Credit unions
A. Outright forward purchase agreement D. All of the given answers
B. Underwriting facilities
Difficulty: Easy
C. Credit card limit approvals unused by cardholder Est time: <1 minute
D. Currency swap Learning Objective: 02-05 Consider the regulation and prudential supervision of banks.
Section: 2.5 Regulation and prudential supervision of commercial banks
Difficulty: Medium
Est time: <1 minute
Learning Objective: 02-04 Outline the nature and importance of banks’ off - balance-sheet business, including direct credit substitutes, trade- and performance-related
items, commitments and market-rate-related contracts.
Section: 2.4 Off-balance-sheet business
64. Within the context of the Corporations Law in Australia, the supervision of financial market integrity 68. According to the textbook, the Basel II approach to capital adequacy for banks involves ____ main
and consumer protection is done by: elements.

A. APRA. A. three
B. ASIC. B. four
C. RBA. C. five
D. ACCC. D. six
Difficulty: Medium Difficulty: Medium
Est time: <1 minute Est time: <1 minute
Learning Objective: 02-05 Consider the regulation and prudential supervision of banks. Learning Objective: 02-06 Understand the background and application of the capital adequacy standards.
Section: 2.5 Regulation and prudential supervision of commercial banks Section: 2.7 Basel II capital accord

65. The requirement and observation of standards designed to ensure the stability and soundness of a 69. Which of the following does NOT apply to Tier 1 capital?
financial system is called:

A. Tier 1 capital is described as ‘core capital'.

A. fiscal policy. B. Tier 1 capital must constitute at least 50% of a bank's capital base.
B. monetary policy. C. Paid-up ordinary shares can be included in Tier 1 capital.
C. prudential supervision. D. Cumulative irredeemable APRA-approved preference shares can be included in Tier 1 capital.
D. the Basel accord.
Difficulty: Hard
Est time: <1 minute
Difficulty: Easy
Learning Objective: 02-06 Understand the background and application of the capital adequacy standards.
Est time: <1 minute
Section: 2.7 Basel II capital accord
Learning Objective: 02-05 Consider the regulation and prudential supervision of banks.
Section: 2.6 A background to the capital adequacy standards
70. Under Basel II prudential standards, an institution is required to maintain a risk-based capital ratio of
66. The Basel capital adequacy requirements apply to: _____ of total-risk-weighted assets.

A. all financial institutions. A. 2.00 percent

B. banks, investment banks and merchant banks only. B. 4.00 percent
C. all financial institutions supervised by ASIC. C. 8.00 percent
D. all banks registered with APRA and some other financial institutions. D. 10.00 percent
Difficulty: Easy Difficulty: Easy
Est time: <1 minute Est time: <1 minute
Learning Objective: 02-06 Understand the background and application of the capital adequacy standards. Learning Objective: 02-05 Consider the regulation and prudential supervision of banks.
Section: 2.6 A background to the capital adequacy standards Section: 2.5 Regulation and prudential supervision of commercial banks

67. Some of the elements in assessing capital adequacy requirements for banks under the Basel II capital 71. Which of the following statements about regulatory capital is false?
accord are:

A. Tier 1 capital includes paid-up ordinary shares, retained earnings, non-cumulative irredeemable
A. credit risk, liquidity risk and interest rate risk. preference shares and general reserves.
B. credit risk, market risk and type of capital held. B. Tier 2 capital includes general provision for doubtful debts, revaluation reserves of premises,
C. default risk, interest rate risk and market risk. mandatory convertible notes and approved perpetual subordinated debt.
D. default risk, liquidity risk and type of capital held. C. Tier 1 capital is core capital, including paid-up ordinary shares, non-cumulative irredeemable
preference shares and general reserves.
Difficulty: Medium
Est time: <1 minute D. Tier 2 capital includes general reserves for doubtful debts, asset revaluation reserves of premises,
Learning Objective: 02-06 Understand the background and application of the capital adequacy standards. other preference shares, mandatory convertible notes, cumulative redeemable preference shares and
Section: 2.7 Basel II capital accord
perpetual subordinated debt.
Difficulty: Hard
Est time: <1 minute
Learning Objective: 02-06 Understand the background and application of the capital adequacy standards.
Section: 2.7 Basel II capital accord
 76. The Basel II risk weighting factor for a bank loan to an Australian company with a Moody's Investors
72. The Pillar 1 approach of Basel II capital adequacy incorporates the following three risk components: Service rating of C is:

A. credit risk, interest-rate risk and market risk. A. 20%.

B. default risk, interest-rate risk and operational risk. B. 50%.
C. credit risk, market risk and operational risk. C. 100%.
D. default risk, foreign exchange risk and operational risk. D. 150%.
Difficulty: Medium
Difficulty: Hard
Est time: <1 minute
Est time: <1 minute
Learning Objective: 02-06 Understand the background and application of the capital adequacy standards.
Learning Objective: 02-08 Understand the standardised approach to credit risk and compute the capital requirements for particular transactions.
Section: 2.7 Basel II capital accord
Section: Extended learning A

73. Which of the following statements regarding capital adequacy requirements is incorrect? 77. Under Pillar 1 of the Basel II framework, the risk weight for a residential housing loan is determined by
the:
A. Existing credit-risk guidelines are extended to include market risk arising from a bank's trading
activities. A. amount borrowed.
B. Regulators focus on credit risk, market risks, operational risk and type of capital held. B. level of mortgage insurance.
C. Eligible Tier 1 capital must constitute at least 70% of a bank's capital base. C. house valuation.
D. Tier 2 capital is divided into upper and lower Tier 2 parts. D. all of the given answers.
Difficulty: Medium
Difficulty: Medium
Est time: <1 minute
Est time: <1 minute
Learning Objective: 02-06 Understand the background and application of the capital adequacy standards.
Learning Objective: 02-08 Understand the standardised approach to credit risk and compute the capital requirements for particular transactions.
Section: 2.7 Basel II capital accord
Section: Extended learning A

74. Under the capital adequacy requirement for banks, in order to fund a $100 000 loan for a multinational 78. A bank provides a loan of $1 million to a company that has an A rating. Calculate the dollar value of
corporate client with a Standard & Poor's rating of AA, a bank will: capital required under the capital adequacy requirements to support the facility.

A. assign a risk-weighting of 20% for the balance. A. $16 000

B. allocate Tier 1 and Tier 2 capital to the loan according to the riskiness of the company. B. $40 000
C. seek funding in the euromarkets to minimise the capital adequacy requirements. C. $80 000
D. apply a risk weighting of 50% to the loan to determine the total capital requirement. D. $120 000
Difficulty: Hard
Difficulty: Hard
Est time: <1 minute
Est time: <1 minute
Learning Objective: 02-08 Understand the standardised approach to credit risk and compute the capital requirements for particular transactions.
Learning Objective: 02-08 Understand the standardised approach to credit risk and compute the capital requirements for particular transactions.
Section: Extended learning A
Section: Extended learning A

75. In the Basel II standardised approach to external rating grades, the asset counterparty weights for capital 79. A bank provides documentary letters of credit for a company that has a credit rating of A+. The face
adequacy guidelines are: value of contracts outstanding is $2 million. Calculate the dollar value of capital required under the
capital adequacy requirements to support these facilities, given that the bank supervisor's credit
conversion factor is 20%.
A. 10%, 20%, 50% and 100%.
B. 10%, 50%, 100% and 150%.
C. 20%, 50%, 100% and 150%. A. $6 400
D. 20%, 50%, 100% and 200%. B. $16 000
Difficulty: Hard C. $160 000
Est time: <1 minute D. $240 000
Learning Objective: 02-08 Understand the standardised approach to credit risk and compute the capital requirements for particular transactions.
Section: Extended learning A
Difficulty: Hard
Est time: <1 minute
Learning Objective: 02-08 Understand the standardised approach to credit risk and compute the capital requirements for particular transactions.
Section: Extended learning A
80. A large commercial bank operating in the international markets will generally apply to the banks' 84. For a commercial bank operating in foreign exchange, interest rate and equity markets, the capital
supervisor to use the _____ to credit risk. adequacy guidelines for the market risk it is exposed to fall under:

A. advanced internal ratings-based approach A. Pillar 1.

B. foundation external ratings-based approach B. Pillar 2.
C. standardised approach C. Pillar 3.
D. standardised approach with external ratings D. Pillar 4.
Difficulty: Medium Difficulty: Medium
Est time: <1 minute Est time: <1 minute
Learning Objective: 02-06 Understand the background and application of the capital adequacy standards. Learning Objective: 02-06 Understand the background and application of the capital adequacy standards.
Section: 2.7 Basel II capital accord Section: 2.7 Basel II capital accord

81. Under Basel II capital accord, the approach to credit risk that requires a bank to assign risk weights 85. For a commercial bank's normal day-to-day business, the capital adequacy guidelines for the operational
given by the prudential supervisor is called: risk it is exposed to fall under:

A. an advanced approach. A. Pillar 1.

B. a foundation approach. B. Pillar 2.
C. a standardised approach. C. Pillar 3.
D. advanced-internal ratings. D. Pillar 4.
Difficulty: Medium Difficulty: Medium
Est time: <1 minute Est time: <1 minute
Learning Objective: 02-06 Understand the background and application of the capital adequacy standards. Learning Objective: 02-06 Understand the background and application of the capital adequacy standards.
Section: 2.7 Basel II capital accord Section: 2.7 Basel II capital accord

82. The risk that arises from chance of loss as a result of inadequate internal bank processes is called: 86. For a commercial bank's market discipline, the capital adequacy guidelines for its disclosure and
transparency requirements fall under:

A. default risk.
B. interest rate risk. A. Pillar 1.
C. market risk. B. Pillar 2.
D. operational risk. C. Pillar 3.
D. Pillar 4.
Difficulty: Medium
Est time: <1 minute
Difficulty: Medium
Learning Objective: 02-06 Understand the background and application of the capital adequacy standards.
Est time: <1 minute
Section: 2.7 Basel II capital accord
Learning Objective: 02-06 Understand the background and application of the capital adequacy standards.
Section: 2.7 Basel II capital accord
83. Which of the following statements about recently adopted guidelines covering capital requirements for
market risk that banks are required to perform is false? 87. Under _____ of Basel II, bank supervisors should review and evaluate banks' internal capital adequacy
assessments.

A. Banks use a risk measurement model based on a VaR approach.

B. Banks estimate the sensitivity of portfolio components to small changes in prices. A. Pillar 4
C. Banks must hold capital against risk of loss from changes in interest rates. B. Pillar 3
D. Banks hold a fixed allocation of funds between various balance sheet assets and off-balance-sheet C. Pillar 1
business. D. Pillar 2
Difficulty: Medium Difficulty: Medium
Est time: <1 minute Est time: <1 minute
Learning Objective: 02-06 Understand the background and application of the capital adequacy standards. Learning Objective: 02-06 Understand the background and application of the capital adequacy standards.
Section: 2.7 Basel II capital accord Section: 2.7 Basel II capital accord
88. Part of a bank's liquidity management is to hold a portfolio of: 92. Banks obtain funds from many areas. These sources of funds appear as liabilities on a bank's balance
sheet.

A. term loans. TRUE

B. mortgages.
C. Commonwealth government securities. Deposits are a major part of a bank's sources of funds and a bank needs to pay interest expenses.
D. credit card loans.
Difficulty: Medium Difficulty: Easy
Est time: <1 minute Est time: <1 minute
Learning Objective: 02-06 Understand the background and application of the capital adequacy standards. Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system.
Section: 2.7 Basel II capital accord Section: 2.1 The main activities of commercial banking

89. In relation to a bank, liquidity management means: 93. Liability management is where banks actively manage their liabilities in order to meet future loan
demand.

A. the bank's ability to quickly convert deposits into loans. TRUE

B. the bank's ability to onsell its loans.
Difficulty: Easy
C. the bank's ability to have funds available when depositors' funds mature. Est time: <1 minute
D. the bank's policies and practices in identifying and managing its loans portfolios. Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system.
Section: 2.1 The main activities of commercial banking
Difficulty: Medium
Est time: <1 minute 94. Call deposits are funds lodged in a bank account for a specified short-term period.
Learning Objective: 02-07 Examine liquidity management and other supervisory controls applied by APRA.
Section: 2.8 Liquidity management and other supervisory controls
FALSE
Difficulty: Easy
Est time: <1 minute
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system.
True / False Questions Section: 2.1 The main activities of commercial banking

95. A bank may either issue a negotiable certificate of deposit directly into the money markets or place it
90. Commercial banks are the main type of financial institution in a financial system because they hold the directly with another bank with surplus funds.
largest amounts of financial assets.
FALSE
TRUE Difficulty: Medium
Est time: <1 minute
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system.
Banks have long been the dominant type of financial institution, although in recent years managed funds Section: 2.1 The main activities of commercial banking
have close to having the same amount of financial assets under management.
96. One of the important attributes of certificates of deposit for a bank is the ability to adjust the yields on
new issues.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system. TRUE
Section: Introduction

91. The greater the dominance of commercial banks in an economy, the less regulation required. The yield on a CD cannot be adjusted until it reaches maturity and a new CD is issued.

FALSE Difficulty: Easy

Est time: <1 minute
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system.
Because of the dominance of banks and the correlation between their business and a country's economy, Section: 2.1 The main activities of commercial banking
there are strong arguments for regulation to constrain a bank's business.

Difficulty: Easy
Est time: <1 minute
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system.
Section: Introduction
97. As the majority of banks' assets are short-term loans, they are active in the money markets in order to 101. Describe how a bill acceptance facility works.
fund part of their lending.

FALSE
If a company with a good credit record is looking to raise funds through the issue of a bill of exchange
A normal bank acquires most of its funding from deposits. into the money markets, a bank may have the role of acceptor for the bill where the bank agrees to pay
the face value of the bill to the holder at maturity and will have a separate arrangement to recover the
funds from the issuer. The bank will earn fees for providing this service. Alternatively, the bank may
Difficulty: Easy provide the funds directly for the bill by agreeing to discount the bill and buy it from the issuer, and
Est time: <1 minute
Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates usually rediscount the bill subsequently. Consequently, the bank could provide both a bill acceptance
of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital. facility and a bill discount facility.
Section: 2.2 Sources of funds

98. A bank may seek to obtain funds by issuing unsecured notes with a collaterised floating charge over its
Est time: 1-3 minutes
deposits. Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Section: 2.2 Sources of funds
FALSE
102. Discuss the main features of housing finance.
Unsecured notes do not have any security attached.

Difficulty: Easy
Est time: <1 minute This involves the lending of long-term funds to individuals so that they can buy residential property. As
Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates security for the loan, the bank lender registers a mortgage over the property. In recent years commercial
of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Section: 2.2 Sources of funds banks and specialist mortgage lenders have used securitisation to refinance their lending.

99. Foreign currency liabilities are debt instruments issued into another country but not denominated in the
currency of that country. Est time: 1-3 minutes
Learning Objective: 02-03 Identify the main uses of funds by commercial banks, including personal and housing lending, commercial lending, lending to government,
and other bank assets.
FALSE Section: 2.3 Uses of funds

103. Discuss the main features of a bank's commercial lending.

Foreign currency liabilities are typically denominated in foreign currencies such as US dollars, the yen
and pound sterling.

Difficulty: Easy Commercial lending is when banks lend to the business sector and other financial institutions. This is
Est time: <1 minute considered essential if economic growth is to be achieved within a country. Commercial banks offer
Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital. borrowers both short-term and long-term loans of various types such as overdraft facilities.
Section: Introduction

Est time: 1-3 minutes

Learning Objective: 02-03 Identify the main uses of funds by commercial banks, including personal and housing lending, commercial lending, lending to government,
and other bank assets.
Short Answer Questions Section: 2.3 Uses of funds

100. Briefly discuss the sources of funds for a commercial bank.

Est time: 1-3 minutes

Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system.
Section: 2.2 Sources of funds
104. Within the context of off-balance-sheet business, explain direct credit substitutes, trade- and
performance-related items and any differences between these items.
Chapter 02 - Test Bank Summary

Category # of Qu
estions
Difficulty: Easy 24
Direct credit substitutes are where a bank supports a client's financial obligation such as providing a Difficulty: Hard 16
‘standby letter of credit' so that a company may raise funds directly in the market place. Trade- and Difficulty: Medium 62
performance-related items are when a bank offers guarantees to support a client's non-financial Est time: <1 minute 102
obligations. Both of these items are not recorded on a bank's balance sheet. Est time: 1-3 minutes 5
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system. 22
Learning Objective: 02- 33
Est time: 1-3 minutes
Learning Objective: 02-04 Outline the nature and importance of banks’ off - balance-sheet business, including direct credit substitutes, trade- and performance-related 02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificat
items, commitments and market-rate-related contracts. es of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Section: 2.4 Off-balance-sheet business Learning Objective: 02- 8
03 Identify the main uses of funds by commercial banks, including personal and housing lending, commercial lending, lending to governme
nt, and other bank assets.
Learning Objective: 02-04 Outline the nature and importance of banks’ off - balance- 14
sheet business, including direct credit substitutes, trade- and performance-related items, commitments and market-rate-related contracts.
Learning Objective: 02-05 Consider the regulation and prudential supervision of banks. 7
Learning Objective: 02-06 Understand the background and application of the capital adequacy standards. 16
Learning Objective: 02-07 Examine liquidity management and other supervisory controls applied by APRA. 1
Learning Objective: 02- 6
08 Understand the standardised approach to credit risk and compute the capital requirements for particular transactions.
Section: 2.1 The main activities of commercial banking 12
Section: 2.2 Sources of funds 33
Section: 2.3 Uses of funds 8
Section: 2.4 Off-balance-sheet business 14
Section: 2.5 Regulation and prudential supervision of commercial banks 6
Section: 2.6 A background to the capital adequacy standards 2
Section: 2.7 Basel II capital accord 15
Section: 2.8 Liquidity management and other supervisory controls 1
Section: Extended learning A 6
Section: Introduction 10