Chapter 5

What is the primary objective of risk management in commercial banks?

• Maximizing shareholder wealth while limiting excessive risk

• Eliminating all forms of financial risk

• Ensuring zero defaults in the loan portfolio

• Achieving the highest market share

Which of the following is NOT a step in the risk-return assessment suggested by Hempel and Simonson?

• Analyze historical performance trends

• Evaluate risk-return decisions of competitors

• Establish realistic objectives based on internal opinions

• Contrast the bank's performance with peer institutions

Credit risk primarily arises from:

• Changes in market interest rates

• Borrowers failing to meet agreed terms

• Fluctuations in foreign exchange rates

• Operational inefficiencies in banks

What is the role of credit scoring in loan evaluation?

• To assign loans without collateral

• To assess a borrower’s creditworthiness using predictive models

• To ensure loans are diversified geographically

• To measure the liquidity needs of borrowers

Liquidity risk refers to:

• Losses from changes in market prices

• The potential inability to meet short-term obligations

• Borrowers failing to repay loans

• Disruptions due to operational failures

What is a common measure to monitor liquidity risk?

• Loan-to-value ratio

• Short-term securities to total deposits ratio

• Debt-to-equity ratio

• Net interest margin

Operational risk includes:

• Failures in technology or internal processes

• Changes in foreign exchange rates

• Variability in interest rates

• Customer default on loans

Market risk refers to:

• The likelihood of borrowers defaulting

• Potential losses from market price movements

• Bank runs due to liquidity shortages

• Failures in regulatory compliance

Greenfield Bank wants to manage credit risk better. Which action aligns with this goal?

• Diversifying loans across industries

• Increasing reliance on volatile liabilities

• Reducing liquidity reserves

• Aligning asset maturities with liability maturities

Which method is used to estimate liquidity needs based on projected changes in deposits and loans?

• Gap analysis

• Structure of funds approach

• Sources and uses of funds approach

• Duration gap management