Question

5. Which of the following is the factor leading to credit crunch?

a) When collateral value is decreasing

b) Excess amount of credit available in an economy (credit bubble)

c) Unexpected change in government regulation raising capital requirement

d) Abrupt increase in insolvency risk in banking industry

e) All of the above

6. Which of the following relates to the adverse selection problem related to the banking industry?

a) Bank A invested heavily into a high-tech industry with the expectation that government will eventually bail it out in case of insolvency (from depositor’s

points of view)

b) Bank B has a poor risk-evaluation team to screen the sub-prime borrowers (from Bank B’s points of view)

c) Bank C expected that they can sell the loans via securitization to arrangers and thus grant loans to sub-prime borrowers (from the arranger’s point of view)

d) Bank D expected that they can sell the loans via securitization to arrangers andthus grant loans to sub-prime borrowers (from the current depositor’s point of view)

e) b）and c）

7. Which of the following is NOT correct?

a) Foreign subsidiary banks are locally incorporated banks in the target market with local employees

b) Correspondent banking form is appropriate when a bank is not wish to have full banking presence in a foreign target market

c) Agencies are able to take deposit but not allowed to make loans to the borrowers

in the target market

d) Compared to foreign subsidiary banks, foreign branch banks are less exposed to the home resistance

e) a) and c) of the above

Answer 1

Questions

(5) Factors leading to the credit crunch

Solution: option "e" i.e all of the above.

(6) Which of the following relates to the adverse selection problem related to the banking industry?

Solution : option "b" i.e. bannk B has poor risk evaluation team to screen the sub prime borrowers

(7) Which of the following is not correct?

Solution : option "C" i.e agencies are able to accept deposits but not allowed to make loans to the borrowers in the target market