ROE Calculation and Limitations Quiz
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Questions and Answers

What are the five C's of credit used by lenders to assess a borrower's creditworthiness?

  • Citizenship, Collaboration, Consistency, Construction, Compensation
  • Character, Capacity, Capital, Collateral, Conditions (correct)
  • Character, Communication, Compliance, Currency, Capital
  • Cash flow, Credit score, Collateral value, Customer service, Collateral options

    • Which element of the five C's of credit refers to the borrower's credit history?

  • Collateral
  • Capacity
  • Capital
  • Character (correct)

    • What percentage is recommended by the Consumer Financial Protection Bureau as the maximum DTI ratio for homeowners?

  • 36% (correct)
  • 10%-15%
  • 25%-30%
  • 50%-60%

    • What is one way for lenders to assess borrowers' capital according to the text?

    <p>Savings and investments</p> Signup and view all the answers

    How does a larger down payment affect loan terms according to the text?

    <p>Can improve interest rate and loan terms</p> Signup and view all the answers

    What is the primary purpose of credit scores and credit reports for lenders?

    <p>To assess the behavior and creditworthiness of potential borrowers</p> Signup and view all the answers

    How does a higher credit score impact a lender's risk assessment?

    <p>Indicates less risk for the lender</p> Signup and view all the answers

    What financial ratio is used to assess a borrower's capacity to take on additional debt?

    <p>Debt-to-Income ratio</p> Signup and view all the answers

    What provides lenders with additional security in case a borrower faces unexpected financial challenges?

    <p>Collateral</p> Signup and view all the answers

    Which of the following is NOT a factor considered by lenders when assessing creditworthiness?

    <p>Collateral value</p> Signup and view all the answers

    What factors are taken into account to verify the borrower's capacity to comply with loan obligations?

    <p>Foreseeable income over the life of the loan, savings, commitments already made</p> Signup and view all the answers

    Which characteristic of each borrower depends on their creditworthiness?

    <p>Probability of default</p> Signup and view all the answers

    What is a key factor in estimating expected loss in credit risk analysis?

    <p>Scoring system in place</p> Signup and view all the answers

    Which aspect affects the exposure at default according to the text?

    <p>Creditworthiness rating</p> Signup and view all the answers

    What type of risk does settlement risk not only have a credit component but also affected by?

    <p>Operational risk</p> Signup and view all the answers

    What type of risk is associated with the counterparty's failure to pay or deliver after delivery or payment by us?

    <p>Delivery risk</p> Signup and view all the answers

    What is the main determinant of issuer risk?

    <p>Issuer credit-rating</p> Signup and view all the answers

    Which risk appears in the purchase and sale of securities, and disappears when Delivery versus Payment (DVP) systems are adopted?

    <p>Delivery risk</p> Signup and view all the answers

    What is analogous to delivery risk?

    <p>Liquidation risk</p> Signup and view all the answers

    Which type of risk is associated with an adverse change in the value of a security due to a change in the market perception of the issuer’s credit-worthiness?

    <p>Issuer risk</p> Signup and view all the answers

    What is the formula for Return on Equity (ROE) based on the text provided?

    <p>Net income / Shareholders' equity</p> Signup and view all the answers

    Why is the degree of openness of ROE small in some countries according to the text?

    <p>Unorthodox accounting techniques compared to standards</p> Signup and view all the answers

    Which indicators are included in the Risk Appetite Framework (RAF) based on the text?

    <p>NPLs, coverage ratio, concentrations</p> Signup and view all the answers

    What is an example of an indicator used to detect changes in the trend of credit portfolio profile based on the text?

    <p>Concentration by worst rating levels</p> Signup and view all the answers

    Why is qualitative analysis important when assessing credit portfolios according to the text?

    <p>To complete quantitative analysis</p> Signup and view all the answers

    What is the primary reference for assessing the financial health of an organization according to the text?

    <p>Annual report</p> Signup and view all the answers

    Which indicator is considered the most important and difficult element to measure when it comes to asset quality?

    <p>Credit risk measurement culture</p> Signup and view all the answers

    What is used as a quantitative measure of management in terms of profitability?

    <p>ROA (Return on Assets)</p> Signup and view all the answers

    Which ratio is calculated by dividing total debts by equity to assess solvency?

    <p>Leverage Ratio</p> Signup and view all the answers

    What type of analysis is conducted to evaluate the balance sheet management in terms of liquidity?

    <p>Interest rate sensitivity analysis</p> Signup and view all the answers

    What does providing collateral help to do when securing a loan or credit card?

    <p>Secure the loan or credit card</p> Signup and view all the answers

    For what type of credit does the car usually act as collateral?

    <p>Automobile loans</p> Signup and view all the answers

    What is the primary purpose of a cash deposit when opening a secured credit card account?

    <p>To act as collateral for the credit card</p> Signup and view all the answers

    Why are secured loans and secured credit cards considered less risky for lenders?

    <p>They are backed by assets or deposits</p> Signup and view all the answers

    What do Counterparty Conditions include in determining someone's qualification for credit?

    <p>Associated credit risks</p> Signup and view all the answers

    What is Counterparty risk associated with in terms of credit assessment?

    <p>Positive market value instruments</p> Signup and view all the answers

    'How you plan to use the money' is considered a factor that affects what in lending decisions?

    <p>'Loan terms'</p> Signup and view all the answers

    'Conditions 1.3.2.2 Counterparty Conditions' provide additional information on what aspect related to lending?

    <p>'Credit risks'</p> Signup and view all the answers

    'Counterparty risk' is also known by what other term related to financial instruments?

    <p>'Pre-settlement risk'</p> Signup and view all the answers

    In what cases are lenders more willing to lend money according to the text?

    <p>'Specific purposes'</p> Signup and view all the answers

    What is the primary risk associated with changes in interest rates affecting an institution's net interest margin?

    <p>Interest rate risk</p> Signup and view all the answers

    Which of the following is considered a structural risk in the balance sheet of a financial institution?

    <p>Interest rate risk</p> Signup and view all the answers

    In the context of banking business, which is NOT one of the three fundamental pillars on which the banking business is based?

    <p>Innovation</p> Signup and view all the answers

    Which financial risk factor is faced by a financial institution due to an adverse change in the value of a security based on market perception of the issuer's credit-worthiness?

    <p>Market risk</p> Signup and view all the answers

    Which type of risk is directly related to the activity in various currencies and is faced by a financial institution?

    <p>Exchange rate risk</p> Signup and view all the answers

    What is the primary purpose of the banking business?

    <p>To focus on credit investment with low interest rates</p> Signup and view all the answers

    What is concentration risk in credit management related to?

    <p>Both individual concentration of borrowers and sectoral concentration</p> Signup and view all the answers

    What does market risk entail in financial markets?

    <p>Changes in the values of financial assets due to market perceptions</p> Signup and view all the answers

    Why is the establishment of limits important in risk management?

    <p>To have easily implementable and measurable boundaries</p> Signup and view all the answers

    What metrics are usually used for the quantification of credit risk?

    <p>Structural nature metrics</p> Signup and view all the answers

    What is the main purpose of risk measurement in banking as mentioned in the text?

    <p>To estimate potential losses that may occur in different banking activities</p> Signup and view all the answers

    How does the level of risk assumed in financial markets affect the capital required for such activities?

    <p>Higher risk requires higher capital</p> Signup and view all the answers

    In financial markets, what are the three main types of risks mentioned in the text?

    <p>Market, credit, and operational risks</p> Signup and view all the answers

    What does the term 'risk appetite' refer to in financial institutions according to the text?

    <p>The number of risks a bank is willing to take on</p> Signup and view all the answers

    Which statement accurately reflects the relationship between risk management and financial market activities?

    <p>Risk management involves managing inherent risks in activities like market, credit, and operational risks</p> Signup and view all the answers

    What should be established to set clear quantitative expectations of losses or negative results in risk management?

    <p>Limits</p> Signup and view all the answers

    What are the main factors linked to credit risk according to the text?

    <p>Liquidity, own resources, credit rating, CDS quotes, country risk assessment</p> Signup and view all the answers

    What is used as a potential exposure analysis metric in the context of counterparty risk?

    <p>Market value</p> Signup and view all the answers

    What type of analysis is conducted to evaluate liquidity risk in balance sheet management?

    <p>Quantitative analysis</p> Signup and view all the answers

    What is the primary determinant of issuer risk in credit risk assessments?

    <p>Legal existence</p> Signup and view all the answers

    What relevant factors should be considered to verify a borrower's capacity to comply with loan obligations?

    <p>Assets in property, commitments already made, and foreseeable income after retirement</p> Signup and view all the answers

    Which element is a characteristic of each borrower and is essential for determining their creditworthiness?

    <p>Credit score</p> Signup and view all the answers

    What factors contribute to estimating the expected loss in credit risk analysis?

    <p>Probability of default and exposure at default</p> Signup and view all the answers

    Settlement risk in addition to having a credit component is also influenced by which other risks?

    <p>Liquidity risk and market risk</p> Signup and view all the answers

    In order to carry out credit risk analysis, what elements should be put in place to estimate the probability of default for each borrower?

    <p>Ratings and scoring</p> Signup and view all the answers

    What is the primary objective of Asset-Liabilities Management (ALM) in financial institutions?

    <p>Maximizing the profit between assets and liabilities</p> Signup and view all the answers

    Which of the following is NOT a fundamental method used to address the measurement of risk factors in the financial field?

    <p>Ignoring banking regulations</p> Signup and view all the answers

    How does Balance Sheet (structural) risk affect financial institutions?

    <p>It affects institutions with a balance sheet subject to business risks</p> Signup and view all the answers

    What aspect of risk does Asset-Liabilities Management (ALM) primarily focus on managing?

    <p>Market and liquidity risks</p> Signup and view all the answers

    What is one of the objectives pursued by Asset-Liabilities Management (ALM) in financial institutions?

    <p>Modulating exposure according to market variables</p> Signup and view all the answers

    What type of risk is associated with the counterparty's failure to pay or deliver after delivery or payment by us?

    <p>Settlement risk</p> Signup and view all the answers

    Which type of risk appears in the purchase and sale of securities and disappears when Delivery versus Payment (DVP) systems are adopted?

    <p>Settlement risk</p> Signup and view all the answers

    What is analogous to liquidation risk in credit risk analysis?

    <p>Delivery risk</p> Signup and view all the answers

    Which type of credit risk is associated with an adverse change in the value of a security due to a change in market perception of the issuer's credit-worthiness?

    <p>Issuer risk</p> Signup and view all the answers

    What type of risk is incurred when one party fails to deliver/pay after the other has satisfied its obligations?

    <p>Delivery risk</p> Signup and view all the answers

    Which element of credit risk analysis is analogous to liquidation risk?

    <p>Delivery risk</p> Signup and view all the answers

    In credit analysis, which type of risk is associated with an adverse market perception of an issuer's credit-worthiness?

    <p>Issuer risk</p> Signup and view all the answers

    'Issuer Risk' in credit assessment is primarily determined by what factor?

    <p>Credit ratings of issuing country</p> Signup and view all the answers

    'Settlement Risk' in credit analysis occurs when the counterparty defaults after fulfilling which obligations in a transaction?

    <p>'Our contractual obligations'</p> Signup and view all the answers

    'Market Risk' includes exposure to external factors like economy, interest rates, and industry trends, while 'Credit Risk' focuses on what aspect in lending decisions?

    <p>Borrower's qualifications</p> Signup and view all the answers

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