Which of the following methods measure loan concentration risk by tracking credit ratings of firms in particular sectors or ratings class for unusual downgrades?

A. Migration analysis.

B. Concentration limits.

C. Loan loss ratio-based model.

D. Moody's An

Migration analysis.

Migration analysis is a tool to measure credit concentration risk and refers to

A. the identification of problem loans in sectors by observing periodic migration of industries. B. the identification of credit concentration by observing trends in market bo

the identification of credit concentration by observing the downgrading or upgrading of credit ratings on securities in different sectors of industry by public rating agencies.

Which of the following observations concerning concentration limits is not true?

A. Limits are set by assessing the borrower's current portfolio, its operating unit's business plans, its economists' economic projections, and its strategic plans.

B. FIs se

Bank regulators in recent years have limited loan concentrations to individual borrowers to a maximum of 30 percent of a bank's capital.

A weakness of migration analysis to evaluate credit concentration risk is that the

A. information obtained for this analysis is usually ex-post (i.e. after the fact).

B. information obtained for this analysis is ex-ante (i.e. before the fact).

C. analysis

information obtained for this analysis is usually ex-post (i.e. after the fact).

If the amount lost per dollar on a defaulted loan is 40 percent, then a bank that does not permit the loss of a loan to exceed 10 percent of its bank capital should set its concentration limit (as a percentage of capital) to

A. 5 percent.

B. 15 percent.

C

25 percent.

Concentration limit = Maximum loss as a percent of capital � (1 � Loss rate) CL = 0.10 � (1 � 0.40) = 0.25.

If a bank's concentration limit (as a percentage of capital) is 25.0 percent, and it does not permit a loss of any loan to impact more than 10 percent of its capital, what is the expected recovery on loans that are defaulted?

A. 20 percent.

B. 30 percent.

60 percent.

Concentration limit = Maximum loss as a percent of capital � (1 � Loss rate) Loss rate = Maximum loss as a percent of capital � Concentration limit

Loss rate = 0.10 � 0.25 = 0.40

Therefore, the recovery rate = 1 - loss rate = 1 - 0.40 = 0.60.

If a bank's concentration limit (as a percent of capital) is 20 percent, and its expected recovery from defaulted loans is 50 percent, what is the maximum loss it permits to affect its capital in the event of a default?

A. 5 percent.

B. 10 percent.

C. 15

10 percent

Concentration limit = Maximum loss as a percent of capital � (1 � Loss rate) Maximum loss as a percent of capital = Concentration limit � Recovery rate Note: recovery rate = (1 - loss rate)

ML = 0.20 � 0.50 = 0.10.

What does Moody's Analytics Portfolio Manager Model use to identify the overall risk of the portfolio?

A. Maximum loss as a percent of capital.

B. Historical loan loss ratios.

C. Default probability on each loan in a portfolio.

D. Market value of an asset

Default probability on each loan in a portfolio.

Any model that seeks to estimate an efficient frontier for loans, and thus the optimal proportions in which to hold loans made to different borrowers, needs to determine and measure the

A. expected return on each loan to a borrower.

B. risk of each loan m

All of the options.

According to Moody's Analytics, default correlations tend to be _____ and lie between _______.

A. Low; 0.002 and 0.15

B. High; 1.86 and 2.99

C. Low; 0.001 and 0.002

D. High; 2.99 and 3.50

E. Low; 0 and 0.001

Low; 0.002 and 0.15

On loans fully secured by physical, non-real estate loans, the Basel Committee has set a loss given defaults (LGD) rate of

A. 15 percent.

B. 25 percent.

C. 40 percent.

D. 45 percent.

E. 60 percent.

45 percent.

As part of measuring unobservable default risk between borrowers, the Moody's Analytics model decomposes asset returns into

A. credit risk and market risk.

B. systematic risk and unsystematic risk.

C. market risk and sovereign risk.

D. regional risk and m

systematic risk and unsystematic risk.

In 1994, The Federal Reserve Board ruled against a proposal to use quantitative models to assess credit concentration risk because

A. current methods to identify concentration risk were not sufficiently advanced.

B. there was no public data on default rat

current methods to identify concentration risk were not sufficiently advanced.

Matrix Bank has compiled the following migration matrix on consumer loans. Which of the following statements accurately summarizes this data? (See chart)

A. Ten percent of grade two loans were upgraded during the year.

B. Grade one loans have a higher pro

All of the options.

In the Moody's Analytics portfolio model, the expected return on a loan is the

A. annual all-in-spread minus the expected loss on the loan.

B. annual all-in-spread minus expected probability of the borrower defaulting over the next year.

C. annual all-in-

annual all-in-spread minus the expected loss on the loan.

In the Moody's Analytics portfolio model, the expected loss on a loan is

A. the product of the estimated loss given default and risk-free rate on a security of equivalent maturity.

B. annual all-in-spread minus the loss given default.

C. annual all-in-spr

the product of the expected default frequency and the estimated loss given default.

In the Moody's Analytics portfolio model, the risk of a loan measures

A. the product of the estimated loss given default and risk-free rate on a security of equivalent maturity.

B. annual all-in-spread minus the loss given default.

C. annual all-in-spread

the volatility of the loan's default rate around its expected value times the amount lost given default.

In the Moody's Analytics model, which of the following is a function of the historical returns of the individual assets.

A. The risk of a loan.

B. The expected default frequency.

C. The loss given default.

D. The correlation of default risk.

E. The volati

The correlation of default risk.

Which of the following is the legislation that required bank regulators to incorporate credit concentration risk into their evaluation of bank insolvency risk?

A. The Bank Holding Company Act (1956).

B. FDIC Improvement Act (1991).

C. Depository Instituti

FDIC Improvement Act (1991).

Which of the following is a source of loan volume data?

A. Commercial bank call reports.

B. Data on shared national credits.

C. Commercial databases.

D. All of the options.

E. Only the Federal Reserve has this data.

All of the options.

Which of the following is a measure of the sensitivity of loan losses in a particular business sector relative to the losses in an FI's loan portfolio?

A. Loss rate.

B. Systematic loan loss risk.

C. Concentration limit.

D. Loss given default.

E. Expected

Systematic loan loss risk.

Which model involves estimating the systematic loan loss risk of a particular sector or industry relative to the loan loss risk of an FI's total loan portfolio?

A. CreditMetrics.

B. Credit Risk +.

C. Loan loss ratio-based model.

D. KMV portfolio manager m

Loan loss ratio-based model.

In applying the loan loss ratio models, the loss rate "?" for the whole loan portfolio is

A. 0.

B. 0.5.

C. 1.

D. 2.

E. negative.

1.

Under which model does an FI compare its own allocation of loans in any specific area with the national allocations across borrowers to measure the extent to which its loan portfolio deviates from the market portfolio benchmark?

A. CreditMetrics.

B. Credi

Loan volume-based model.

A Hypothetical Rating Migration, or Transition Matrix, reflects all of the following EXCEPT

A. rating at which the portfolio ended the year.

B. transition probabilities.

C. rating at which the portfolio of loans began the year.

D. future migration expecte

future migration expected in the portfolio.

In models that are based on loan loss ratios, a ? that is found to be less than one for a particular loan sector indicates that

A. the loans in that sector will soon be downgraded soon.

B. the FI should increase its concentration in that loan sector due t

the FI should decrease its exposure to that sector because losses are higher than the rest of the portfolio.

What is the FI's expected return on its loan portfolio? (See chart)

A. 15.00 percent.

B. 18.00 percent.

C. 12.00 percent.

D. 14.67 percent.

E. 13.33 percent.

14.67 percent.

What is the risk (standard deviation of returns) on the bank's loan portfolio if loan returns are uncorrelated (? = 0)? (See chart)

A. 1.41 percent.

B. 1.63 percent.

C. 0.93 percent.

D. 3.57 percent.

E. 1.18 percent.

1.18 percent.

If Bank A's average return on its loan portfolio is lower than that of Bank B's,

A. its risk-adjusted return is higher than Bank B's.

B. its risk-adjusted return is lower than Bank B's.

C. its standard deviation is lower than Bank B's.

D. its standard dev

its risk-adjusted return is lower than Bank B's and its standard deviation is higher than Bank B's.

A regression of sectoral loan losses against total loans losses, both measured as a percentage of total loans, of a bank results in the following beta coefficients for the real estate (RE) and commercial (CL) loan variables: ?RE = 1.2, ?CL = 1.6. The inte

both the real estate loan losses and the commercial loan losses are systematically higher than the total loan losses.

if the total loan losses of the bank measured as a percentage of total loans is 2 percent, the losses in the commercial sector, measured as a percentage of total loans, is 3.2 percent.

Kansas Bank has a policy of limiting their loans to any single customer so that the maximum loss as a percent of capital will not exceed 20 percent for both secured and unsecured loans. The limit has been adopted under the assumption that if the unsecured

20 percent.

Concentration limit = Maximum loss as a percent of capital � (1 � Loss rate) For unsecured loans the loss rate is 100%

CL = 0.20 � (1 � 1.0) = 0.20.

33 percent

Concentration limit = Maximum loss as a percent of capital � (1 � Loss rate) Note that recovery rate for secured loans is 40%; therefore the loss rate is 60% CL = 0.20 � (1 � 0.60) = 0.3333.

25 cents.

Concentration limit = Maximum loss as a percent of capital � (1 � Loss rate) Loss rate = Maximum loss as a percent of capital � Concentration limit

Loss rate = 0.10 � 0.40 = 0.25.

Using standard deviations, which bank is in a better position if the average earnings on the assets of Bank A is 11 percent and Bank B is 12 percent (ignore all other factors)?

A. Bank B, because its earnings of 12 percent is higher than Bank A's 11 perce

Bank B, because its earnings of 12 percent is higher compared to Bank A's 11 percent, while its standard deviation is the same.

LNW Bank is charging a 12 percent interest rate on a $5,000,000 loan. The bank also charged $100,000 in fees to originate the loan. The bank has a cost of funds of 8 percent. The borrower has a five percent chance of default, and if default occurs, the ba

5.50 percent.

2.18 percent.