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CHAPTER 14
TRUE/FALSE QUESTIONS
of a foreign bank, or a U. S. office of an Edge Act Corporation.
the host country.
4. (F) Representative offices can accept deposits and make loans in the host country.
regulations in the U.S.
6. (F) International banking facilities (IBFs) operate as subsidiaries of bank holding companies.
loans to developing countries.
operating advantages over domestic banks in the U.S.
in the U.S.
countries than at home in order to be competitive with foreign banks.
foreign banks.
with the public of the host country.
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foreclosed.
deregulation of banking industry.
to assisting customers with export-import trade and international credit.
MULTIPLE-CHOICE QUESTIONS
between 1980 and 2000 ?
a. the establishment of the Edge Act
b. overall expansion of U.S. world trade
c. the growth of multinational corporations
d. restrictions on outflow of funds from the U.S.
e. the International Bank Act of 1978
a. Japan.
b. United Kingdom.
c. Bahamas and British West Indies.
d. Canada.
3. (a) Unlike the United States, many countries grant their banks the authority for
a. full merchant banking.
b. deposit banking.
c. forming bank holding companies.
d. lending to foreign companies and countries.
e. borrowing from foreign markets
framework of the Bank for International Settlements, central banks from leading economies have
agreed to
a. allow international banks to branch throughout every country involved.
b. stabilize interest rates.
c. establish minimum capital ratios for international banks.
d. maintain fixed exchange rates.
a. Federal Reserve Act of 1913
b. Edge Act of 1919
c. National Banking Act of 1863
d. International Banking Act of 1978
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interbank money market transactions?
a. representative office
b. shell branch
c. Edge Act corporation
d. international banking facility
providing a complete range of international banking services associated with foreign trade to
domestic banks?
a. international banking facility
b. shell branch
c. correspondent bank
d. Edge Act bank
domestic bank but is located in a foreign country?
a. foreign branch
b. shell branch
c. representative office
d. international banking facility
e. correspondent bank
corporate charter to operate international banking business including equity investments?
a. international banking facility
b. foreign branch
c. correspondent bank
d. Edge Act bank
incorporated bank owned entirely or in part by a U.S. bank or bank holding company?
a. foreign subsidiary bank
b. international banking facility
c. Edge Act bank
d. shell branch
offshore, shell banking back to the U. S.?
a. Edge Act banks
b. correspondent bank
c. international banking facility
d. foreign subsidiary bank
a. are unsecured.
b. have floating rates.
c. are made for relatively small amounts.
d. are priced relative to the LIBOR.
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a. Europe
b. the United States
c. Japan
d. China
e. Latin America
a. liquidity risk.
b. interest rate risk.
c. default risk.
d. solvency risk.
a. loan securitization.
b. investment banking underwriting syndicates.
c. defaulting on a loan.
d. having a mortgage on specific asset to support the loan.
e. credit insurance.
16. (b) An international lender’s concern about the changing tax rate on interest income from an
international loan is an example of
a. credit risk.
b. country risk.
c. foreign exchange risk.
d. reinvestment risk.
lending?
a. profit controls
b. loan default by borrower
c. nationalization of borrower
d. a new political party now controls the government
18. (c) Which of the following is associated with the currency risk of international lending by a U.S.
bank?
a. The Spanish borrower is slow to pay the U.S. bank.
b. The U.S. bank is paid dollars by its foreign borrowers.
c. A U.S. bank receives an interest payment from a French borrower paid in Euros.
d. A U.S. bank holds a mortgage on property in a country in the middle of a civil war.
a. an interbank lending rate.
b. an index rate used to price many international loans.
c. the highest yield available on time deposits in international banks.
d. the informal currency exchange in London.
e. both a and b
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a. credit risk
b. country risk
c. currency risk
d. all of the above
a. relatively long-term time deposits because the loans have long maturities.
b. syndicated demand deposits.
c. short-term time deposits.
d. cash flows from loan interest and principal.
a. country risk
b. credit risk
c. currency risk
d. both a and c
e. all of the above
a. the separation of larger loans into several more, smaller loans that are easier to repay.
b. the extension of governmental guarantees to private sector debts.
c. the granting of grace periods, which defers payment for a time.
d. the extension of the payment date.
a. Shortening the repayment schedule.
b. The consolidation of several loans into one.
c. The extension of governmental guarantees to private business debt.
d. The granting of a grace period, during which no payment is expected.
a. prohibited foreign banks from establishing any new U.S. banking operations.
b. allowed U.S. banks to engage in a wider range of non-banking activities overseas.
c. allowed U.S. banks to take equity positions in overseas business ventures.
d. reduced the competitive advantage of foreign banks over U.S. banks.
a. return the competitive edge to U.S. banks.
b. return competitive equality between domestic and foreign banks.
c. slow down the competitiveness of foreign banks.
d. none of the above
a. IBFs may be established by a U.S.-chartered depository institution, a U.S. branch or
agency of a foreign bank, or a U.S. office of an Edge Act Corporation.
b. An IBFs is a set of asset and liability accounts segregated on the books of the establishing
institution.
c. IBFs can accept deposits over $100,000 from non-U.S. residents or other IBFs.
d. Deposits generated can be used to make domestic loans only.
e. All of the above is true.
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a. In general, U.S. banks are permitted to engage in a wider range of business activities in
the U.S. than in foreign countries.
b. In general, U.S. banks are permitted to engage in a wider range of business activities in
foreign countries than in the U.S.
c. In general, U.S. banks are permitted to engage in a wider range of business activities in
the U.S. than foreign banks.
d. In general, foreign banks are permitted to engage in a wider range of business activities in
the U.S. than in their home countries.
e. Both a and d are true statements.
a. make floating-rate loans
b. pay competitive rates on deposits
c. make loans to borrowers with subprime credit ratings
d. take equity stakes in non-financial companies
e. make overnight interbank loans
a. foreign government guarantees of loans to private corporations.
b. pooling risk through syndication with other banks.
c. making floating-rate loans as opposed to fixed-rate loans.
d. diversification.
a. can assist the parent bank’s customer only in that country and cannot accept deposits or
make loans.
b. can only accept deposits and cannot make loans.
c. can both accept deposits and make loans.
d. can engage only in money market transactions.
following U.S. regulations that restricted U.S. capital flows abroad except:
a. Foreign Direct Investment Program (FDIP)
b. Agricultural Export Restraint Program (AERP)
c. Interest Equalization Tax (IET)
d. Voluntary Foreign Credit Restraint program (VFCR)
controlling equity investments because of a concern for
a. bank safety.
b. promoting competition.
c. keeping banking and other business activity separate.
d. protecting bank depositors.
34. (a) An initial foothold entry into international banking is a(n)
a. representative office.
b. branch bank.
c. Edge Act corporation.
d. IBF.
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a. U.S. bank regulations
b. the host country bank regulation.
c. the FDIC.
d. the SEC.
e. both a and b
a. be located in the United States outside a parent’s own state.
b. own foreign banking subsidiaries.
c. engage only in international banking activities.
d. all of the above
government and payable in dollars has what risks associated with it?
a. bank risk
b. country risk
c. foreign exchange risk
d. both a and c
e. all of the above
a. seeking guarantees from borrowers.
b. FDIC insurance.
c. portfolio diversification.
d. insurance through the International Monetary Fund
e. both a and c
with the loan by
a. requiring that the payments be made in yen.
b. speculating in yen futures.
c. having the borrower seek third-party assistance.
d. hedging the risk in yen futures.
guaranteed by an organization of insurance companies called the
a. Overseas Private Investment Corporation.
b. World Bank.
c. Foreign Credit Insurance Association.
d. Receivables Assurance Association.
lender.
a. credit
b. currency
c. interest rate
d. liquidity
e. country
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on loans from loan applicant, Country A, have
a. a high positive correlation with prior loans from Country A.
b. a high positive correlation with the loan returns on the bank’s international loan portfolio.
c. a negative correlation with the loan returns on the bank’s international loan portfolio.
d. a very low negative correlation with the returns on U.S. Treasury bonds.
days. What is the more likely action taken by a currency risk manager?
a. The Mexican manager will sell U.S. dollars in a 90-day forward contract.
b. The U.S. bank will buy peso in a 90-day forward contract.
c. The Mexican manager will buy U.S. dollars in a 90-day forward contract.
d. The Mexican manager will buy a peso 90-day forward contract.
days. If the Mexican manager thought that the value of the peso would fall in the next 90 days,
which of the following would he choose to hedge the foreign exchange risk?
a. Buy U.S. dollars in a forward contract.
b. Wait 90 days and buy U.S. dollars in the spot market.
c. Buy a U.S. dollar T-bill now.
d. Either b or c would work.
prime plus 2 percent, payable in U.S. dollars, one year from now. The current Canadian
dollar/U.S. dollar exchange rate is 1.367. With a prime rate of 7 percent, what is the amount of
interest paid in a year?
a. C$ 1,230,300
b. $900,000
c. $700,000
d. C$658,376
percent for one year and the same in U.S. dollars at a Detroit bank at 8 percent. With a current
C$/$ exchange rate of $1.345, what one-year forward contract rate would make the borrower
indifferent between the two loans?
a. 1.345
b. 1.324
c. 1.357
d. 1.362
percent for one year and the same in U.S. dollars at a Detroit bank at 8 percent. If the C$/U.S.$
one-year forward rate contract was priced at 1.344, which loan was more favorable to the
borrower?
a. The cost of the loan from the U.S. bank is lower.
b. The cost of the loan from the Canadian bank is lower.
c. The borrower is indifferent between the two at the forward rate of 1.344.
d. The solution cannot be calculated from the information above.
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international loan?
a. The cost of gathering information about the borrower.
b. The level of country risk.
c. The size of the borrowing business.
d. The credit risk of the borrower.
a. An analysis of both the borrower and borrower’s country is done by the bank’s foreign
lending and economic departments.
b. Evaluation involves a statistical analysis of the country’s political and economic risks.
c. Since the accounting standards in different countries vary, a financial analysis of the
borrower is not needed.
d. If the cost of doing the analysis internally is too high, bank can use outside information
sources. However, they should not be treated as reliable as the internal sources.
e. The higher the cost of gathering information, the higher the loan rate, reflecting the
increased risk due to unreliable information or lack of information.
a. late interest payments on a loan by a foreign borrower
b. increased exchange controls limiting the payment of interest on a loan.
c. the government guarantee of the borrower’s debt
d. LIBOR is increasing, therefore increasing the odds that the borrower will be unable to
meet their obligations
companies which
a. insures the foreign lending risk (trade credit) of exporters.
b. insures the foreign lending risk (trade credit) of importers.
c. insures bank loans made to developing nations.
d. assures that foreign exporters will pay their trade credit.
a. expropriation
b. nationalization
c. elimination of currency controls.
d. change of government
a. They conduct limited interbank money market transactions rather than retail public
operations.
b. They do foreign exchange transactions and limited loan participation in Eurocurrency
markets.
c. They pay local taxes.
d. All of the above are true
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a. an analysis of the borrower
b. an analysis of the country’s political and economic risks
c. an analysis of domestic economy
d. both a and b
e. all of the above
a. World Bank
b. Bank for International Settlements
c. European Central Bank
d. Federal Reserve Board
e. United Nations Financial Supervision Committee
a. Use the guarantees by governments, their central banks, and other agencies
b. Pooling risk by participating syndicate loans among banks to spread risk.
c. Diversification of foreign loan portfolio in different geographical regions and
industry
d. Selling nonperforming loans in the secondary market with a discount.
e. All above.
a. Japan – Bank of Japan
b. European Union – European Central Bank
c. China – Central Bank of China
d. The U.S. – Federal Reserve System
e. Canada – Bank of Canada
ESSAY QUESTIONS
1. What risks are involved in international lending? What methods do banks have to reduce these risks?
2. List the various organizational forms to deliver international banking services.
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3. Explain the “rollover pricing” feature of LIBOR lending?
4. What were the primary reasons U.S. banks began to develop overseas operations after World War II?
5. Explain how syndicated bank loans work and why they are particularly popular in international
lending.
6. How did technology innovations and internationalization of banking industry change the regulation?
How are these trends related to economies of scale and scope in the banking industry? How did these
changes lead to changes in regulations of bank activities and changes in geographic restrictions ?