Which one of the following four options does NOT represent a benefit of compensating balances to the bank?

• A.Compensating balances allow the bank to net some of the exposure they may have in case of default, by
  taking funds from these specific deposit account one the borrower defaults.
• B.Since the compensating balances reduce the next amount lent to the borrower, the earned return on the
  loan is increased, further widening the bank's interest rate margin and profitability.
• C.Since the compensating balances cannot be withdrawn at short notice, if at all, they are not considered
  transaction accounts and are able to provide a stable funding to the bank, reducing its reliance on more
  volatile external inter-bank based funding sources.
• D.Compensation balances influence the expected loss rate of the bank given the default obligor and
  improve capital structure by controlling obligor type and avoiding payment delays.

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On January 1, 2010 the TED (treasury-euro dollar) spread was 0.4%, and on January 31, 2010 the TED spread
is 0.9%. As a risk manager, how would you interpret this change?

• A.Increase in interest rates on both interbank loans and T-bills.
• B.The decrease in the TED spread indicates an increase in credit risk on interbank loans.
• C.Increase in credit risk on T-bills.
• D.The decrease in the TED spread indicates a decrease in credit risk on interbank loans.

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10 basis points are equal to:

• A.0.01%
• B.0.1%
• C.1%
• D.10%

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Which of the following measure describes the symmetry of a statistical distribution?

• A.Skewness
• B.Standard deviation
• C.Kurtosis
• D.Mean

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Why is economic capital across market, credit and operational risks simply added up to arrive at an estimate of
aggregate economic capital in practice?

• A.In practice, it is very difficult to estimate the correlations between the risk categories and as a result a
  conservative estimate is obtained by adding up the risks.
• B.Regulators require banks to add up economic capital across market, credit and operational risks.
• C.Market, credit and operational risks are perfectly correlated which justifies adding up their associated
  economic capital.
• D.Since market, credit and operational risks are significantly different measures of risk, there is no
  diversification benefit to computing economic capital to banks across types of risks.

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