MINI-TEST 1 (September 22, 2023)

The following statements are true or false. Briefly explain the reason.

1.When bad loans are charged off in an accounting period, they do not alter profit or loss of
the same period.

2.If available funds are not sufficient to meet credit need of a customer at the decision-
making timing, a bank can either seek for additional liabilities or co-financing arrangement
from other banks.

3.When a bank perfects its claim against an asset of a borrower, its claim is equal to those of
other creditors.

4.Loan review and loan work out must be carried out periodically in the lending process.

5.The lending process of a loan is completed when the loan agreement is signed and the
customer information is entered into a computer file (i.e., customer profile).

Bad answers:
-True. The charged off of bad loans does not alter profit or loss.
or
-False. Loan review and loan work out must not be carried out periodically.

Good answers:
Q: Interest rates on non-deposit liabilities are highly volatile.

A: True. Non-deposit borrowings are mainly short-term. The money market lenders, who
offer non-deposit sources of funds to banks, are looking for interest revenue while lending
their available capital to the depository institutions. Therefore, their offered interest rate is
sensitive to risks à Interest rates on non-deposits are highly volatile (see text book, p.139)
ANSWERS:
1. When bad loans are charged off in an accounting period, they do not alter profit
or loss of the same period.
A: True.
The term "charge-off" is an accounting term, meaning that the lender doesn't count
(bad) debts as their assets and write them off from balance sheet. Normally, bank makes
provision for potential loan loss, which decreases profit, before debts are really uncollectible.
Therefore, when a debt is “charged-off”, the allowance for loan loss declines by the same
amount, not the profit in the accounting period (p. 136 – Chapter 2).

2. If available funds are not sufficient to meet credit need of a customer at the
decision-making timing, a bank can either seek for additional liabilities or co-
financing arrangement from other banks.
A: True.
Bank can control not only the loan portfolio, but also sources of funds. In case of
insufficient funds for credit needs from borrowers, they may attract more deposits or non-
deposit liabilities. Syndicated lending is also an alternative to reduce the funding burden
among a group of lenders. (p. 428 – Chapter 13)

3. When a bank perfects its claim against an asset of a borrower, its claim is equal
to those of other creditors.
A: False. See page 534-535 - Chapter 16.

4. Loan review and loan work out must be carried out periodically in the lending
process.
A: False.
Loan review is undertaken on a periodic basis, such as 30, 60, 90 days for all types of
loans, along with a random sample of smaller loans. Loan work out is done for problematic
loans only, for the purpose of fund recovery. (p. 542-544 – Chapter 16)

5. The lending process of a loan is completed when the loan agreement is signed
and customer information is entered into a computer file (i.e., customer profile).
A: False.
The loan agreement should be monitored continuously to ensure the loan terms are
followed and all required payments of principal and interest are made as promised. Any
problem can be arising at any time before the final payment is made. Early detection of these
problems and quick solutions can protect banks from more serious headaches. (p. 530 –
Chapter 16)
 MINI-TEST 2 (October 23, 2023)

The following statements are true or false. Briefly explain the reason.

1. Credit analysis contains either judgmental or quantitative evaluation of borrower’s debt

2. The only purpose of taking collaterals from borrowers is to cover delinquent loans.

3. Interest rates of consumer loans mostly exceed those applied to business loans.

4. Banks should require borrowers’ pro forma statements audited to have a better judgment
of their creditworthiness.

5. The inherent potential loss in debit card is equal to that in credit card.

Bad answers:
-True. The charged off of bad loans does not alter profit or loss.
or
-False. Loan review and loan work out must not be carried out periodically.

Good answers:
Q: Interest rates on non-deposit liabilities are highly volatile.

A: True. Non-deposit borrowings are mainly short-term. The money market lenders,
who offer non-deposit sources of funds to banks, are looking for interest revenue while
lending their available capital to the depository institutions. Therefore, their offered interest
rate is sensitive to risks à Interest rates on non-deposits are highly volatile (see text book,
p.139)
ANSWERS:
1. Credit analysis contains either judgmental or quantitative evaluation of borrower’s
debt service capacity.
A: False.
Judgmental credit analysis entails evaluating the borrowers application and using prior
experience dealing with similar applicants to determine credit approval.
Quantitative credit analysis uses large pools of data, consisting of financial history and
default experience taken from a sample of actual companies. Subjective information about a
borrower carries little or no weight in the analysis.
No single credit risk rating system is best for all possible uses. Quantitative rating is simpler
and often less costly; however, they may fall short of the need for accuracy, flexibility, and
transparency. While judgmental assessment may be more costly, but more flexible in
adapting to different environments, and can be understood by users. When properly designed
and implemented, judgmental analysis delivers a higher degree of accuracy in ratings.
à It’s better to combine both judgmental and quantitative evaluation in credit rating.

2. The only purpose of taking collaterals from borrowers is to cover delinquent loans.
A: False.
Collaterals are required by banks for two purposes: (1) to cover what the borrower did
not pay back, and (2) give the lender a psychological advantage over the borrower, because
the borrower may feel more obliged to work harder to avoid loosing the assets. (p. 534 -
Chapter 16)

3. Interest rates of consumer loans mostly exceed those applied to business loans.
A: True. See page 599 - Chapter 18.

4. Banks should require borrowers’ pro forma statements audited to have a better
judgment of their creditworthiness.
A: False.
Pro forma statements are prepared by borrowers as a projection of future performance,
while auditors work on actual financial statements only. Therefore, pro forma statements
cannot be audited as required by banks, if any. (p. 573 – Chapter 17)

5. The inherent potential loss in debit card is equal to that in credit card.
A: False. See page 598.