Chapter02 Testbank

Chapter 02 Testbank
Student: ___________________________________________________________________________
1.
Which of the following statements is true?
A. Non-bank depository institutions exclude building societies and credit unions.

B. A non-bank depository institution meets the legal definition of a bank.
C. Building societies are the same as credit unions.
D. A non-bank depository institution may be a building society or a credit union and a non-bank depository institution undertakes
many of the same activities of a bank without meeting the legal definition of a bank.
2.
A. Authorised depository institutions are those that have been granted an authority by the RBA to operate in Australia.
B. Authorised depository institutions are those that have been granted an authority by APRA to operate in Australia.
C. Authorised depository institutions are those that have been granted an authority by the Australian government to operate in
Australia.
D. Authorised depository institutions are those that have been granted an authority by ASIC to operate in Australia.
3.
A.
B.
C.
D.
Building societies are depository institutions.

Building societies usually operate on a cooperative basis.
In case of building societies the depositors are also members of the society.
All of the listed options are correct.
4.
Authorised depository institutions include:
A.
B.
C.
D.
banks, building societies, credit unions

banks, building societies
banks, credit unions
only banks
5.
A. Credit unions are mutual cooperative organisations.

B. Credit unions provide deposit facilities, personal and housing loans and payments services to their members.
C. In case of credit unions the depositors are also members of the society.
D. Credit unions are mutual cooperative organisations that provide deposit facilities, personal and housing loans and payments
services to their members.
6.
A. An off-balance-sheet item is recorded on the balance sheet of a financial institution when the annual report is being prepared.
B. An off-balance-sheet liability is an item that moves onto the liability side of the balance sheet when a contingent event occurs.
C. An off-balance-sheet asset is an item that moves onto the asset side of the balance sheet when a contingent event occurs or at the
end of a financial period.
D. All of the listed options are correct.
7.
Which of the following is a reason for the increase in the number of banks since the mid-1980s?
A. relaxation of entry requirements into the Australian banking industry

B. changes in the regulatory requirements of non-bank depository institutions
C. the need for a more sophisticated banking system in Australia
D. relaxation of entry requirements into the Australian banking industry and changes in the regulatory requirements of non-bank
depository institutions
8.
Which of the following statements is true for the Australian banking industry?
A.
B.
C.
D.
The Australian banking industry is highly concentrated.

There are four major banks in Australia.
The four major banks and the five regional banks offer a full range of commercial and investment banking services.
9.
Australia's big four banks include:
A.
B.
C.
D.
National Australia Bank, Commonwealth Bank of Australia, Westpac, Bendigo Bank.

National Australia Bank, Commonwealth Bank of Australia, Westpac, and Australia and New Zealand Banking Group.
National Australia Bank, Commonwealth Bank of Australia, Macquarie Bank, and Australia and New Zealand Banking Group.
None of the listed options are correct.
10.
The Australian major banks' 30-year average return on equity (ROE) is:
A.
B.
C.
D.
-16 %
-5 %
5%
16 %
11.
The difference between Australian major bank margins and those of regional banks is in the main due to:
A.
B.
C.
D.
flexibility of the regional banks.

the ability of the regional banks to issue covered bonds.
the advantage of the major banks in the funding market and to a lesser extent their asset mix.
12.
Which of the following is true of off-balance-sheet activities?
A.
B.
C.
D.
They involve generation of fees without exposure to any risk.

They include contingent activities recorded in the current balance sheet.
They invite regulatory costs and additional 'taxes'.
They have both risk-reducing as well as risk-increasing attributes.
13.
The most important source of bank funding is:
A.
B.
C.
D.
short-term debt
long-term debt
covered bonds
domestic deposits
14.
Following the global financial crisis, banks strengthened their funding and liquidity profiles by:
A.
B.
C.
D.
reducing their holdings of liquid assets

increasing their holdings of liquid assets
reducing their use of wholesale funds and increasing their holdings of liquid assets
increasing their use of wholesale funds and decreasing their holdings of liquid assets
15.
The collapse of Lehman Brothers in 2008 and the impact of the global financial crisis made it difficult for Australian banks to obtain off-shore
funding. As a consequence banks pursued more stable sources of funds. These strategies include:
A.
B.
C.
D.
increased use of wholesale long-term funding

decreased use of wholesale long-term funding
decreased holdings of liquid assets
decreased use of wholesale long-term funding and increased holdings of liquid assets
16.
A. The net interest margin is a profitability indicator and is measured as net income divided by earning assets.
B. The net interest margin is a profitability indicator and is measured by interest income minus interest expense, divided by earning
assets.
C. The net interest margin is a profitability indicator and is measured by interest income plus interest expense, divided by earning
assets.
D. The net interest margin is a profitability indicator and is measured as interest income minus non-interest income divided by total
assets.
17.
The market structure of the banking sector has changed since deregulation of the financial system during the 1980s. Which statement more closely
reflects the current structure of the banking sector in Australia?
A.
B.
C.
D.
Foreign banks dominate in number and share of total assets.

The major banks no longer hold the largest share of total assets.
Total assets are fairly evenly distributed between the major, regional and foreign banks.
The number of banks has grown steadily since the 1980s and the major banks maintain the highest percentage share of total assets.
18.
Which of the following is a role of a bank?
A.
B.
C.
D.
Attract funds from the capital markets to facilitate borrowing by the household sector.
Accept deposits and make loans and in doing so facilitate the flow of funds from borrowers to lenders.
Accept deposits and make loans and in doing so facilitate the flow of funds from savers to borrowers.
Manage the level of interest rates.
19.
Which of the following is true?
A.
B.
C.
D.
All banks are depository institutions and are authorised by APRA to carry out financial intermediation.
All authorised depository institutions are banks.
All financial intermediaries are authorised depository institutions by APRA to carry out financial intermediation.
20.
The number of banks has grown steadily since the middle of the 1980s for the following reasons:
A.
B.
C.
D.
liberalisation of conditions for foreign bank entry by APRA

deregulation of the banking industry, including the relaxation of bank entry requirements
changes to the regulatory regime for non-bank depository institutions favoured conversion from building society to banks
21.
The main features of the local banking industry over the two decades to 2010 have been an increase in concentration. This has occurred due to
mergers and acquisitions motivated by the desire to:
A.
B.
C.
D.
be competitive in global markets

protect against takeover by foreign competitors
increase efficiency in terms of economies of scale and scope
22.
A. Australian banks' decreased reliance on off-shore funding post GFC led to funding pressures and increased the costs of obtaining
funds.
B. Australian banks' increased reliance on off-shore funding post GFC led to funding pressures and increased the costs of funding.
C. Australian banks reduced their reliance on on-shore funding in an effort to reduce the costs of funding and ease pressure on
mortgage interest rates.
D. Australian banks increased their reliance on on-shore funding post GFC which led to funding pressures and increased the costs of
obtaining funds.
23.
In response to the GFC and the global liquidity crisis the Australian government introduced the following measure in 2008:
A. a financial claims scheme that provided coverage to all depositors in any financial institution
B. a financial claims scheme that guaranteed bank deposits coverage to depositors up to a million dollars per depositor
C. a financial claims scheme that guaranteed bank deposits coverage to depositors up to a million dollars per depositor and provided a
temporary wholesale funding guarantee
24.
Since 1 February 2012, a financial claims scheme provides protection to depositors up to:
A.
B.
C.
D.
$250 000 per account holder per ADI

$1 000 000 per account holder per ADI
25.
The term 'spread' refers to the difference between an FI's:
A.
B.
C.
D.
assets and liabilities

liabilities and equity
short-term lending rates and long-term lending rates
lending and deposit rates
26.
A. Capital adequacy regulations of banks were introduced in 1989.

B. Capital adequacy regulations require banks to hold, on average, less capital for low-risk assets such as housing loans compared to
higher risk assets such as commercial loans.
C. Capital adequacy regulations were abolished in 2000.
D. Capital adequacy regulations of banks were introduced in 1989 and capital adequacy regulations require banks to maintain levels
of capital adequate for the type of activity undertaken, on average, less capital for low-risk assets such as housing loans compared to
27.
The major reasons for the shift in the composition of bank lending commitments from the retail market to the commercial market are the:
A.
B.
C.
D.
introduction of capital adequacy regulations in 1989

number of non-bank depository institutions that gained banking licences in the early 1990s
fact that commercial loans paid higher returns than housing loans
None of the listed options are correct as the shift was from commercial loans to housing loans.
28.
Depository institutions are required by APRA to be responsible for:
A.
B.
C.
D.
their own liquidity management strategy that must include scenario analysis
their own capital management strategy that must include risk analysis
both their own liquidity, capital management strategies and a business continuity plan
None of the listed options are correct. APRA is responsible for the supervision and oversight of all depository institutions.
29.
A. Off-balance-sheet transactions for Australian banks include direct credit substitutes, interest rate derivative contracts and foreign
exchange derivative contracts.
B. On-balance-sheet transactions for Australian banks include direct futures and forward contracts.
C. Off-balance-sheet transactions for Australian banks include the commercial loans and term deposits.
30.
A. On average building societies are larger than credit unions and their total share of the depository institution market has increased
since 1992.
B. On average building societies are smaller than credit unions and their total share of the depository institution market has decreased
significantly since 1992.
C. On average building societies are larger than credit unions and their total share of the depository institution market has decreased
D. On average building societies are smaller than credit unions and their total share of the depository institution market has increased
since 1992.
31.
A.
B.
C.
D.
The majority of players in terms of asset value as a percentage of GDP in the Australian financial system are credit unions.
The majority of players in terms of asset value as a percentage of GDP in the Australian financial system are building societies.
The majority of players in terms of asset value as a percentage of GDP in the Australian financial system are banks.
The majority of players in terms of asset value as a percentage of GDP in the Australian financial system are superannuation funds.
32.
A. During the 1960s and 1970s, the growth of building societies ensured an increasing supply of funds for housing loans at reasonable
rates.
B. During the 1960s and 1970s, the credit union expansion ensured the availability of relatively low cost unsecured and secured
personal loans.
C. During the 1960s and 1970s, regulatory constraints meant that banks could not in general satisfy the demand for consumer credit.
33.
A. Deregulation of the banking system in the 1980s brought greater competition from the banks.
B. Deregulation of the banking system in the 1980s resulted in loss of market share by non-bank depository institutions.
C. Deregulation of the banking system in the 1980s brought greater competition from the non-bank depository institutions.
D. Deregulation of the banking system in the 1980s brought greater competition from the banks and resulted in loss of market share
by non-bank depository institutions.
34.
In which way did building societies respond to the competitive pressures resulting from the deregulation of the banking system in the 1980s?
A.
B.
C.
D.
They engaged in mergers for efficiency and scale reasons.

They adopted improved technology.
They diversified their products and activities.
35.
A. Key performance ratios for credit unions and building societies indicate that from 2005 to 2014 their cost structures were higher
than for banks.
B. Key performance ratios for credit unions and building societies indicate that from 2005 to 2014 their cost structures were lower
than for banks.
C. Deposits are a higher proportion of the funding base for banks than for credit unions and building societies.
D.
Despite credit unions and building societies having higher cost structures over the period 20052014 than banks, they have much lower bad debt
expenses than banks and hence have navigated the GFC well in terms of their overall performance.
36.
Costs to average assets ratio is the lowest for:
A.
B.
C.
D.
major banks
credit unions
building societies
credit unions and building societies
37.
Costs to average assets ratio is the highest for:
A.
B.
C.
D.
major banks
credit unions
building societies
major banks and building societies
38.
Which of the following statements is not true?
A.
B.
C.
D.
ACCC is responsible for market integrity and consumer protection across the financial system.
The RBA is responsible for prudential supervision and the promotion of financial system stability.
The RBA is responsible for monetary policy and for overall financial system stability.
APRA is responsible for prudential supervision of the financial services industry and supervises all deposit-taking institutions.
39.
A. Australia's current financial regulatory system has its origins in the late 1990s' Financial System Inquiry, commonly known as the
Campbell Committee.
B. Australia's current financial regulatory system has its origins in the late 1990s' Financial System Inquiry, commonly known as the
Wallis Committee.
C. Australia's current financial regulatory system has its origins in the late 1990s' Financial System Inquiry, commonly known as the
Martin Committee.
D. Australia's current financial regulatory system has its origins in the late 1990s' Financial System Inquiry, commonly known as the
Valentine Committee.
40.
The current financial system in Australia consists of three major agencies, these being:
A.
B.
C.
D.
APRA, ASIC and the Australian government

APRA, the RBA and the Australian government
APRA, ASIC and the RBA
the RBA, ASIC and the Australian government
41.
A.
B.
C.
D.
APRA stands for Australian Prudential Regulation Authority.

APRA stands for Australian Payments Regulation Association.
APRA stands for Australian Payments Review Authority.
42.
A.
B.
C.
D.
APRA is responsible for market integrity and consumer protection across the financial system.
The RBA is responsible for prudential supervision.
ASIC is responsible for monetary policy and for overall financial system stability.
43.
APRA's aim is to develop prudential policies that:
A.
B.
C.
D.
promote financial safety and efficiency and that enable smaller institutions to put competitive pressures on larger institutions
balance financial safety and efficiency, competition contestability and competitive neutrality
promote financial system stability and fair interest rates
protect consumers from predatory behaviour of financial institutions
44.
The Probability and Impact Rating System (PAIRS):
A.
B.
C.
D.
determines the response ASIC should make to the outcomes of PAIRS ratings
determines the response the RBA should make to the outcomes of bank failures
determines the response the RBA should make to the outcomes of financial crisis
45.
Some prudential standards issued by APRA include regulations regarding:
A.
B.
C.
D.
capital adequacy for market risk and liquidity

credit quality and capital adequacy for credit risk
large exposures, business continuity management and securitisation
46.
APRA's Supervisory Oversight and Response System (SOARS) is designed to assess the:
A. likelihood of FI failure
B. impact of the FI failure
C. impact of FI failure and provide the appropriate supervisory response, which in the case of a low PAIRS probability rating will
require restructure
D. impact of FI failure and provide the appropriate supervisory response, which in the case of an extreme PAIRS probability rating
will require restructure
47.
Off-balance-sheet activities are:
A. not shown on the current balance sheet

B. not shown on the balance sheet but after the completion of the financial year are recorded on the balance sheet
C. not shown on the current balance sheet but are an off-balance-sheet asset/liability, if when a contingent event occurs, the activity
moves onto the asset/liability side of the balance sheet
D. contingent events which move the asset or liability from the balance sheet to off balance sheet
48.
A. PAIRS provides APRA with a score-card approach to assessing the risk of FI failure and the impact of any failure.
B. PAIRS provides APRA with a single rating which incorporates both the probability that the FI will fail and the impact of any
failure.
C. PAIRS provides APRA with a rating that assesses the risk of FI failure.
D. PAIRS provides APRA with an impact factor that determines what regulatory response needs to be implemented to prevent FI
failure.
49.
Customer loans are classified on a DI's balance sheet as:
A.
B.
C.
D.
liabilities, because the customer may default on the loan

assets, because the DI earns servicing fees on the loan
liabilities, because the DI must transfer funds to the borrower at the initiation of the loan
assets, because DIs originate and monitor loan portfolios
50.
A.
B.
C.
D.

51.
Which of the following is not an off-balance-sheet activity for banks?
A.
B.
C.
D.
derivative contracts
loan commitments
standby letters of credit
trust services
52.
Which of the following observations concerning credit unions is not true?
A.
B.
C.
D.
They invest heavily in corporate securities.

Member loans constitute a majority of their total assets.
They engage in off-balance-sheet activities.
They focus more on providing services and less on profitability.
53.
Which of the following is part of the supervisory activities of APRA?
A. Prudential review is the most important as it provides a detailed assessment of an FI's inherent risks and the adequacy of its risk
management controls.
B. Licensing is the last stage of APRA's supervision which ensures that only FIs that have the capacity to successfully operate can
operate in the market.
C. Enforcement supervision is not part of APRA supervisory activity as it would involve enforcement teams to specifically intervene
in the running of the FI.
D. Entity financial analysis is the FI's own assessment of its financial position.
54.
Which of the following statements is not correct concerning credit risk?
A. Credit risk is the risk of counterparty default and is usually the single largest risk facing an FI.
B. Credit risk occurs when borrowers are unable to repay their loans on time.
C. Credit risk decreases when FIs concentrate their loan exposures on a few counterparties and APRA requires that FIs have
appropriate policies to manage such risk.
D. Credit risk increases when FIs concentrate their loan exposures on a few counterparties.
55.
Business continuity relates to:
A. an FI that has a business plan that meets the liquidity and capital requirements of APRA
B. a whole-of-business approach to FI operations and profitability
C. a business continuity plan which reduces the impact of any disruption on FI operations, reputation, profitability, depositors and
other stakeholders of an FI
D. a business continuity plan which increases profitability of an FI
56.
Credit unions were generally less affected than other depository institutions by the recent financial crisis because:
A.
B.
C.
D.
they hold more government securities, on average

they hold less government securities, on average
they had a focus on high-quality domestic assets
they had a focus on domestic deposits and more assets in residential mortgages
57.
Responding to the financial crisis, the Australian government introduced a number of measures to ease liquidity issues and included the following:
A. a permanent financial claims scheme (FCS) in October 2008, which explicitly guaranteed bank deposits with a $1 million cap
B. a semi-permanent financial claims scheme (FCS), which implicitly guaranteed bank deposits
C. a permanent guarantee scheme for large deposits and wholesale funding which, for a fee, guaranteed bank deposits greater than $1
million
D. a permanent financial claims scheme (FCS) in October 2008, which explicitly guaranteed bank deposits with a $1 million cap; the
guarantee was reduced to $250 000 per depositor from 2012
58.
Covered bonds:
A.
B.
C.
D.
were introduced following the GFC to ease liquidity pressures on the bank's balance sheet
are issued by a bank, backed by a pool of assets, which remain on the balance sheet of the issuing bank
are issued by a bank, backed by a pool of assets, which are off-balance-sheet items of the issuing bank
are issued by the Reserve Bank of Australia to FIs with liquidity problems
59.
Covered bonds:
A.
B.
C.
D.
can only be issued by building societies

can only be issued by credit unions
can only be issued by building societies and credit unions
are issued by a bank, backed by a pool of assets
60.
Depository institutions are financial institutions that only take deposits from savers, but do not lend money to borrowers.
True
False
61.
Depository institutions are financial institutions that only lend money to borrowers, but do not take deposits from savers.
True
False
62.
Non-bank depository institutions are also referred to as CUBS.
True
False
63.
CUBS means credit unions and building societies.
True
False
64.
In case of building societies, the members are usually linked to the society by some common bond such as locality or trade union.
True
False
65.
In case of credit unions, the members are usually linked to the society by some common bond such as employer or profession.
True
False
66.
A financial institution is an institution that performs financial intermediary services and/or services requiring transactions in the capital markets.
True
False
67.
Most foreign banks have succeeded in establishing a well-developed and profitable retail banking network in Australia.
True
False
68.
The growth in off-balance-sheet activities during the two decades from 1990 to 2014 was due, in large part, to the use of derivative contracts.
True
False
69.
During the 1960s and 1970s, the growth of credit unions ensured an increasing supply of funds for housing loans at reasonable rates, while the
building society expansion ensured the availability of relatively low cost unsecured and secured personal loans.
True
False
70.
The use of off-balance-sheet activities and instruments will always reduce the risk to a bank.
True
False
71.
The major banks' return on equity, a measure of bank profitability, has been lower than the regional banks with the gap widening since 2007.
True
False
72.
ASIC stands for Australian Society of Inter-bank Cooperation and ASIC is responsible for market integrity and consumer protection across the
financial system.
True
False
73.
Australia's current financial regulatory framework was reformed in 1999 and moved from industry-based regulation to functional regulation of
financial institutions.
True
False
74.
PAIRS provides APRA with a score-card approach to assessing the risk of FI failure and the impact of any failure by detailing the 12 risk elements
separately and disclosing the result to the FI being investigated.
True
False
75. Discuss the factors that contributed to Australia's financial resilience and relatively strong performance during the global financial
crisis.
76. Explain the Post Wallis Inquiry regulatory framework in Australia.
77. Compare and contrast credit unions with the major banks.
78.
APRA conducts a prudential supervisory framework that assesses FI risk and likelihood of FI failure and determines an appropriate supervisory
response. Outline the two systems implemented by APRAPAIRS and SOARSand the purpose of the assessment system.
Chapter 02 Testbank Key

1.
A. Non-bank depository institutions exclude building societies and credit unions.

B. A non-bank depository institution meets the legal definition of a bank.
C. Building societies are the same as credit unions.
D. A non-bank depository institution may be a building society or a credit union and a non-bank depository institution undertakes
many of the same activities of a bank without meeting the legal definition of a bank.
AACSB: Analytic
Bloom's: Application
Difficulty: Medium
Est time: 1-3
Learning Objective: 2.1 Learn the different types of depository institutions in Australia and how they compete in the same market and face similar risks
2.
A. Authorised depository institutions are those that have been granted an authority by the RBA to operate in Australia.
B. Authorised depository institutions are those that have been granted an authority by APRA to operate in Australia.
C. Authorised depository institutions are those that have been granted an authority by the Australian government to operate in
Australia.
D. Authorised depository institutions are those that have been granted an authority by ASIC to operate in Australia.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: 1-3
Learning Objective: 2.5 Learn the history of the industry comprising credit unions and building societies and the structure of their industry
3.
A.
B.
C.
D.
Building societies are depository institutions.

Building societies usually operate on a cooperative basis.
In case of building societies the depositors are also members of the society.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: <1
4.
Authorised depository institutions include:
A.
B.
C.
D.
banks, building societies, credit unions

banks, building societies
banks, credit unions
only banks
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: <1
5.
A. Credit unions are mutual cooperative organisations.

B. Credit unions provide deposit facilities, personal and housing loans and payments services to their members.
C. In case of credit unions the depositors are also members of the society.
D. Credit unions are mutual cooperative organisations that provide deposit facilities, personal and housing loans and payments
services to their members.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: 1-3
6.
A. An off-balance-sheet item is recorded on the balance sheet of a financial institution when the annual report is being prepared.
B. An off-balance-sheet liability is an item that moves onto the liability side of the balance sheet when a contingent event occurs.
C. An off-balance-sheet asset is an item that moves onto the asset side of the balance sheet when a contingent event occurs or at the
end of a financial period.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
Est time: 1-3
Learning Objective: 2.3 Gain an insight into the balance sheet of banks and the trends in assets, liabilities and capital
7.
Which of the following is a reason for the increase in the number of banks since the mid-1980s?
A. relaxation of entry requirements into the Australian banking industry

B. changes in the regulatory requirements of non-bank depository institutions
C. the need for a more sophisticated banking system in Australia
D. relaxation of entry requirements into the Australian banking industry and changes in the regulatory requirements of non-bank
depository institutions
AACSB: Analytic
Difficulty: Medium
Est time: 1-3
Learning Objective: 2.2 Gain an understanding of the major activities of banks and the industry structure
8.
Which of the following statements is true for the Australian banking industry?
A.
B.
C.
D.
The Australian banking industry is highly concentrated.

There are four major banks in Australia.
The four major banks and the five regional banks offer a full range of commercial and investment banking services.
AACSB: Analytic
Difficulty: Easy
Est time: <1
9.
Australia's big four banks include:
A.
B.
C.
D.
National Australia Bank, Commonwealth Bank of Australia, Westpac, Bendigo Bank.

National Australia Bank, Commonwealth Bank of Australia, Westpac, and Australia and New Zealand Banking Group.
National Australia Bank, Commonwealth Bank of Australia, Macquarie Bank, and Australia and New Zealand Banking Group.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: <1
10.
The Australian major banks' 30-year average return on equity (ROE) is:
A.
B.
C.
D.
-16 %
-5 %
5%
16 %
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: <1
Learning Objective: 2.4 Appreciate the key performance ratios of banks and the trends in bank performance
11.
The difference between Australian major bank margins and those of regional banks is in the main due to:
A.
B.
C.
D.
flexibility of the regional banks.

the ability of the regional banks to issue covered bonds.
the advantage of the major banks in the funding market and to a lesser extent their asset mix.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: <1
12.
A.
B.
C.
D.

AACSB: Analytic
Difficulty: Hard
Est time: 1-3
13.
The most important source of bank funding is:
A.
B.
C.
D.
short-term debt
long-term debt
covered bonds
domestic deposits
AACSB: Analytic
Difficulty: Easy
Est time: <1
14.
Following the global financial crisis, banks strengthened their funding and liquidity profiles by:
A.
B.
C.
D.
reducing their holdings of liquid assets

increasing their holdings of liquid assets
reducing their use of wholesale funds and increasing their holdings of liquid assets
increasing their use of wholesale funds and decreasing their holdings of liquid assets
AACSB: Analytic
Difficulty: Medium
Est time: 1-3
15.
The collapse of Lehman Brothers in 2008 and the impact of the global financial crisis made it difficult for Australian banks to obtain off-shore
funding. As a consequence banks pursued more stable sources of funds. These strategies include:
A.
B.
C.
D.
increased use of wholesale long-term funding

decreased use of wholesale long-term funding
decreased holdings of liquid assets
decreased use of wholesale long-term funding and increased holdings of liquid assets
AACSB: Analytic
Difficulty: Medium
Est time: 1-3
16.
A. The net interest margin is a profitability indicator and is measured as net income divided by earning assets.
B. The net interest margin is a profitability indicator and is measured by interest income minus interest expense, divided by earning
assets.
C. The net interest margin is a profitability indicator and is measured by interest income plus interest expense, divided by earning
assets.
D. The net interest margin is a profitability indicator and is measured as interest income minus non-interest income divided by total
assets.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: 1-3
17.
The market structure of the banking sector has changed since deregulation of the financial system during the 1980s. Which statement more closely
reflects the current structure of the banking sector in Australia?
A.
B.
C.
D.
Foreign banks dominate in number and share of total assets.

The major banks no longer hold the largest share of total assets.
Total assets are fairly evenly distributed between the major, regional and foreign banks.
The number of banks has grown steadily since the 1980s and the major banks maintain the highest percentage share of total assets.
AACSB: Analytic
Difficulty: Medium
Est time: 1-3
18.
Which of the following is a role of a bank?
A.
B.
C.
D.
Attract funds from the capital markets to facilitate borrowing by the household sector.
Accept deposits and make loans and in doing so facilitate the flow of funds from borrowers to lenders.
Accept deposits and make loans and in doing so facilitate the flow of funds from savers to borrowers.
Manage the level of interest rates.
AACSB: Analytic
Difficulty: Medium
Est time: 1-3
19.
A.
B.
C.
D.
All banks are depository institutions and are authorised by APRA to carry out financial intermediation.
All authorised depository institutions are banks.
All financial intermediaries are authorised depository institutions by APRA to carry out financial intermediation.
AACSB: Analytic
Difficulty: Medium
Est time: <1
20.
The number of banks has grown steadily since the middle of the 1980s for the following reasons:
A.
B.
C.
D.
liberalisation of conditions for foreign bank entry by APRA

deregulation of the banking industry, including the relaxation of bank entry requirements
changes to the regulatory regime for non-bank depository institutions favoured conversion from building society to banks
AACSB: Analytic
Difficulty: Easy
Est time: 1-3
21.
The main features of the local banking industry over the two decades to 2010 have been an increase in concentration. This has occurred due to
mergers and acquisitions motivated by the desire to:
A.
B.
C.
D.
be competitive in global markets

protect against takeover by foreign competitors
increase efficiency in terms of economies of scale and scope
AACSB: Analytic
Difficulty: Hard
Est time: 1-3
22.
A. Australian banks' decreased reliance on off-shore funding post GFC led to funding pressures and increased the costs of obtaining
funds.
B. Australian banks' increased reliance on off-shore funding post GFC led to funding pressures and increased the costs of funding.
C. Australian banks reduced their reliance on on-shore funding in an effort to reduce the costs of funding and ease pressure on
mortgage interest rates.
D. Australian banks increased their reliance on on-shore funding post GFC which led to funding pressures and increased the costs of
obtaining funds.
AACSB: Analytic
Difficulty: Hard
Est time: 1-3
23.
In response to the GFC and the global liquidity crisis the Australian government introduced the following measure in 2008:
A. a financial claims scheme that provided coverage to all depositors in any financial institution
B. a financial claims scheme that guaranteed bank deposits coverage to depositors up to a million dollars per depositor
C. a financial claims scheme that guaranteed bank deposits coverage to depositors up to a million dollars per depositor and provided a
temporary wholesale funding guarantee
AACSB: Analytic
Difficulty: Medium
Est time: 1-3
24.
Since 1 February 2012, a financial claims scheme provides protection to depositors up to:
A.
B.
C.
D.

$1 000 000 per account holder per ADI
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: <1
25.
The term 'spread' refers to the difference between an FI's:
A.
B.
C.
D.
assets and liabilities

liabilities and equity
short-term lending rates and long-term lending rates
lending and deposit rates
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: <1
26.
A. Capital adequacy regulations of banks were introduced in 1989.

B. Capital adequacy regulations require banks to hold, on average, less capital for low-risk assets such as housing loans compared to
C. Capital adequacy regulations were abolished in 2000.
D. Capital adequacy regulations of banks were introduced in 1989 and capital adequacy regulations require banks to maintain levels
of capital adequate for the type of activity undertaken, on average, less capital for low-risk assets such as housing loans compared to
AACSB: Analytic
Difficulty: Medium
Est time: 1-3
Learning Objective: 2.8 Understand the key areas of regulation and the reasons why these areas are targeted for regulation
27.
The major reasons for the shift in the composition of bank lending commitments from the retail market to the commercial market are the:
A.
B.
C.
D.
introduction of capital adequacy regulations in 1989

number of non-bank depository institutions that gained banking licences in the early 1990s
fact that commercial loans paid higher returns than housing loans
None of the listed options are correct as the shift was from commercial loans to housing loans.
AACSB: Analytic
Difficulty: Hard
Est time: 1-3
28.
Depository institutions are required by APRA to be responsible for:
A.
B.
C.
D.
their own liquidity management strategy that must include scenario analysis
their own capital management strategy that must include risk analysis
both their own liquidity, capital management strategies and a business continuity plan
None of the listed options are correct. APRA is responsible for the supervision and oversight of all depository institutions.
AACSB: Analytic
Difficulty: Medium
Est time: 1-3
29.
A. Off-balance-sheet transactions for Australian banks include direct credit substitutes, interest rate derivative contracts and foreign
exchange derivative contracts.
B. On-balance-sheet transactions for Australian banks include direct futures and forward contracts.
C. Off-balance-sheet transactions for Australian banks include the commercial loans and term deposits.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: 1-3
30.
A. On average building societies are larger than credit unions and their total share of the depository institution market has increased
since 1992.
B. On average building societies are smaller than credit unions and their total share of the depository institution market has decreased
C. On average building societies are larger than credit unions and their total share of the depository institution market has decreased
D. On average building societies are smaller than credit unions and their total share of the depository institution market has increased
since 1992.
AACSB: Analytic
Difficulty: Medium
Est time: 1-3
31.
A.
B.
C.
D.
The majority of players in terms of asset value as a percentage of GDP in the Australian financial system are credit unions.
The majority of players in terms of asset value as a percentage of GDP in the Australian financial system are building societies.
The majority of players in terms of asset value as a percentage of GDP in the Australian financial system are banks.
The majority of players in terms of asset value as a percentage of GDP in the Australian financial system are superannuation funds.
AACSB: Analytic
Difficulty: Medium
Est time: 1-3
32.
A. During the 1960s and 1970s, the growth of building societies ensured an increasing supply of funds for housing loans at reasonable
rates.
B. During the 1960s and 1970s, the credit union expansion ensured the availability of relatively low cost unsecured and secured
personal loans.
C. During the 1960s and 1970s, regulatory constraints meant that banks could not in general satisfy the demand for consumer credit.
AACSB: Analytic
Difficulty: Medium
Est time: 1-3
Learning Objective: 2.6 Gain an understanding of the changing shape of the market for credit unions and building societies and how they have performed
33.
A. Deregulation of the banking system in the 1980s brought greater competition from the banks.
B. Deregulation of the banking system in the 1980s resulted in loss of market share by non-bank depository institutions.
C. Deregulation of the banking system in the 1980s brought greater competition from the non-bank depository institutions.
D. Deregulation of the banking system in the 1980s brought greater competition from the banks and resulted in loss of market share
by non-bank depository institutions.
AACSB: Analytic
Difficulty: Medium
Est time: 1-3
34.
In which way did building societies respond to the competitive pressures resulting from the deregulation of the banking system in the 1980s?
A.
B.
C.
D.
They engaged in mergers for efficiency and scale reasons.

They adopted improved technology.
They diversified their products and activities.
AACSB: Analytic
Difficulty: Easy
Est time: <1
35.
A. Key performance ratios for credit unions and building societies indicate that from 2005 to 2014 their cost structures were higher
than for banks.
B. Key performance ratios for credit unions and building societies indicate that from 2005 to 2014 their cost structures were lower
than for banks.
C. Deposits are a higher proportion of the funding base for banks than for credit unions and building societies.
D.
Despite credit unions and building societies having higher cost structures over the period 20052014 than banks, they have much lower bad debt
expenses than banks and hence have navigated the GFC well in terms of their overall performance.
AACSB: Analytic
Difficulty: Medium
Est time: 1-3
36.
Costs to average assets ratio is the lowest for:
A.
B.
C.
D.
major banks
credit unions
building societies
credit unions and building societies
AACSB: Analytic
Difficulty: Medium
Est time: 1-3
37.
Costs to average assets ratio is the highest for:
A.
B.
C.
D.
major banks
credit unions
building societies
major banks and building societies
AACSB: Analytic
Difficulty: Medium
Est time: 1-3
38.
Which of the following statements is not true?
A.
B.
C.
D.
ACCC is responsible for market integrity and consumer protection across the financial system.
The RBA is responsible for prudential supervision and the promotion of financial system stability.
The RBA is responsible for monetary policy and for overall financial system stability.
APRA is responsible for prudential supervision of the financial services industry and supervises all deposit-taking institutions.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: 1-3
Learning Objective: 2.7 Appreciate the regulatory framework governing the activities of Australian depository institutions and the key regulatory agencies
39.
A. Australia's current financial regulatory system has its origins in the late 1990s' Financial System Inquiry, commonly known as the
Campbell Committee.
B. Australia's current financial regulatory system has its origins in the late 1990s' Financial System Inquiry, commonly known as the
Wallis Committee.
C. Australia's current financial regulatory system has its origins in the late 1990s' Financial System Inquiry, commonly known as the
Martin Committee.
D. Australia's current financial regulatory system has its origins in the late 1990s' Financial System Inquiry, commonly known as the
Valentine Committee.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: 1-3
40.
The current financial system in Australia consists of three major agencies, these being:
A.
B.
C.
D.
APRA, ASIC and the Australian government

APRA, the RBA and the Australian government
APRA, ASIC and the RBA
the RBA, ASIC and the Australian government
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: <1
41.
A.
B.
C.
D.
APRA stands for Australian Prudential Regulation Authority.

APRA stands for Australian Payments Regulation Association.
APRA stands for Australian Payments Review Authority.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: <1
42.
A.
B.
C.
D.
APRA is responsible for market integrity and consumer protection across the financial system.
The RBA is responsible for prudential supervision.
ASIC is responsible for monetary policy and for overall financial system stability.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: 1-3
43.
APRA's aim is to develop prudential policies that:
A.
B.
C.
D.
promote financial safety and efficiency and that enable smaller institutions to put competitive pressures on larger institutions
balance financial safety and efficiency, competition contestability and competitive neutrality
promote financial system stability and fair interest rates
protect consumers from predatory behaviour of financial institutions
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: 1-3
44.
The Probability and Impact Rating System (PAIRS):
A.
B.
C.
D.
determines the response ASIC should make to the outcomes of PAIRS ratings
determines the response the RBA should make to the outcomes of bank failures
determines the response the RBA should make to the outcomes of financial crisis
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: 1-3
45.
Some prudential standards issued by APRA include regulations regarding:
A.
B.
C.
D.
capital adequacy for market risk and liquidity

credit quality and capital adequacy for credit risk
large exposures, business continuity management and securitisation
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: 1-3
46.
APRA's Supervisory Oversight and Response System (SOARS) is designed to assess the:
A. likelihood of FI failure
B. impact of the FI failure
C. impact of FI failure and provide the appropriate supervisory response, which in the case of a low PAIRS probability rating will
require restructure
D. impact of FI failure and provide the appropriate supervisory response, which in the case of an extreme PAIRS probability rating
will require restructure
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: 1-3
47.
Off-balance-sheet activities are:
A. not shown on the current balance sheet

B. not shown on the balance sheet but after the completion of the financial year are recorded on the balance sheet
C. not shown on the current balance sheet but are an off-balance-sheet asset/liability, if when a contingent event occurs, the activity
moves onto the asset/liability side of the balance sheet
D. contingent events which move the asset or liability from the balance sheet to off balance sheet
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: 1-3
48.
A. PAIRS provides APRA with a score-card approach to assessing the risk of FI failure and the impact of any failure.
B. PAIRS provides APRA with a single rating which incorporates both the probability that the FI will fail and the impact of any
failure.
C. PAIRS provides APRA with a rating that assesses the risk of FI failure.
D. PAIRS provides APRA with an impact factor that determines what regulatory response needs to be implemented to prevent FI
failure.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: 1-3
49.
Customer loans are classified on a DI's balance sheet as:
A.
B.
C.
D.
liabilities, because the customer may default on the loan

assets, because the DI earns servicing fees on the loan
liabilities, because the DI must transfer funds to the borrower at the initiation of the loan
assets, because DIs originate and monitor loan portfolios
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: <1
50.
A.
B.
C.
D.

AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: <1
51.
Which of the following is not an off-balance-sheet activity for banks?
A.
B.
C.
D.
derivative contracts
loan commitments
standby letters of credit
trust services
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: <1
52.
Which of the following observations concerning credit unions is not true?
A.
B.
C.
D.
They invest heavily in corporate securities.

Member loans constitute a majority of their total assets.
They engage in off-balance-sheet activities.
They focus more on providing services and less on profitability.
AACSB: Analytic
Difficulty: Medium
Est time: 1-3
53.
Which of the following is part of the supervisory activities of APRA?
A. Prudential review is the most important as it provides a detailed assessment of an FI's inherent risks and the adequacy of its risk
management controls.
B. Licensing is the last stage of APRA's supervision which ensures that only FIs that have the capacity to successfully operate can
operate in the market.
C. Enforcement supervision is not part of APRA supervisory activity as it would involve enforcement teams to specifically intervene
in the running of the FI.
D. Entity financial analysis is the FI's own assessment of its financial position.
AACSB: Analytic
Difficulty: Medium
Est time: 1-3
54.
Which of the following statements is not correct concerning credit risk?
A. Credit risk is the risk of counterparty default and is usually the single largest risk facing an FI.
B. Credit risk occurs when borrowers are unable to repay their loans on time.
C. Credit risk decreases when FIs concentrate their loan exposures on a few counterparties and APRA requires that FIs have
appropriate policies to manage such risk.
D. Credit risk increases when FIs concentrate their loan exposures on a few counterparties.
AACSB: Analytic
Difficulty: Medium
Est time: 1-3
55.
Business continuity relates to:
A. an FI that has a business plan that meets the liquidity and capital requirements of APRA
B. a whole-of-business approach to FI operations and profitability
C. a business continuity plan which reduces the impact of any disruption on FI operations, reputation, profitability, depositors and
other stakeholders of an FI
D. a business continuity plan which increases profitability of an FI
AACSB: Analytic
Difficulty: Medium
Est time: 1-3
56.
Credit unions were generally less affected than other depository institutions by the recent financial crisis because:
A.
B.
C.
D.
they hold more government securities, on average

they hold less government securities, on average
they had a focus on high-quality domestic assets
they had a focus on domestic deposits and more assets in residential mortgages
AACSB: Analytic
Difficulty: Medium
Est time: 1-3
57.
Responding to the financial crisis, the Australian government introduced a number of measures to ease liquidity issues and included the following:
A. a permanent financial claims scheme (FCS) in October 2008, which explicitly guaranteed bank deposits with a $1 million cap
B. a semi-permanent financial claims scheme (FCS), which implicitly guaranteed bank deposits
C. a permanent guarantee scheme for large deposits and wholesale funding which, for a fee, guaranteed bank deposits greater than $1
million
D. a permanent financial claims scheme (FCS) in October 2008, which explicitly guaranteed bank deposits with a $1 million cap; the
guarantee was reduced to $250 000 per depositor from 2012
AACSB: Analytic
Difficulty: Medium
Est time: 1-3
58.
Covered bonds:
A.
B.
C.
D.
were introduced following the GFC to ease liquidity pressures on the bank's balance sheet
are issued by a bank, backed by a pool of assets, which remain on the balance sheet of the issuing bank
are issued by a bank, backed by a pool of assets, which are off-balance-sheet items of the issuing bank
are issued by the Reserve Bank of Australia to FIs with liquidity problems
AACSB: Analytic
Difficulty: Medium
Est time: 1-3
59.
Covered bonds:
A.
B.
C.
D.
can only be issued by building societies

can only be issued by credit unions
can only be issued by building societies and credit unions
are issued by a bank, backed by a pool of assets
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: 1-3
60.
Depository institutions are financial institutions that only take deposits from savers, but do not lend money to borrowers.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: <1
61.
Depository institutions are financial institutions that only lend money to borrowers, but do not take deposits from savers.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: <1
62.
Non-bank depository institutions are also referred to as CUBS.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: <1
63.
CUBS means credit unions and building societies.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: <1
64.
In case of building societies, the members are usually linked to the society by some common bond such as locality or trade union.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: <1
65.
In case of credit unions, the members are usually linked to the society by some common bond such as employer or profession.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: <1
66.
A financial institution is an institution that performs financial intermediary services and/or services requiring transactions in the capital markets.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: <1
67.
Most foreign banks have succeeded in establishing a well-developed and profitable retail banking network in Australia.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: <1
68.
The growth in off-balance-sheet activities during the two decades from 1990 to 2014 was due, in large part, to the use of derivative contracts.
TRUE
AACSB: Analytic
Difficulty: Medium
Est time: <1
69.
During the 1960s and 1970s, the growth of credit unions ensured an increasing supply of funds for housing loans at reasonable rates, while the
building society expansion ensured the availability of relatively low cost unsecured and secured personal loans.
FALSE
AACSB: Analytic
Difficulty: Medium
Est time: 1-3
70.
The use of off-balance-sheet activities and instruments will always reduce the risk to a bank.
FALSE
AACSB: Analytic
Difficulty: Medium
Est time: <1
71.
The major banks' return on equity, a measure of bank profitability, has been lower than the regional banks with the gap widening since 2007.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: <1
72.
ASIC stands for Australian Society of Inter-bank Cooperation and ASIC is responsible for market integrity and consumer protection across the
financial system.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: <1
73.
Australia's current financial regulatory framework was reformed in 1999 and moved from industry-based regulation to functional regulation of
financial institutions.
TRUE
AACSB: Analytic
Difficulty: Medium
Est time: <1
74.
PAIRS provides APRA with a score-card approach to assessing the risk of FI failure and the impact of any failure by detailing the 12 risk elements
separately and disclosing the result to the FI being investigated.
FALSE
AACSB: Analytic
Difficulty: Hard
Est time: <1
75. Discuss the factors that contributed to Australia's financial resilience and relatively strong performance during the global financial
crisis.
The maintenance of high lending standards and risk conservatism during the 2000s was one of the reasons why the Australian economy generally was
less impacted by the GFC than many other countries. Despite the changes in structure of the banking industry, the Australian banks performance
during the GFC was relatively good compared to global markets. Some features that prevented excessive risk-taking by Australian financial
institutions include the following:
a. Internal governance characteristics are one possible factor. Inherent conservatism induced by memory of the banking crisis at the start of the 1990s
may have been another, inducing lower risk lending and limiting exposure.
b. External influences may also have been important influences upon risk-taking. For example, deposit and debt markets could have exerted
discipline against excessive risk-taking, if depositors believed that their funds were at risk and subordination of debt holder claims due to depositor
preference increased monitoring.
c. Another external influence is regulation and strong prudential supervision. The twin-peaks model adopted just prior to the start of the decade
created a specialist prudential regulator (APRA) and a specialist corporate, markets and financial services regulator (ASIC). Such specialisation may
have facilitated more effective prudential regulation and prevention of excessive risk-taking. Also, with the collapse of the major insurance company
HIH at the start of the decade, a tougher approach to prudential regulation was induced.
d. Another factor may have been the overall structure of financing in the economy. With (major) Australian banks borrowing extensively offshore
(helping to finance Australias current account deficit) and able to profitably use those funds for housing and other domestic lending, there were
limited incentives to invest in ultimately 'toxic' assets and have very limited involvement in securities trading on their own account and consequently
did not have material holdings of assets (such as collateralised debt obligations) that caused large asset write-downs by many large international
banks.
AACSB: Reflective thinking

Bloom's: Analysis
Difficulty: Hard
Est time: 10-20
76. Explain the Post Wallis Inquiry regulatory framework in Australia.
Australias current financial regulatory framework has its origins in the Wallis Committees Financial System Inquiry of the late 1990s. The main
elements of the new regulatory framework recommended by the Wallis Committee were fully implemented by 1999. The changes included wideranging reforms to the structure of financial regulation based on function rather than industry, and were designed to improve financial system
efficiency and competitiveness. Prior to these reforms FI regulation was based on industry, while financial markets, such as securities, futures and
foreign exchange markets and products, were regulated on a functional basis. Consequently, with FIs covering many functional types, regulatory
supervision was complex and involved a number of different authorities. For example, banks were regulated by the RBA, yet their growing funds
management, superannuation and insurance activities were supervised by different agencies. As the distinction between the activities of different
types of FIs became increasingly blurred in the deregulated financial environment of the 1990s, the unwieldy regulation resulted in duplication,
inconsistencies, inefficiencies and unintended regulatory gaps. These challenges were overcome by the Wallis Committees regulatory reforms. By
1999, the regulatory framework consisted of three agencies, each with specific functional responsibilities:
1. Australian Prudential Regulation Authority (APRA), with responsibility for prudential regulation and supervision of financial institutions
2. Australian Securities and Investments Commission (ASIC), with responsibility for market integrity and consumer protection across the financial
system
3. Reserve Bank of Australia (RBA), with responsibility for monetary policy and for overall financial system stability.
AACSB: Communication
Bloom's: Comprehension
Difficulty: Hard
Est time: 10-15
77. Compare and contrast credit unions with the major banks.
In Australia, banks and credit unions are classified as depository institutions (DIs) and are both regulated by APRA. Credit unions are subject to the
same prudential regulations as banks.
Historically, Australia's largest banks have operated as well-diversified financial institutions, with large holdings of residential mortgages as well as
personal and commercial loans, thus covering both retail and business sectors. Credit unions tend to concentrate on retail finance-related activities,
such as personal and small business loans, and residential mortgages tend to dominate their asset portfolios.
Bank assets have grown from 50 per cent of GDP in 1990 to more than 200 per cent in 2012, whereas the non-bank depository institutions including
credit unions have fluctuated between 10 and 20 per cent of GDP. In terms of total FI assets, banks again dominate, holding more than 60 per cent of
total FI assets.
Credit unions market share changed very little from 1992 to 2011 (at 2 per cent); although during this period it rose as high as 2.9 per cent. The most
notable changes in credit union assets are the fall in cash and liquid assets (from 11.4 per cent of total assets in 1990 to 3.8 per cent in 2011) and the
rise in housing loans (from 17.8 per cent in 1990 to 69.8 per cent in 2011).
Deposits form the priority funding base for credit unions, representing nearly 83 per cent in 2011, a much higher proportion than banks with only
60.6 per cent in 2011. Moreover, the cost structure of credit unions is higher than for banks, credit union expenses represent more than 2.5 per cent of
assets. Also credit unions operate on higher interest margins than major banks.
Bloom's: Analysis
Difficulty: Medium
Est time: 10-15
78.
APRA conducts a prudential supervisory framework that assesses FI risk and likelihood of FI failure and determines an appropriate supervisory
response. Outline the two systems implemented by APRAPAIRS and SOARSand the purpose of the assessment system.
The main objectives of the FI risk assessment are to:

determine the probability that an FI will not meet its financial commitments
measure the impact of the potential consequences of not meeting those commitments
determine an appropriate supervisory action plan to address the key issues identified.
The risk assessment is made using two APRA systems (PAIRS and SOARS) which together provide a structure to guide APRA in gauging risks and
determining the appropriate supervisory response.
A Probability and Impact Rating System (PAIRS) assessment details APRA's assessment of key risks, management and controls and capital support
for the institution and its supervisory action plan. APRA's supervisory actions are driven by its Supervisory Oversight and Response System
(SOARS). The outcome of the PAIRS process determines the SOARS response. SOARS sorts FIs into four types of supervisory responses: normal,
oversight, mandated improvement and restructure.

Bloom's: Analysis
Difficulty: Hard
Est time: 10-15
Chapter 02 Testbank Summary

Category
# of Question
s
AACSB: Analytic
74
2
2
Bloom's: Analysis
3
37
Bloom's: Comprehension
1
Bloom's: Knowledge
37
Difficulty: Easy
18
Difficulty: Hard
9
Difficulty: Medium
51
Est time: 1-3
44
Est time: 10-15
3
Est time: 10-20
1
Est time: <1
30
Learning Objective: 2.1 Learn the different types of depository institutions in Australia and how they compete in the same market an
8
d face similar risks
13
18
2
Learning Objective: 2.5 Learn the history of the industry comprising credit unions and building societies and the structure of their in
12
dustry
Learning Objective: 2.6 Gain an understanding of the changing shape of the market for credit unions and building societies and how
9
they have performed
Learning Objective: 2.7 Appreciate the regulatory framework governing the activities of Australian depository institutions and the ke
14
y regulatory agencies
9

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What are the different types of depository institutions in Australia?

What are the different types of depository institutions in Australia?

What are the major activities of banks?

What are the major activities of banks?

Chapter 02 Testbank

A. Non-bank depository institutions exclude building societies and credit unions.

Building societies are depository institutions.

banks, building societies, credit unions

A. Credit unions are mutual cooperative organisations.

A. relaxation of entry requirements into the Australian banking industry

The Australian banking industry is highly concentrated.

National Australia Bank, Commonwealth Bank of Australia, Westpac, Bendigo Bank.

flexibility of the regional banks.

They involve generation of fees without exposure to any risk.

reducing their holdings of liquid assets

increased use of wholesale long-term funding

Foreign banks dominate in number and share of total assets.

liberalisation of conditions for foreign bank entry by APRA

be competitive in global markets

$250 000 per account holder per ADI

assets and liabilities

A. Capital adequacy regulations of banks were introduced in 1989.

introduction of capital adequacy regulations in 1989

They engaged in mergers for efficiency and scale reasons.

APRA, ASIC and the Australian government

APRA stands for Australian Prudential Regulation Authority.

capital adequacy for market risk and liquidity

A. not shown on the current balance sheet

liabilities, because the customer may default on the loan

They involve generation of fees without exposure to any risk.

They invest heavily in corporate securities.

they hold more government securities, on average

can only be issued by building societies

76. Explain the Post Wallis Inquiry regulatory framework in Australia.