Chap 9

By agreeing to service any assets that are packaged together in the securitization process a bank can:

• Ensure the assets that are packaged and securitized remain in the package and are not sold off.

• Choose the best loans to go through the securitization process.

• Earn added fee income.

• Liquidate any assets it chooses.

Loan sales by banks are generally of two types: (a) participation loans; and (b)__________. The term that correctly fills in the blank above is:

• Assignments
• Recourse loans

• Direct loans

• Subscription loans

In a collateralized mortgage obligation (CMO) a tranche:

• Promises a different return (coupon) to investors

• A liquidity enhancement

• Carries a different risk exposure

• A and C above

What are the ways to reduce the risk of standby credit letters?

• Avoid renegotiating the terms of loans of SLC customers

• Specialize in SLCs issued by the same region and industry

• Sell participations in standbys in order to share risk with other lending institutions

• Do not count standbys as loans when assessing the bank’s risk exposure

Loan sales are generally viewed as risk-reducing for the selling financial institution.

• True

• False

Securitized assets carry a unique form of risk called:

• Default risk

• Inflation risk

• Interest-rate risk

• Prepayment risk

• None of the above

Bank use of credit derivatives is dominated by the largest banks.

• True

• False

Banks are the principal sellers of credit derivatives.

• True

• False

Securitized assets as a source of bank funds are subject to reserve requirements set by the Federal Reserve Board.

• True

• False

The credit derivatives market has grown nine-fold during the recent years.

• True

• False