Select all that are true regarding credit risk for a bank. OThis risk is an estimate of future uncollectibility that results in a provision expense on the bank's income statement. O Changes in the business cycle affect all firms the same, so credit risk is pro-cyclical. O Despite it's significance to banks, the housing market is a small part of the economy and has little effect elsewhere so there is no impact to credit risk. O Material changes in the housing market impacts banks and their credit risk significantly due to the relative size of the mortgage portfolios. O Business cycles create variations in this risk, but affect each borrower differently.

Select all that are true regarding credit risk for a bank. OThis risk is an estimate of future uncollectibility that results in a provision expense on the bank's income statement. O Changes in the business cycle affect all firms the same, so credit risk is pro-cyclical. O Despite it's significance to banks, the housing market is a small part of the economy and has little effect elsewhere so there is no impact to credit risk. O Material changes in the housing market impacts banks and their credit risk significantly due to the relative size of the mortgage portfolios. O Business cycles create variations in this risk, but affect each borrower differently.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Which type of information asymmetry explains why bad credit risks are more likely to seek bank loans? A. Moral hazard B. Adverse selection C. Principal-agent problem
Why is it that oftentimes banks refuse to lend to many borrowers even though they offer high interest rates? To reduce the exposure to diversification risk. To reduce the exposure to interest rate risk. To reduce the exposure to credit risk. To reduce transactions costs To reduce the free-rider problem.
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A bank wants to implement a loan pricing model and has to look at several variables to consider. Please select the variable that is incorrectly described. a. A profit margin to provide the bank with an adequate return on capital. b. Risk premium to counter the effect of default risk. c. Cost of funding that include the cost of bonds issued. d. Operating costs that include the cost of interest paid to depositors.
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1) If borrowers with the most risky investment projects seek bank loans in higher proportion to those borrowers with the safest investment projects, banks are said to face the problem of A) adverse credit risk. B) adverse selection. C) moral hazard. D) lemon lenders.
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