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Question 291

Bank B is a correspondent of Bank A. Which of the following must be included in Bank A's calculation of credit exposure to Bank B?

A loan to Mr. Pierce from Bank A secured by Bank B common stock

Bank B's purchase of U.S. government T-Bills on behalf of Bank A under an overnight repurchase arrangement

Bank A's deposit account of $1 million in Bank B

A letter of credit issued by Bank B and pledged against the ACME Company's debt at Bank A

Correct Answer: C

Bank A's calculation of credit exposure to Bank B must include any deposits Bank A has with Bank B. This $1 million deposit account represents a direct exposure to Bank B because it is money that Bank A has entrusted to Bank B, and thus it is at risk should Bank B face any financial difficulties.

Discussion

Cam22Option: C

When calculating credit exposure to a correspondent bank, Bank A would include its deposit accounts held at Bank B. This is because the deposit account represents exposure to Bank B in the form of funds held by Bank A with Bank B. Options A, B, and D represent exposures of Bank B to Bank A but are not relevant to Bank A's calculation of credit exposure to Bank B.