2016-FRR Exam Dumps | After entering the securitization business, Delta Bank increases its cash efficiency by selling off the

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GARP.2016-FRR.v2024-09-09.q145
Question 116

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Question 116/145

After entering the securitization business, Delta Bank increases its cash efficiency by selling off the lower risk portions of the portfolio credit risk. This process ___ risk on the residual pieces of the credit portfolio, and as a result it ___ return on equity for the bank.

A. Decreases; increases;

B. Increases; increases;

C. Increases; decreases;

D. Decreases; increases;

Correct Answer: B

When Delta Bank sells off the lower-risk portions of its credit portfolio, it retains the higher-risk residual pieces. This process inherently increases the risk associated with the remaining portfolio because the lower-risk assets, which provided a cushion, are no longer part of the portfolio. As the risk increases, the potential return on these higher-risk assets also increases to compensate for the additional risk taken on by the bank. Consequently, this higher risk and potential return increase the bank's return on equity (ROE), as the bank is now leveraging more volatile assets that have higher potential returns.
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