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 142

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Question 142/145

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 ___ return on equity for the bank, because the cash generated by the risk-transfer and the overall ___ of the bank's exposure to the risk.

A. Increases; increase;

B. Increases; reduction;

C. Decreases; increase;

D. Decreases; reduction;

Correct Answer: B

* By selling off the lower risk portions of the portfolio credit risk, Delta Bank can increase its cash efficiency. This process generates cash which can be reinvested or used for other purposes, effectively improving the return on equity (ROE).
* The overall risk exposure of the bank is reduced as the lower risk assets are sold off, leaving a more concentrated higher-risk portfolio, which still needs to be managed effectively.
References:
* How Finance Works: "Securitization and selling lower risk assets can increase cash efficiency and return on equity by reducing the overall exposure to risk."

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