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financial accounting

Questions and Answers of Financial Accounting

During the credit crisis in the 2008-2009 periods, banks were criticized for restricting their credit. Write a short essay to explain why you think banks should or should not be allowed to restrict
a. "Lower interest rates may reduce the size of banks." b. "Banks are no longer as limited when competing with other financial institutions for funds targeted for the stock market." c. "If the demand
a. Should the bank continue to focus on attracting funds by offering CDs, or should it push its other types of deposits? b. Should the bank continue to focus on real estate loans? If the bank reduces
a. Explain the different types of services provided by a financial conglomerate that may allow Carson Company to obtain funds or to hedge its risk.b. Review the services that you listed in the
How are banks' balance sheet decisions regulated?
Describe highly leveraged transactions (HLTs), and explain why a bank's exposure to HLTs is closely monitored by regulators.
Explain the "moral hazard" problem as it relates to deposit insurance.
How do economies of scale in banking relate to the issue of interstate banking?
How can the financial problems of one large bank affect the market's risk evaluation of other large banks?
Why are bank regulators more concerned about a large bank failure than a small bank failure?
Describe the Financial Services Modernization Act of 1999. Explain how it affected commercial bank operations, and how it changed the competitive landscape among financial institutions.
Explain how the Sarbanes-Oxley (SOX) Act improved the transparency of banks. Why might the act have a negative impact on some banks?
Explain how the conversion of securities firms to a bank holding company (BHC) structure might reduce their risk.
Explain why banks struggled to satisfy capital requirements because of the accounting method applied to mortgage-backed securities.
Provide examples of off-balance sheet activities. Why are regulators concerned about them?
Explain why regulators might argue that the assistance they provided to Bear Stearns was necessary.
Should the Fed have the power to rescue firms such as Bear Stearns that are not commercial banks?
Why were bank regulators concerned with credit default swaps?
Explain how bank regulation can be more effective when there is consolidation of banks and securities firms.
Explain why the credit crisis caused concerns about systemic risk.
Explain how the Troubled Asset Relief Program was expected to help resolve problems during the credit crisis.
Explain how the Financial Reform Act is intended to prevent some problems that contributed to the credit crisis.
How did the Financial Reform Act of 2010 change the reserve requirements of the FDIC's Deposit Insurance Fund?
How did Basel III change capital and liquidity requirements for banks?
Lehman Brothers continued to report positive earnings through the spring of 2008, even though mortgage valuations were clearly declining. Nevertheless, some institutional investors were concerned
Explain why the moral hazard problem may have received so much attention during the credit crisis.
Explain the government's dilemma regarding whether it should rescue American International Group (AIG) during the credit crisis.
What led to the establishment of FDIC insurance?
Briefly describe the Glass-Steagall Act. Then explain how the related regulations have changed.
Explain how the CAMELS ratings are used.
Explain how the uniform capital requirements can discourage banks from taking excessive risk.
Explain how the value at risk (VaR) method can be used to determine whether a bank has adequate capital.
The Volcker Rule is intended to prevent banks from engaging in proprietary trading. Write a short essay offering your opinion on whether banks should be allowed to engage in proprietary trading.
a. "The FDIC recently subsidized a buyer for a failing bank, which had different effects on FDIC costs than if the FDIC closed the bank." b. "Bank of America has pursued the acquisitions of many
a. Which regulatory criteria will be affected by the bank's strategies? How? b. Do you believe that the strategies planned by the bank will satisfy shareholders? Is it possible for the bank to use
a. Explain how the services provided by a commercial bank (just the banking, not the nonbank services) to Carson may be limited because of bank regulation. b. Explain the types of nonbank services
What is accomplished when a bank integrates its liability management with its asset management?
What is a bank's gap, and what does it attempt to determine? Interpret a negative gap. What are some limitations of measuring a bank's gap?
Why do loans that can be prepaid on a moment's notice complicate the bank's assessment of interest rate risk?
As economic conditions change, how do banks adjust their asset portfolio?
In what two ways should a bank diversify its loans? Why? Is international diversification of loans a viable strategy for dealing with credit risk? Defend your answer.
Does the use of floating-rate loans eliminate interest rate risk? Explain.
Explain how banks become exposed to exchange rate risk.
Oregon Bank has branches overseas that concentrate in short-term deposits in dollars and floating-rate loans in British pounds. Because it maintains rate-sensitive assets and liabilities of equal
Dakota Bank has a branch overseas with the following balance sheet characteristics: 50 percent of the liabilities are rate sensitive and denominated in Swiss francs; the remaining 50 percent of
What is the formula for the net interest margin? Explain why it is closely monitored by banks.
According to this chapter, have banks been able to insulate themselves against interest rate movements? Explain.
Some bank managers argue that a bank's access to capital is restricted because the capital requirements imposed by regulators in the U.S. are too high. Write a short essay that can offer logical
a. Explain the difference in the willingness of banks to provide loans to Carson Company. Why is there a difference between banks when they are assessing the same information about a firm that wants
a. "The bank's biggest mistake was that it did not recognize that its forecast of a strong local real estate market and declining interest rates could be wrong." b. "Banks still need some degree of
a. Determine the spread that would be earned each year if Stetson uses an interest rate swap to hedge all of its interest rate risk. Would you recommend that Stetson use an interest rate swap?b.
Suppose a bank earns $201 million in interest revenue but pays $156 million in interest expense. It also has $800 million in earning assets. What is its net interest margin?
If a bank earns $169 million net profit after tax and has $17 billion invested in assets, what is its return on assets?
If a bank earns $75 million net profits after tax and has $7.5 billion invested in assets and $600 million equity investment, what is its return on equity?
Use the balance sheet for San Diego Bank in Exhibit A (given below) and the industry norms in Exhibit B (given below) to answer the following questions:a. Estimate the gap and determine how San Diego
Montana Bank wants to determine the sensitivity of its stock returns to interest rate movements, based on the following information:Use a regression model in which Montana's stock return is a
How can gross interest income rise, while the net interest margin remains somewhat stable for a particular bank?
What are likely reasons for weak bank performance?
Assume that SUNY Bank plans to liquidate Treasury security holdings and use the proceeds for small business loans. Explain how this strategy will affect the different income statement items. Also
If a bank shifts its loan policy to pursue more credit card loans, how will its net interest margin be affected?
What has been the trend in noninterest income in recent years? Explain.
How could a bank generate higher income before tax (as a percentage of assets) when its net interest margin has decreased?
Suppose the net income generated by a bank is equal to 1.5 percent of assets. Based on past experience, would the bank experience a loss or a gain? Explain.
What does the assets/equity ratio of a bank indicate?
In recent years, many banks rely more heavily on non-interest income as a proportion of their total income. Write a short essay explaining whether banks that rely more heavily on non-interest income
a. "The three most important factors that determine a local bank's bad debt level are the bank's location, location, and location." b. "The bank's profitability was enhanced by its limited use of
a. Forecast Hawaii Bank's net interest margin.b. Forecast Hawaii Bank's earnings before taxes as a percentage of assets.c. Forecast Hawaii Bank's earnings after taxes as a percentage of assets.d.
Explain why many savings institutions experience financial problems at the same time.
If market interest rates were expected to decline over time, will a savings institution with rate-sensitive liabilities and a large amount of fixed-rate mortgages perform best by (a) using an
The following table discloses the interest-rate sensitivity of two SIs (dollar amounts are in millions).Based on this information only, which institution's stock price would likely be affected more
What were some of the more obvious reasons for the SI crisis?
Who are the owners of credit unions? Explain the tax status of credit unions and the reason for that status. Why are CUs typically smaller than commercial banks or savings institutions?
Describe the main source of funds for credit unions. Why might the average cost of funds to credit unions be relatively stable even when market interest rates are volatile?
Who regulates CUs? What are the regulators' powers? Where do credit unions obtain deposit insurance?
Explain how credit union exposure to liquidity risk differs from that of other financial institutions. Explain why credit unions are more insulated from interest rate risk than some other financial
Identify some advantages of credit unions. Identify disadvantages of credit unions that relate to their common bond requirement.
Explain why savings institutions may benefit when interest rates fall.
Explain in general terms how savings institutions differ from commercial banks with respect to their sources of funds and uses of funds. Discuss each source of funds for savings institutions.
How did the creation of money market deposit accounts influence the savings institution's overall cost of funds?
Discuss the entrance of savings institutions into consumer and commercial lending. What are the potential risks and rewards of this strategy? Discuss the conflict between diversification and
Describe the liquidity and credit risk of savings institutions, and discuss how each is managed.
What is an adjustable-rate mortgage (ARM)? Discuss potential advantages such mortgages offer a savings institution.
Explain how savings institutions could use interest rate futures to reduce interest rate risk.
Explain how savings institutions could use interest rate swaps to reduce interest rate risk. Will savings institutions that use swaps perform better or worse than those that were unhedged during a
Write a short essay on the future of thrift operations? Should they be merged into the banking industry, or should they remain distinctly different from commercial banks?
a. "Deposit insurance can fueled a crisis because it allows weak SIs to grow." b. "Thrifts are no longer so sensitive to interest rate movements, even if their assets and liability compositions have
a. Boca asks you to assess its exposure to interest rate risk. Describe how Boca will be affected by rising interest rates and by a decline in interest rates. b. Given the information about the yield
a. Explain the interaction between Carson Company and Rimsa Savings. b. Why is Rimsa willing to allow Carson Company to transfer its interest rate risk to Rimsa? c. If Rimsa maintains the mortgage
Is the cost of funds obtained by finance companies very sensitive to market interest rate movements? Explain.
How are small and medium-sized finance companies able to issue commercial paper? Why do some well-known finance companies directly place their commercial paper?
Explain why some finance companies are associated with automobile manufacturers. Why do some of these finance companies offer below-market rates on loans?
Explain how finance companies benefit from offering consumers a credit card.
Explain how finance companies provide financing through leasing.
Describe the kinds of regulations that are imposed on finance companies.
Explain how the liquidity position of finance companies differs from that of depository institutions such as commercial banks.
Explain how the interest rate risk of finance companies differs from that of savings institutions.
Write a short essay on the future of finance company operations? Should they be merged into the banking industry, or should they remain distinctly different from commercial banks?
a. Explain how finance companies are unique by comparing Fente's net interest income, noninterest income, noninterest expenses, and loan losses to those of commercial banks. b. Explain why Fente
a. Assume that you expect interest rates decline over time. Should you issue bonds or commercial paper in order to obtain funds? b. If you expect interest rates decline, will you benefit more from
a. "During a credit crunch, finance companies tend to generate a large amount of business." b. "Some finance companies took a huge hit as a result of the last recession because they opened their

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