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financial institutions management

Questions and Answers of Financial Institutions Management

1.Go to the APRA website and find Prudential Statement APS 113, and go to Attachment A. Examine the various risk weightings and discuss the logic implied by their structure. Identify the assets that
1.Go to the website of one of Australia’s major banks—ANZ, Commonwealth Bank, National Australia Bank or Westpac Bank. Find the bank’s latest Pillar 3 disclosure document—often called A330
1.Go to APRA’s website and find the most recent changes to the three pillars of APRA’s capital adequacy regulation regime. LO 18.10 , 18.11
1.What are the two capital buffers under Pillar 1 of the capital adequacy regulations and when are they used? LO 18.9
1.Why is there a need for an additional regulation covering non-traded interest rate risk? LO 18.6
1.Why does market risk measure both general market risk and specific risk? LO 18.6
1.What is the general approach to the measurement of operational risk capital charge using the standardised approach? LO 18.6
1.Third Bank has the following balance sheet (in millions of dollars) with the risk weights in parentheses.In addition, the bank has $30 million in performance-related standby letters of credit
1.How does the leverage ratio test impact the stringency of regulatory monitoring of bank capital positions? LO 18.8
1.What is the contribution to the asset base of the following items under the capital adequacy requirements?$10 million cash reserves.$50 million 91-day Australian government securities.$25 million
1.Identify and discuss the problems in the risk-based capital approach to measuring capital adequacy. (See Appendix) LO 18.7
1.How does the risk-based capital measure attempt to compensate for the limitations of the static leverage ratio? LO 18.7
1.Explain how off-balance-sheet market contracts, or derivative instruments, differ from non-market-related off-balance-sheet or contingent guarantee contracts.What is counterparty credit risk?Why do
1.Explain the process of calculating risk-adjusted non-market-related off-balance-sheet contracts.What is the basis for differentiating the credit equivalent amounts of non-market-related off-balance
1.Onshore Bank has $20 million in assets, with risk-adjusted assets of $10 million. Tier I capital is $700 000, and Tier II capital is $300 000. How will each of the following transactions affect the
1.Mercantile Bank has the following balance sheet (in millions of dollars) and has no off-balance-sheet or securitisation activities.What is the value of the regulated capital measures (i.e. common
1.Explain the process of calculating credit-risk-adjusted on-balance-sheet assets.What is the basis of risk-weighting of assets to account for credit risk?What are the appropriate risk weights for
1.What are the definitional differences between Tier I and Tier II capital? LO 18.5
1.What are the three capital adequacy ratios? What are the minimum requirements for each? LO 18.4 , 18.5 , 18.6
1.What are the major features in the estimation of credit-risk-adjusted assets under the capital regulations? LO 18.6
1.What is Basel III? LO 18.3
1.Identify and discuss the weaknesses of the leverage ratio as a primary measure of capital adequacy. LO 18.1 , LO 18.2
1.What are the arguments for and against the use of market value accounting for FIs? LO 18.1 , 18.2
1.State Bank has the following year-end balance sheet (in millions of dollars): The loans primarily are fixed-rate, medium-term loans, while the deposits are either short-term or variable-rate
1.Why is the market value of equity a better measure of an FI’s ability to absorb losses than book value of equity? LO 18.1 , 18.2
1.What are the differences between the economic definition of capital and the book value definition of capital?How does economic value accounting recognise the adverse effects of credit and interest
1.Why are regulators more concerned with the levels of capital held by an FI than a non-financial institution? LO 18.1
1.Identify and briefly discuss the importance of the five functions of an FI’s capital. LO 18.1
1.How does Pillar 3 promote market discipline?
1.What is the objective of Pillar 2 and how does it complement Pillar 1?
1.What is the difference between Pillar 1 and Pillar 2?
1.What are the two capital buffers introduced under Basel III, why are they required and what is the objective of each?
1.Why has APRA introduced a simple leverage ratio to complement the risk-based capital adequacy ratios?
1.How does the measurement of losses across eight business lines using the AMA approach improve the measurement of operational risk compared to the standardised approach?
1.Name five examples of operational risk exposure.
1.Why is operational risk an important risk to capture for capital adequacy purposes?
1.Why are exchange-traded derivative contracts treated differently to over-the-counter derivative contracts in the credit-risk-adjusted asset calculation?
1.Why is there a difference in the way that credit risk is measured in on-balance-sheet assets and off-balance-sheet assets?
1.What is the difference between Tier 1 capital and Tier 2 capital?
1.What are the problems with the simple leverage ratio measure of capital adequacy?
1.How has Basel III expanded the scope of capital regulation for Australian depository institutions?
1.What are the three pillars in the three pillars framework of capital adequacy requirements for Australian depository institutions?
1.Why did regulators introduce a leverage ratio as part of the Basel III capital regulations?
1.Describe the challenge of using a simple leverage ratio only for capital regulation purposes.
1.In what way can capital regulation introduce moral hazard in the management of an FI?
1.What are the four traditional components of an FI’s book equity and how is this different in Australia?
1.Go to the Australian Payments Clearing Association website and find the most recent APCA payments fraud data. Discuss the findings. LO 17.5 ,
1.Go to the RBA website and examine the statistics for the payments system and the use of electronic payments to verify the continued growth in this sector. Has the strong growth continued? Discuss
1.What actions has the BIS taken to protect depository institutions from insolvency due to operational risk? LO 17.7
1.How has technology altered the competition risk of FIs? LO 17.5
1.How have crime and fraud risk and the avoidance of regulation been made easier by rapid technological improvements in the electronic payment systems? LO 17.5
1.What does it mean when the central bank acts as a ‘settlement agent’ and how does this minimise settlement risk for a central bank? LO 17.5
1.What is the RTGS and how does it reduce risk in the payment system? LO 17.5
1.Discuss some of the factors that may have resulted in the decline of the usage of cheques in favour of electronic payment methods? LO 17.5
1.What are some of the conclusions of empirical studies on economies of scale and scope? How important is the impact of cost reductions on total average costs? What are X-inefficiencies? What role do
1.What is the difference between the production approach and the intermediation approach to estimating cost functions of FIs? LO 17.4
1.A survey of a local market has provided the following average cost data: Mortgage Bank A (MBA) has assets of $3 million and an average cost of 20 per cent. Life Insurance Company B (LICB) has
1.What are diseconomies of scope? How could diseconomies of scope occur? LO 17.4
1.A bank with assets of $2 billion and costs of $200 million has acquired an investment banking firm subsidiary with assets of $40 million and expenses of $15 million. After the acquisition, the
1.What are diseconomies of scale? What are the risks of large-scale technological investments, especially to large FIs? Why are small FIs willing to outsource production to large FIs against which
1.Buy Bank had $130 million in assets and $20 million in expenses before the acquisition of Sell Bank, which had assets of $50 million and expenses of $10 million. After the merger, the bank had $180
1.What information on the operating costs of FIs is provided by the measurement of economies of scope? What implications do economies of scope have for regulators? LO 17.4
1.What information on the operating costs of FIs does the measurement of economies of scale provide? If economies of scale exist, what implications do they have for regulators? LO 17.4
1.Distinguish between economies of scale and economies of scope. LO 17.3 , 17.4
1.City Bank upgrades its computer equipment every five years to keep up with changes in technology. Its next upgrade is two years from today and is budgeted to cost $1 000 000. Management is
1.The operations department of a major FI is planning to reorganise several of its back-office functions. Its current operating expense is $1 500 000, of which $1 000 000 is for staff expenses. The
1.What are some of the risks inherent in being the first to introduce a financial innovation? LO 17.1
1.Compare the effects of technology on an FI’s wholesale operations with the effects of technology on an FI’s retail operations. Give some specific examples. LO 17.1 , 17.2
1.Explain how technological improvements can increase an FI’s interest and non-interest income and reduce interest and non-interest expenses. Use some specific examples. LO 17.1
1.What steps have been taken to ensure privacy and protection against fraud in the use of personal and financial consumer information placed on the internet?
1.How has financial technology increased the diversity of financial product offerings?
1.Why do daylight overdrafts create a risk for the financial system and what has the RBA done to minimise these risks in Australia?
1.Discuss the risks faced by FIs with the growth of electronic payment systems.
1.Describe the basic principles behind the production approach to testing for economies of scale and economies of scope.
1.Make a list of the potential economies of scope or cost synergies if a bank merged with a fund manager.
1.If there are diseconomies of scope, do specialised FIs have a relative cost advantage or disadvantage over product-diversified FIs?
1.What are some of the technological services in banking that may have contributed to the generation of fee revenues for FIs?
1.Go to the RBA website and find from RBA Statistical Table B4 the total amount of unused commitments and letters of credit, and the notional value of interest rate swaps of Australian banks for the
1.Defend the statement that although OBS activities expose FIs to several forms of risks, they also can alleviate the risks of FIs. LO 16.5
1.Distinguish between loan sales with and without recourse. Why would FIs want to sell loans with recourse? Explain how loan sales can leave FIs exposed to contingent interest rate risks. LO 16.3 ,
1.What is meant by when-issued trading? Explain how forward purchases of when-issued government Treasury securities can expose FIs to contingent interest rate risk. LO 16.3 , 16.4
1.Explain how the use of derivative contracts, such as forwards, futures, swaps and options creates contingent credit risk for an FI. Why do OTC contracts carry more contingent credit risk than do
1.A corporation is planning to issue $1 million of 270-day commercial paper for an effective yield of 5 per cent. The corporation expects to save 30 basis points on the interest rate by using either
1.How do standby letters of credit differ from documentary letters of credit? With what other types of FI products do SLCs compete? What types of FIs can issue SLCs? LO 16.4
1.A German bank issues a three-month letter of credit on behalf of its customer in Germany, who is planning to import $100 000 worth of goods from Australia. It charges an upfront fee of 100 basis
1.What is a letter of credit? How is a letter of credit like an insurance contract? LO 16.4
1.Do the contingent risks of interest rate, drawdown, credit and aggregate funding tend to increase the insolvency risk of an FI? Why or why not? LO 16.3
1.How is an FI exposed to drawdown risk and aggregate funding risk? How are these two contingent risks related? LO 16.3
1.How is the FI exposed to credit risk when it makes loan commitments? How is credit risk related to interest rate risk? What control measure is available to an FI for the purpose of protecting
1.How is an FI exposed to interest rate risk when it makes loan commitments? In what way can an FI control for this risk? How does basis risk affect the implementation of the control for interest
1.Suburb Bank has issued a one-year loan commitment of $10 million for an up-front fee of 50 basis points. The back-end fee on the unused portion of the commitment is 20 basis points. The bank
1.An FI has issued a one-year loan commitment of $2 million for an upfront fee of 25 basis points. The back-end fee on the unused portion of the commitment is 10 basis points. The FI requires a
1.An FI makes a loan commitment of $2.5 million with an upfront fee of 50 basis points and a back-end fee of 25 basis points on the unused portion of the loan. The drawdown on the loan is 50 per cent
1.What are the characteristics of a loan commitment that an FI may make to a customer? In what manner and to whom is the commitment an option?What are the various possible pieces of the option
1.What factors explain the growth of FI OBS activities from the 1980s up to the early 2000s? LO 16.2
1.An FI has purchased options on bonds with a notional value of $500 million and has sold options on bonds with a notional value of $400 million.The purchased options have a delta of 0.25 and the
1.Why are contingent assets and liabilities like options? What is meant by the delta of an option? What is meant by the term ‘notional value’? LO 16.1 , 16.2
1.Contingent Bank has the following balance sheet in market value terms (in millions of dollars):In addition, the bank has contingent assets with $100 million market value and contingent liabilities
1.How does one distinguish between an OBS asset and an OBS liability? LO 16.1
1.Classify the following items as (1) on-balance-sheet assets, (2) on-balance-sheet liabilities, (3) off-balance-sheet assets, (4) off-balance-sheet liabilities or (5) capital accounts:Loan

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