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financial institutions management

Questions and Answers of Financial Institutions Management

1. State Bank has the following year-end balance sheet (in millions):The loans primarily are fixed-rate, medium-term loans, while the deposits are either short-term or variable-rate deposits. Rising
1. Why is the market value of equity a better measure of an FI’s ability to absorb losses than book value of equity?
1. Under FASB Statement No. 115, what would be the effect on equity capital(net worth) if interest rates increased by 30 basis points? The T-notes are held for trading purposes; the rest are all
1. A financial intermediary has the following balance sheet (in millions), with all assets and liabilities in market values.Assets Liabilities and Equity 6 percent semiannual fouryear Treasury notes
1. How does book value accounting recognize the adverse effects of credit and interest rate risk?
1. How does economic value accounting recognize the adverse effects of credit and interest rate risk?
1. What are the differences between the economic definition of capital and the book value definition of capital?
1. Why are regulators concerned with the levels of capital held by an FI compared with those held by a nonfinancial institution?
1. Identify and briefly discuss the importance of the five functions of an FI’s capital.
1. How do the NAIC’s model risk-based capital requirements for PC insurers differ from the life insurance industry’s RBC?
1. What types of risks are included by the NAIC in estimating the RBC of life insurance firms?
1. How do the capital requirements for securities firms differ from the book value capital rules employed by DI regulators?
1. Identify one asset in each of the five credit risk weight categories.
1. What is the difference between Tier I capital and Tier II capital?
1. What are three problems with the simple leverage ratio measure of capital adequacy?
1. Why isn’t a capital ratio levied on exchange-traded derivative contracts?
1. You are a DI manager with a total risk-based capital ratio of 6 percent. Discuss four strategies to meet the required 8 percent ratio in a short period of time without raising new capital.
1. What are the major strengths of the risk-based capital ratios?
1. What does a market to book ratio that is less than 1 imply about an FI’s performance?
1. Is book value accounting for loan losses backward looking or forward looking?
1. What are the four major components of an FI’s book value equity?
1. Why is an FI economically insolvent when its net worth is negative?
1. Go to the Federal Reserve Board’s Web site at www.federalreserve.gov and click on “Economic Research and Data.” Click on “Statistics: Releases and Historical Data.” Under “Interest
1. Go to the FDIC Web site at www.fdic.gov. Click on “Analysts.” Click on “FDIC Quarterly Banking Profile.” Click on “Deposit Insurance Fund Trends.” Click on “Table II-B.
1. Calculate the deposit insurance assessment for each institution.BIG Bank has total assets of $20 billion, a composite CAMELS rating of 1, a weighted-average CAMELS rating of 1.25, an S&P bond
1. Two depository institutions have composite CAMELS ratings of 1 or 2 and are“well capitalized.” Thus, each institution falls into the FDIC Risk Category I deposit insurance assessment scheme.
1. Two depository institutions have composite CAMELS ratings of 1 or 2 and are“well capitalized.” Thus, each institution falls into the FDIC Risk Category I deposit insurance assessment scheme.
1. Guernsey Bank has a composite CAMELS rating of 2, a total risk-based capital ratio of 10.2 percent, a Tier 1 risk-based capital ratio of 5.2 percent, and a Tier I leverage ratio of 4.8 percent.
1. Under the Federal Deposit Insurance Reform Act of 2005, how is a Category I deposit insurance premium determined?
1. The following questions and problems are based on material in Appendix 19A to the chapter.What changes did the Federal Deposit Insurance Reform Act of 2005 make to the deposit insurance assessment
1. How was the 1994 Retirement Protection Act expected to reduce the deficits experienced by the PBGC?
1. How does the PBGC differ from the FDIC in its ability to control risk?
1. What was the purpose of the establishment of the Pension Benefit Guaranty Corporation (PBGC)?
1. How do insurance guaranty funds differ from deposit insurance? What impact do these differences have on the incentive for insurance policyholders to engage in a contagious run on an insurance
1. Why is access to the discount window of the Fed less of a deterrent to bank runs than deposit insurance?
1. Match the following policies with their intended consequences:Policies:Lower FDIC insurance levels Stricter reporting standards Risk-based deposit insurance Consequences:Increased stockholder
1. In what ways did FDICIA enhance the regulatory discipline to help reduce moral hazard behavior? What has the operational impact of these directives been?
1. A commercial bank has $150 million in assets at book value. The insured and uninsured deposits are valued at $75 and $50 million, respectively, and the book value of equity is $25 million. As a
1. A bank with insured deposits of $55 million and uninsured deposits of $45 million has assets valued at only $75 million. What is the cost of failure resolution to insured depositors, uninsured
1. What amount do the uninsured depositors lose if the FDIC uses the insured depositor transfer method to close the bank immediately? The assets will be sold after the two-day period.
1. What is the amount of loss to the insured depositors if a run on the bank occurs on the first day? On the second day?
1. The following is a balance sheet of a commercial bank (in millions of dollars):Assets Liabilities and Equity Cash $ 5 Insured deposits $30 Loans 40 Uninsured deposits 10 Equity 5 Total assets $45
1. Why does this method of failure resolution encourage uninsured depositors to more closely monitor the strategies of DI managers?
1. How is the insured depositor transfer method implemented in the process of failure resolution?
1. What is the primary goal of the FDIC in employing the LCR strategy?
1. What are the implications to the other DIs in the economy of the implementation of this exemption?
1. What procedural steps must be taken to gain approval for using the systemic risk exemption?
1. When can the systemic risk exemption be used as an exception to the LCR policy of DI closure methods?
1. What is the least-cost resolution (LCR) strategy?
1. What are some of the essential features of the FDICIA of 1991 with regard to the resolution of failing DIs?
1. What is the too-big-to-fail doctrine? What factors caused regulators to act in a way that caused this doctrine to evolve?
1. What changes did the Federal Deposit Insurance Reform Act of 2005 make to the deposit insurance cap?
1. What trade-offs were weighed in the decision to leave the deposit insurance ceiling at $100,000?
1. How did FIRREA and FDICIA change the treatment of brokered deposits from an insurance perspective?
1. What are brokered deposits? Why are brokered deposits considered more risky than nonbrokered deposits by DI regulators?
1. How is it possible to structure deposits in a DI to reduce the effects of the insured ceiling?
1. Why did the fixed-rate deposit insurance system fail to induce insured and uninsured depositors to impose discipline on risky banks in the United States in the 1980s?
1. Under what conditions may the implementation of minimum capital guidelines, either risk-based or non-risk-based, fail to impose stockholder discipline as desired by regulators?
1. What is capital forbearance? How does a policy of forbearance potentially increase the costs of financial distress to the insurance fund as well as the stockholders?
1. What four factors were provided by FDICIA as guidelines to assist the FDIC in the establishment of risk-based deposit insurance premiums? What happened to the level of deposit insurance premiums
1. How is the provision of deposit insurance by the FDIC similar to the FDIC’s writing a put option on the assets of a DI that buys the insurance? What two factors drive the premium of the option?
1. What are some ways of imposing stockholder discipline to prevent stockholders from engaging in excessive risk taking?
1. What are three suggested ways a deposit insurance contract could be structured to reduce moral hazard behavior?
1. How does a risk-based insurance program solve the moral hazard problem of excessive risk taking by FIs? Is an actuarially fair premium for deposit insurance always consistent with a competitive
1. What is moral hazard? How did the fixed-rate deposit insurance program of the FDIC contribute to the moral hazard problem of the savings association industry? What other changes in the savings
1. Contrast the two views on, or reasons why, depository institution insurance funds became insolvent in the 1980s.
1. What major changes did the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 make to the FDIC and the FSLIC?
1. How does federal deposit insurance help mitigate the problem of bank runs?What other elements of the safety net are available to DIs in the United States?
1. What are some of the potentially serious adverse social welfare effects of a contagious run? Do all types of FIs face the same risk of contagious runs?
1. What is and Problems a contagious run?
1. What specific protection against insolvencies does the Securities Investor Protection Corporation provide to securities firm customers?
1. How do state-sponsored guaranty funds for insurance companies differ from deposit insurance?
1. Is a DI’s access to the discount window as effective as deposit insurance in deterring bank runs and panics? Why or why not?
1. What additional measures were mandated by the FDICIA to bolster regulator discipline?
1. Make up a simple balance sheet example to show a case where the FDIC can lose even when it uses an IDT to resolve a failed DI.
1. Why do uninsured depositors benefit from a too-big-to-fail policy followed by regulators?
1. Under current deposit insurance rules, how can DI depositors achieve many times the$100,000 coverage cap on deposits?
1. Do we need both risk-based capital requirements and risk-based insurance premiums to discipline shareholders?
1. If you are managing a DI that is technically insolvent but has not yet been closed by the regulators, would you invest in Treasury bonds or real estate development loans? Explain your answer.
1. If deposit insurance is similar to a put option, who exercises that option?
1. Bank A has a ratio of deposits to assets of 90 percent and a variance of asset returns of 10 percent. Bank B has a ratio of deposits to assets of 85 percent and a variance of asset returns of 5
1. Historically, what effect has deposit insurance had on DI panics and runs?
1. Why was interest rate risk less of a problem for banks than for thrifts in the early 1980s?
1. What two basic views are offered to explain why depository institution insurance funds became insolvent during the 1980s?
1. What events brought about the demise of the FSLIC?
1. What events led to Congress’s passing of the FDIC Improvement Act (FDICIA)?
1. Go to the Federal Deposit Insurance Corporation’s Web site at www.fdic.gov and click on “analysts.” Click on “Statistics on Banking.” Click on “Assets and Liabilities.” Click on
1. What are the primary methods that insurance companies can use to reduce their exposure to liquidity risk?
1. What trends have been observed between 1960 and 2006 in regard to liquidity and liability structures of commercial banks? What changes have occurred in the management of assets that may cause
1. What does a low fed funds rate indicate about the level of bank reserves? Why does the fed funds rate have higher-than-normal variability around the last two days in the reserve maintenance period?
1. What characteristics of fed funds may constrain a DI’s ability to use fed funds to expand its liquidity quickly?
1. Why do wholesale CDs have minimal withdrawal risk to the issuing FI?
1. spread useful in managing the withdrawal risk of MMDAs?
1. How does the cost of MMMFs differ from the cost of MMDAs? How is the
1. How does the cash balance, or liquidity, of an FI determine the types of repurchase agreements into which it will enter?
1. How is the withdrawal risk different for federal funds and repurchase agreements?
1. Rank the following liabilities with respect, first, to funding risk and, second, to funding cost.Money market deposit account.Demand deposits.Certificates of deposit.Federal funds.Bankers
1. What is the average return if the bank pays interest only on the amount in excess of $400? Assume that the minimum required balance is $400.How much should the bank increase its check fee to the
1. What is the average return if the bank lowers the minimum balance to$400?
1. A NOW account requires a minimum balance of $750 for interest to be earned at an annual rate of 4 percent. An account holder has maintained an average balance of $500 for the first six months and

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