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financial institutions management

Questions and Answers of Financial Institutions Management

Calculate the DEAR for the following portfolio with the correlation coefficients and then with perfect positive correlation between various asset groups.What is the amount of risk reduction resulting
Despite the fact that market risk capital requirements have been imposed on FIs since the 1990s, huge losses in value were recorded during the financial crisis from losses incurred in FIs’ trading
In its trading portfolio, an FI holds 5,000 shares of HSBC at a share price of\($43.50\), 4,000 shares of China Construction Bank at a price of \($16.40\), and 2,500 shares of Whirlpool at
Define a contingent asset and a contingent liability.
How can option pricing theory be used to price OBS assets and liabilities?
What are the four risks related to loan commitments?
What is the major difference between a commercial letter of credit and a standby letter of credit?
What is meant by counterparty risk in a forward contract?
Which is more risky for an FI, loan sales with recourse or loan sales without recourse?
What is the source of settlement risk on the CHIPS payments system?
What are two major sources of affiliate risk?
While recognizing that OBS instruments may add to the risk of an FI’s activities, explain how they also work to reduce the overall insolvency risk of FIs.
Other than hedging and speculation, what reasons do FIs have for engaging in OBS activities?
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, (5) capital accounts, or (6) none of
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
Use the following information on a one-year loan commitment to calculate the return on the loan commitment.BR = FI’s base interest rate on the loans = 8%φ = Risk premium on loan commitment =
Suburb Bank has issued a one-year loan commitment of $10 million for an upfront fee of 50 basis points. The back-end fee on the unused portion of the commitment is 20 basis points. The bank’s base
Go to the FDIC website at www.fdic.gov and find the total amount of unused commitments of FDIC-insured commercial banks for the most recent quarter available using the following steps. Click on
Go to the website of the Office of the Comptroller of the Currency at www.occ. treas.gov and update Table 16–5 using the following steps. Click on “Publications& Resources,” and then
Just as banks paid out billions in settlements over LIBOR manipulation, they also paid billions in fines to the Department of Justice for creating and selling toxic mortgage-backed securities.
Related to a third-party risk is so called fourth-party risk. Fourth parties are those entities to which FI’s third parties may outsource or use for certain tasks. How do you address this issue and
What are two risk factors involved in an FI’s investment of resources in innovative technological products?
What is the link between interstate banking restrictions and the retail demand for electronic payment services?
Does the existence of economies of scale for FIs mean that in the long run, small FIs cannot survive?
If there are diseconomies of scope, do specialized FIs have a relative cost advantage or disadvantage over product-diversified FIs?
Make a list of the potential economies of scope or cost synergies if a commercial bank merged with an investment bank.
Describe the six risks faced by FIs with the growth of wire transfer payment systems.
Why do daylight overdrafts create more of a risk problem for banks on CHIPS than on Fedwire?
What steps have the members of CHIPS taken to lower settlement, or daylight overdraft, risk?
What are the three approaches proposed by the Basel Committee on Banking Supervision for measuring capital requirements associated with operational risk?
What steps have been or are being taken to ensure privacy and protection against fraud in the use of personal and financial consumer information placed on the Internet?
Describe the sources of operational risk. Use some specific examples.
What is cybersecurity risk? What are the primary methods of breaching data systems?Use some specific examples.
What is technology vendor and third-party risk? What actions have regulators taken with respect to third-party risk management?
What information on the operating costs of FIs is provided by the measurement of economies of scope?
Go to the BIS website at www.bis.org/statistics/payment_stats.htm and find the most recent data on the volume and value of payment system transactions in the United States (Table 17–1) using the
Go to the BIS website at www.bis.org/statistics/payment_stats.htm and find the most recent data on the participation in major payment systems (Table 17–3).Click on “BIS Statistics Explorer.”
What is risk of digital disruption from fintech and big tech firms?
What are the supply factors that contributed to the recent emergence of fintechs?
What are the demand factors that contributed to the recent emergence of fintechs?
What is stablecoin? What is the primary use of stablecoin?
What is CBDC? Why are they being explored by central banks?
What is DeFi? What are the risks and rewards of DeFi?
Describe applications of artificial intelligence and machine learning in financial services industry.
Explain one of the reasons why high-frequency trading (HFT) has hita speed bump. Do you think fintechs will experience the same difficulties that HFT firms have experienced?
Why do regulators set minimum liquid asset requirements for FIs?
Can we view reserve requirements as a tax when the consumer price index (CPI) is falling?
In general, would it be better to hold three-month T-bills or 10-year T-notes as buffer assets? Explain.
In addition to the target reserve ratio, what other pieces of information does a DI reserve manager require to manage the DI’s reserve requirement position?
For a DI that undershoots its reserve target, what ways are available to a reserve manager to build up reserves to meet the target?
Since 1998, U.S. DIs have operated under a lagged reserve accounting system in which the reserve computation period ends 17 days before the reserve maintenance period begins. Does the reserve manager
What explains the decline in the level of required reserves held by DIs between 1990 and August 2008 and the rise in August of 2009 (see Table 19A–3)?
How are liquidity and liability management related?
Describe the trade-off faced by an FI manager in structuring the liability side of the balance sheet.
Describe the withdrawal risk and funding cost characteristics of some of the major liabilities available to a modern DI manager.
Since transaction accounts are subject to both reserve requirements and deposit insurance premiums, whereas fed funds are not, why should a DI not fund all its assets through fed funds? Explain your
What are the major differences between fed funds and repurchase agreements?
Look at Table 19–2. How has the ratio of traditional liquid to illiquid assets changed over the 1960–2021 period? TABLE 19-2 Liquid Assets versus Nonliquid Assets for Insured Commercial Banks,
Look at Table 19–3. How has the liability composition of banks changed over the 1960–2021 period? TABLE 19-3 Liability Structure All Banks Liabilities and Capital 12/31/60 09/30/21 09/30/21 All
Discuss two strategies insurance companies can use to reduce liquidity risk.
Consider the assets (in millions) of two banks, A and B. Both banks are funded by\($120\) million in deposits and \($20\) million in equity. Which bank has the stronger liquidity position? Which bank
Rank the following liabilities with respect, first, to funding risk and, second, to funding cost.a. Money market deposit account.b. Demand deposits.c. Certificates of deposit.d. Federal funds.e.
Go to the Federal Deposit Insurance Corporation’s website at https://www7.fdic.gov/sdi/index.asp and update Tables 19–2 and 19–3 using the following steps. Click on “Create or Modify
What events led to Congress’s passing of the FDIC Improvement Act (FDICIA)?
What events brought about the demise of the FSLIC?
What two basic views are offered to explain why depository institution insurance funds become insolvent?
Why was interest rate risk less of a problem for banks than for thrifts in the early 1980s?
Historically, what effect has deposit insurance had on DI panics and runs?
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
If deposit insurance is similar to a put option, who exercises that option?
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.
Do we need both risk-based capital requirements and risk-based insurance premiums to discipline shareholders?
Under current deposit insurance rules, how can DI depositors achieve many times the $250,000 coverage cap on deposits?
Why do uninsured depositors benefit from a too-big-to-fail policy followed by regulators?
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.
What measures were mandated by the FDICIA to bolster regulator discipline?
Is a DI’s access to the discount window as effective as deposit insurance in deterring bank runs and panics? Why or why not?
How do state-sponsored guaranty funds for insurance companies differ from deposit insurance?
What specific protection against insolvencies does the Securities Investor Protection Corporation provide to securities firm customers?
What is capital forbearance? How does a policy of forbearance potentially increase the costs of financial distress to the deposit insurance fund as well as the stockholders?
What four factors were provided by the 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
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?
What is the primary goal of the FDIC in employing the LCR strategy?a. How is the insured depositor transfer method implemented in the process of failure resolution?b. Why does this method of failure
In what ways did the FDICIA enhance the regulatory discipline to help reduce moral hazard behavior? What has the operational impact of these directives been?
Why is access to the discount window of the Fed less of a deterrent to DI runs than deposit insurance?
What was the purpose of the establishment of the Pension Benefit Guaranty Corporation (PBGC)?a. How does the PBGC differ from the FDIC in its ability to control risk?b. How were the 1994 Retirement
Webb Bank has a composite Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, and Sensitivity (CAMELS) rating of 2, a total risk-based capital ratio of 10.2 percent, a Tier 1 risk-based
Million Bank has a composite CAMELS rating of 2, a total risk-based capital ratio of 9.8 percent, a Tier I risk-based capital ratio of 6.8 percent, a CET1 leverage ratio of 6.0 percent, and a Tier I
Go to the FDIC website at www.fdic.gov. Click on “Analysis” and then click on“Latest Profile” under “Quarterly Banking Profile.” After selecting a quarter, click on “Access QBP” and
Why is an FI economically insolvent when its net worth is negative?
Why does market value accounting produce a more accurate picture of a DI’s net worth than book value accounting?
What are the arguments against the use of market value accounting for DIs?
What are the major strengths of the risk-based capital ratios?
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.
Why is a capital requirement not levied on exchange-traded derivative contracts?
What is the difference between Tier I capital and Tier II capital?
Identify one asset in each of the credit risk weight categories.
What are the risk-weighted assets in the denominator of the common equity Tier I (CET1) risk-based capital ratio, the Tier I risk-based capital ratio, and the total risk-based capital ratio?
How is the leverage ratio for a DI defined?
Explain the process of calculating risk-weighted on-balance-sheet assets.

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