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business
financial institutions management

Questions and Answers of Financial Institutions Management

1. In addition to the target reserve ratio, what other pieces of information does the DI reserve manager require to manage the DI’s reserve requirement position?
1. In general, would it be better to hold three-month T-bills or 10-year T-notes as buffer assets? Explain.
1. Can we view reserve requirements as a tax when the consumer price index (CPI) is falling?
1. Why do regulators set minimum liquid asset requirements for FIs?
1. Go to the BIS Web site at www.bis.org and find the most recent data on the volume and value of worldwide wire transfer systems (Table 16–5). Click on “Committee on Payment and Settlement
1. Go to the BIS Web site at www.bis.org and find the most recent data on the volume and value of payment system transactions in the United States(Table 16–2) using the following steps. Click on
1. What actions has the BIS taken to protect depository institutions from insolvency due to operational risk?
1. How has technology altered the competition risk of FIs?
1. What are usury ceilings? How does technology create regulatory risk?
1. What has been the impact of rapid technological improvements in the electronic payment systems on crime and fraud risk?
1. Why do FIs in the United States face a higher degree of international technology risk than do the FIs in other countries, especially some European countries?
1. How does Regulation F of the 1991 FDICIA reduce the problem of daylight overdraft risk?
1. What is a daylight overdraft? How do an FI’s overdraft risks incurred during the day differ for each of the two competing electronic payment systems, Fedwire and CHIPS? What provision has been
1. What are the differences between the Fedwire and CHIPS payment systems?
1. Why does the United States lag behind most other industrialized countries in the proportion of annual electronic noncash transactions per capita? What factors probably will be important in
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
1. What is the difference between the production approach and the intermediation approach to estimating cost functions of FIs?
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 percent. Life Insurance Company B (LICB) has assets
1. What are diseconomies of scope? How could diseconomies of scope occur?
1. A commercial 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
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
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?
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. 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?
1. Distinguish between economies of scale and economies of scope.
1. Identify and discuss three benefits of technology in generating revenue for FIs.
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 million. Management is
1. The operations department of a major FI is planning to reorganize several of its back-office functions. Its current operating expense is $1.5 million, of which$1 million is for staff expenses. The
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.What are some of the risks inherent
1. Calculate the annual growth rates in the various income, expense, earnings, and asset categories from 1991 to 2005. If part of the growth rates in assets, earnings, and expenses can be attributed
1. Table 16–1 shows data on earnings, expenses, and assets for all insured banks.
1. Explain how technological improvements can increase an FI’s interest and noninterest income and reduce interest and noninterest expenses. Use some specific examples.
1. 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?
1. What are the three approaches proposed by the Basel Committee on Banking Supervision for measuring capital requirements associated with operational risk?
1. What risk management efforts are involved in controlling operational risk?
1. What are some examples of operational risk coming from employees, customer relationships, capital assets, and external risk?
1. What steps have the members of CHIPS taken to lower settlement, or daylight overdraft, risk?
1. Why do daylight overdrafts create more of a risk problem for banks on CHIPS than on Fedwire?
1. Describe the six risks faced by FIs with the growth of wire transfer payment systems.
1. What conclusion is suggested by recent studies that have focused on the dispersion of costs across banks of a given asset size?
1. What does the empirical evidence reveal about economies of scale and scope?
1. How does the intermediation approach differ from the production approach?
1. Describe the basic concept 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 commercial bank merged with an investment bank?
1. If there are diseconomies of scope, do specialized FIs have a relative cost advantage or disadvantage over product-diversified FIs?
1. Does the existence of economies of scale for FIs mean that in the long run small FIs cannot survive?
1. What is the link between interstate banking restrictions and the retail demand for electronic payment services?
1. What are two risk factors involved in an FI’s investment of resources in innovative technological products?
1.Describe some of the automated retail payment products available today. What advantages do these products offer the retail customer?
1.Describe some of the wholesale financial services provided to corporate customers that have been improved by technology.
1. What are some of the advantages of an efficient technological base for an FI? How can it be used to directly improve profitability?
1. Looking at Table 16–1, determine if noninterest expenses and noninterest income have been increasing or decreasing as a percent of total bank costs over the 1991–2006 period?
Dark Star Bank has estimated its average VAR for the previous 60 days to be $35.5 million. DEAR for the previous day was $30.2 million. Under the latest BIS standards, what is the amount of capital
What conditions were introduced by BIS in 1998 to allow large banks to use internally generated models for the measurement of market risk? What types of capital can be held to meet the capital charge
Explain the BIS capital charge calculation for unsystematic and systematic risk for an FI that holds various amounts of equities in its portfolio. What would be the total capital charge required for
Explain how the capital charge for foreign exchange risk is calculated in the BIS standardized model. If an FI has an $80 million long position in euros, a $40 million short position in British
An FI has the following bonds in its portfolio: long 1-year U.S. Treasury bills, short 3½-year Treasury bonds, long 3-year AAA-rated corporate bonds, and long 12-year B-rated (nonqualifying) bonds
In the BIS standardized framework for regulating risk exposure for the fixedincome portfolios of banks, what do the terms specific risk and general market risk mean? Why does the capital charge for
How is Monte Carlo simulation useful in addressing the disadvantages of back simulation? What is the primary statistical assumption underlying its use?
What is the primary disadvantage of the back simulation approach in measuring market risk? What effect does the inclusion of more observation days have as a remedy for this disadvantage? What other
Export Bank has a trading position in Japanese yen and Swiss francs. At the close of business on February 4, the bank had ¥300 million and SF10 million. The exchange rates for the most recent six
What are the advantages of using the back simulation approach to estimate market risk? Explain how this approach would be implemented.
Calculate the DEAR for the following portfolio with the correlation coefficients and then with perfect positive correlation between various asset groups. Estimated DEAR (S,FX) (S,B) (FX,B) Stocks
Jeff Resnick, vice president of operations of Choice Bank, is estimating the aggregate DEAR of the bank’s portfolio of assets consisting of loans (L), foreign currencies (FX), and common stock
Bank of Alaska’s stock portfolio has a market value of $10 million. The beta of the portfolio approximates the market portfolio, whose standard deviation (m) has been estimated at 1.5 percent.
Bank of Southern Vermont has determined that its inventory of 20 million euros (:) and 25 million British pounds (£) is subject to market risk. The spot exchange rates are $0.40/: and $1.28/£,
Bank Alpha has an inventory of AAA-rated, 15-year zero-coupon bonds with a face value of $400 million. The bonds currently are yielding 9.5 percent in the over-the-counter market. What is the
In what sense is duration a measure of market risk?
The mean change in the daily yields of a 15-year, zero-coupon bond has been five basis points (bp) over the past year with a standard deviation of 15 bp. Use these data and assume that the yield
What is meant by value at risk (VAR)? How is VAR related to DEAR in J. P. Morgan’s RiskMetrics model? What would be the VAR for the bond in problem 4 for a 10-day period? What statistical
Follow Bank has a $1 million position in a five-year, zero-coupon bond with a face value of $1,402,552. The bond is trading at a yield to maturity of 7.00 percent. The historical mean change in daily
What is meant by daily earnings at risk ( DEAR )? What are the three measurable components? What is the price volatility component?
Why is the measurement of market risk important to the manager of a financial institution?
What is meant by market risk?
Go to Standard & Poor's Market Insight Web site at www.mhhe.com/edu- marketinsight and find the most recent balance sheet for Capital One Financial Corp (COF) and American Express (AXP) using the
Go to Standard & Poor's Market Insight Web site at www.mhhe.com/edu- marketinsight and identify the industry constituents for Capital One Financial Corp. through the related links using the following
Go to the Federal Reserve's Web site at www.federalreserve.gov and get the latest information on finance company consumer, real estate, and business lending using the following steps. Click on
How does the amount of equity as a percentage of total assets compare for finance companies and commercial banks? What accounts for this difference?
Compare Tables 6-1 and 4-6. Which firms have higher ratios of capital to total assets: finance companies or securities firms? What does this comparison indi- cate about the relative strengths of
What advantages do finance companies have over commercial banks in offer- ing services to small business customers? What are the major subcategories of business loans? Which category is the largest?
What have been the major changes in the accounts receivable balances of fi- nance companies over the 29-year period 1977-2006?
What is the primary function of finance companies? How do finance companies differ from commercial banks?
Go to the Standard & Poor's Market Insight Web site at www.mhhe.com/ edumarketinsight. Find the most recent balance sheets for Washington Mutual (WM) and Astoria Financial (AF) using the following
Go to the Standard & Poor's Market Insight Web site at www.mhhe. com/edumarketinsight. Find the most recent balance sheets for Bank of America (BAC) and Suntrust Banks (STI) using the following
Go to the Standard & Poor's Market Insight Web site at www.mhhe.com/edu- marketinsight. Look up the industry financial highlights for banks as posted by S&P using the following steps. Click on
Go to the Standard & Poor's Market Insight Web site at www.mhhe.com/edu- marketinsight. Identify the industry description and industry constituents for banks using the following steps. Click on
Go to the National Credit Union Association Web site at www.ncua.gov to collect the most recent information on number of credit unions, assets of credit unions, and membership in credit unions using
Go to the Federal Reserve Board's Web site at www.federalreserve.gov and find the most recent balance sheet information for the credit union industry using the following steps. Click on "Economic
Go to the FDIC Web site at www.fdic.gov and find the most recent break- down of U.S. bank asset concentrations using the following steps. Click on "Analysts." From there click On "FDIC Quality
Compare and contrast the performance of the U.S. depository institution in- dustry with those of Japan and China.
What are the operating advantages of credit unions that have caused concern among commercial bankers? What has been the response of the Credit Union National Association to the banks' criticism?
How do savings banks differ from savings institutions? Differentiate in terms of risk, operating performance, balance sheet structure, and regulatory responsibility.
How did two pieces of regulatory legislation-the DIDMCA in 1980 and the DIA in 1982-change the operating profitability of savings institutions in the early 1980s? What impact did these pieces of
What happened in 1979 to cause the failure of many savings institutions dur- ing the early 1980s? What was the effect of this change on the operating state- ments of savings institutions?
What are the main features of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994? What major impact on commercial banking activity is expected from this legislation?
What factors are given credit for the strong performance of commercial banks in the early 2000s?
What factors normally are given credit for the revitalization of the banking industry during the 1990s? How is Internet banking expected to provide benefits in the future?
Use the data in Table 2-6 to answer the following questions.a. What was the average annual growth rate in OBS total commitments over the period 1992-2006?b. What categories of contingencies have had
The following balance sheet accounts (in millions of dollars) have been taken from the annual report for a U.S. bank. Arrange the accounts in balance sheet order and determine the value of total
What are the major sources of funds for commercial banks in the United States? How is the landscape for these funds changing and why?

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