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business
financial institutions management

Questions and Answers of Financial Institutions Management

1. What sources of competition have had an impact on the asset side of banks’ balance sheets?
1. Offer support for the claim that product expansion restrictions have affected commercial banks more than any other type of financial services firm.
== Go to the Web site of the Office of the Comptroller of the Currency at www .occ.treas.gov and update Table 13–6 using the following steps. Click on “Publications.” Click on “Qrtrly.
== Go to the FDIC Web site at www.fdic.gov and find the total amount of unused commitments and letters of credit and the notional value of interest rate swaps of FDIC-insured commercial banks for
== The manager of Shakey Bank sends a $2 million funds transfer payment message via CHIPS to the Trust Bank at 10 am. Trust Bank sends a $2 million funds transfer message via CHIPS to Hope Bank
== Distinguish between loan sales with and without recourse. Why would banks want to sell loans with recourse? Explain how loan sales can leave banks exposed to contingent interest rate risks.
== What is meant by when issued trading? Explain how forward purchases of when issued government T-bills can expose FIs to contingent interest rate risk.
== 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
== A corporation is planning to issue $1 million of 270-day commercial paper for an effective annual yield of 5 percent. The corporation expects to save 30 basis points on the interest rate by using
== How do standby letters of credit differ from commercial letters of credit? With what other types of FI products do SLCs compete? What types of FIs can issue SLCs?
== 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 the United States. It charges an up-front fee of
== What is a letter of credit? How is a letter of credit like an insurance contract?
== How is an FI exposed to takedown risk and aggregate funding risk? How are these two contingent risks related?
== 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
== Suburb Bank has issued a one-year loan commitment of $10,000,000 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
== A FI has issued a one-year loan commitment of $2 million for an up-front fee of 25 basis points. The back-end fee on the unused portion of the commitment is 10 basis points. The FI requires a
== A FI makes a loan commitment of $2.5 million with an up-front fee of 50 basis points and a back-end fee of 25 basis points on the unused portion of the loan. The takedown on the loan is 50
== 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
== What role does Schedule L play in reporting off-balance-sheet activities? Refer to Table 13–5 . What was the annual growth rate over the 14-year period 1992–2006 in the notional value of
== What factors explain the growth of off-balance-sheet activities in the 1980s through the early 2000s among U.S. FIs?
== 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
== 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?
== Contingent Bank has the following balance sheet in market value terms (in millions of dollars). Assets Liabilities Cash $ 20 Deposits $220 Mortgages 220 Equity 20 Total assets $240 Total
== How does one distinguish between an off-balance-sheet asset and an off-balance-sheet liability?
== Classify the following items as (1) on-balance-sheet assets, (2) on-balancesheet liabilities, (3) off-balance-sheet assets, (4) off-balance-sheet liabilities, or (5) capital account. Loan
= An FI has a loan portfolio of 10,000 loans of $10,000 each. The loans have a historical average default rate of 4 percent, and the severity of loss is 40 cents per dollar. Over the next year, what
= A five-year fixed-rate loan of $100 million carries a 7 percent annual interest rate. The borrower is rated BB. Based on hypothetical historical data, the probability distribution given below has
= The questions and problems that follow refer to Appendixes 12A and 12B. Refer to the information in Appendix 12A for problems 20 and 21. From Table 12A–1 , what is the probability of a loan
= An FI is limited to holding no more than 8 percent of its assets in securities of a single issuer. What is the minimum number of securities it should hold to meet this requirement? What if the
= What rules on credit concentrations has the National Association of Insurance Commissioners enacted? How are they related to modern portfolio theory?
= Over the last ten years, a bank has experienced the following loan losses on its C&I loans, consumer loans, and total loan portfolio. Year C&I Loans Consumer Loans Total Loans 2009 0.0080 0.0165
= Assume that, on average, national banks engaged primarily in mortgage lending have their assets diversified in the following proportions: 20 percent residential, 30 percent commercial, 20 percent
= Information concerning the allocation of loan portfolios to different market sectors is given below. Allocation of Loan Portfolios in Different Sectors (%) Sectors National Bank A Bank B Commercial
= How can they be used to analyze credit concentration risk?
= What databases are available that contain loan information at the national and regional levels?
= CountrySide Bank uses the KMV Portfolio Manager model to evaluate the risk-return characteristics of the loans in its portfolio. A specific $10 million loan earns 2 percent per year in fees, and
= A bank vice president is attempting to rank, in terms of the risk-reward tradeoff, the loan portfolios of three loan officers. Information on the portfolios is noted below. How would you rank the
= The obvious benefit to holding a diversified portfolio of loans is to spread risk exposures so that a single event does not result in a great loss to the bank. Are there any benefits to not being
= The Bank of Tinytown has two $20,000 loans with the following characteristics: Loan A has an expected return of 10 percent and a standard deviation of returns of 10 percent. The expected return
= If the average historical losses in the mining sector total 15 percent, what is the maximum loan a manager can make to a firm in this sector as a percentage of total capital? An FI has set a
= A manager decides not to lend to any firm in sectors that generate losses in excess of 5 percent of capital. If the average historical losses in the automobile sector total 8 percent, what is the
= What does loan concentration risk mean?
= What are its shortcomings?
= How do FIs use it to measure credit risk concentration?
= What is migration analysis?
= How do loan portfolio risks differ from individual loan risks?
1. What is the bank’s capital adequacy level (under Basel II) if the par value of its equity is $225,000, the surplus value of equity is $200,000, and the qualifying perpetual preferred stock is
1. Using the leverage ratio requirement, what is the minimum regulatory capital required to keep the bank in the well-capitalized zone?
1. What are the bank’s Tier I and total risk–based capital requirements under Basel II?
1. What is the bank’s risk-adjusted asset base under Basel II?
1. Go to the Web site of the Bank for International Settlements at www.bis.org. Under “Basel Committee on Bank Supervision,” click on “Basel II.” This will download a file onto your computer
1. If the firm currently has $7 million in capital, what should be its surplus to meet the minimum capital requirement?
1. A property–casualty insurance company has estimated the following required charges for its various risk classes (in millions):Risk Description RBC Charge R0 Affiliated P/C $ 2 R1 Fixed income 3
1. How do the risk categories in the risk-based capital model for property–casualty insurance companies differ from those for life insurance companies? What are the assumed relationships between
1. How much capital must be raised to meet the minimum requirements?
1. What is the required risk-based capital for the life insurance company?If the total surplus and capital held by the company is $9 million, does it meet the minimum requirements?
1. A life insurance company has estimated the following capital requirements for each of the risk classes: asset risk ( C1) $5 million, insurance risk ( C2) $4 million, interest rate risk ( C3)
1. Identify and define the four risk categories incorporated into the life insurance risk-based capital model.
1. How does the net capital rule for investment banks differ from the capital requirements imposed on commercial banks and other depository institutions?
1. What should the FI do to maintain the net minimum required liquidity?
1. Does the investment bank have sufficient liquid capital to cushion any unexpected losses per the net capital rule?
1. An investment bank specializing in fixed-income assets has the following balance sheet (in millions). Amounts are in market values, and all interest rates are annual unless indicated
1. A securities firm has the following balance sheet (in millions):Assets Liabilities and Equity Cash $ 40 Five-day commercial paper $ 20 Debt securities 300 Bonds 550 Equity securities 500
1. According to SEC Rule 15C 3–1, what adjustments must securities firms make in the calculation of the book value of net worth?
1. Does the bank have sufficient capital to meet the Basel requirements? How much in excess? How much short?
1. What are the risk-adjusted on-balance-sheet assets of the bank as defined under Basel II?
1. Third Fifth Bank has the following balance sheet (in millions), with the risk weights in parentheses.Assets Liabilities and Equity Cash (0%) $ 20 Deposits $130 Mortgage loans (50%) 50 Subordinated
1. If not, what minimum Tier I or total capital does it need to meet the requirement?
1. What is the total capital required for both off- and on-balance-sheet assets?Does the bank have enough capital to meet the Basel requirements?
1. What are the risk-adjusted on-balance-sheet assets of the bank as defined under the Basel Accord?
1. How does the leverage ratio test impact the stringency of regulatory monitoring of bank capital positions?Third Bank has the following balance sheet (in millions), with the risk weights in
1. What is the contribution to the credit risk–adjusted asset base of the following items under the Basel II requirements? Under the U.S. capital–assets ratio?$10 million cash reserves.$50
1. Identify and discuss the problems in the risk-based capital approach to measuring capital adequacy.
1. How does the risk-based capital measure attempt to compensate for the limitations of the static leverage ratio?
1. Why do regulators not allow banks to benefit from positive current exposure values?
1. Why are the credit conversion factors for the potential exposure of foreign exchange contracts greater than they are for interest rate contracts?
1. What is the difference between the potential exposure and the current exposure of over-the-counter derivative contracts?
1. Why do exchange-traded derivative security contracts have no capital requirements?
1. What is counterparty credit risk?
1. Explain how off-balance-sheet market contracts, or derivative instruments, differ from contingent guaranty contracts.
1. On what basis are the risk weights for the credit equivalent amounts differentiated?
1. What is the basis for differentiating the credit equivalent amounts of contingent guaranty contracts?
1. The bank repurchases $100,000 of common stock with cash.The bank issues $2 million of CDs and uses the proceeds to issue mortgage loans.The bank receives $500,000 in deposits and invests them in
1. Onshore Bank has $20 million in assets, with risk-adjusted assets of $10 million. Tier I capital is $500,000, and Tier II capital is $400,000. How will each of the following transactions affect
1. National Bank has the following balance sheet (in millions) and has no off-balance-sheet activities.Assets Liabilities and Equity Cash $ 20 Deposits $ 980 Treasury bills 40 Subordinated
1. What are the appropriate risk weights for each category?
1. What assets are included in the five categories of credit risk exposure under Basel II?
1. Explain the process of calculating risk-adjusted on-balance-sheet assets.
1. What components are used in the calculation of risk-adjusted assets?
1. What are the definitional differences between Tier I and Tier II capital?
1. Identify the five zones of capital adequacy, and explain the mandatory regulatory actions corresponding to each zone.
1. What is the total risk–based capital ratio?
1. What is the major feature in the estimation of credit risk under Basel II capital requirements?
1. What is the Basel Agreement?
1. Identify and discuss the weaknesses of the leverage ratio as a measure of capital adequacy.
1. What is the significance of prompt corrective action as specified by the FDICIA legislation?
1. How is the leverage ratio for an FI defined?
1. What are the arguments for and against the use of market value accounting for FIs?
1. What is the new market to book value ratio if State Bank has 1 million shares outstanding?
1. What is the impact on the balance sheet after the necessary adjustments are made according to book value accounting? According to market value accounting?

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