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financial markets institutions

Questions and Answers of Financial Markets Institutions

3. What major assets commercial banks hold?
4. What the major sources of funding for commercial banks are?
5. What OBS assets and liabilities are?
6. What other types of feegenerating activities banks participate in?
7. What the features are that distinguish a money center bank from other banks?
8. Which size banks generally have the highest ROA? ROE?
9. What the trend in bank performance has been in the commercial banking industry over the last twenty years?
10. Who the major regulators of commercial banks are?
11. Which of all commercial banks the OCC regulates?
12. What the major advantages of international expansion to an FI are?
13. What the major disadvantages of international expansion to an FI are?
4. Why do commercial banks hold investment securities?( LG 11-2)
11. What is meant by an off-balance-sheet activity? What are some of the forces responsible for them? ( LG 11-4)
12. How does one distinguish between an off-balance-sheet asset and an off-balance-sheet liability? ( LG 11-4)
13. What types of activities are normally classified as offbalance-sheet (OBS) activities? ( LG 11-4)How does an OBS activity move onto the balance sheet as an asset or liability?What are the
16. What is a money center bank and a regional bank? ( LG 11-5)
18. How do small bank activities differ from large bank activities?( LG 11-5)
19. How has the performance of the commercial banking industry changed in the last twenty years? ( LG 11-6 )
21. Who are the major regulators of commercial banks? Which banks does each agency regulate? ( LG 11-7 )
22. What are the major functions performed by the FDIC?( LG 11-7 )
23. What are the main advantages of being a member of the Federal Reserve System? ( LG 11-7 )
24. For each of the following banking organizations, identify which regulatory agencies (OCC, FRB, FDIC, or state banking commission) may have some regulatory supervision responsibility. ( LG 11-7 )
25. State-chartered, nonmember, non–holding company bank State-chartered, nonmember, holding company bank State-chartered member bank Nationally chartered non–holding company bank Nationally
26.What are the advantages and disadvantages of international expansion? ( LG 11-8)
1. Calculate the percentage change in total assets for the commercial bank industry since 2010 reported in Table 11–2 .Go to the Federal Deposit Insurance Corporation Web site at www.fdic.gov and
2. Calculate the percent of investment securities to total assets, loans to total assets, deposits to total assets, and equity to total assets. How have these changed since 2010?Go to the Federal
LG 12-1. Describe the four major categories of assets on a commercial bank’s balance sheet .
LG 12-2. Distinguish between core deposits and purchased funds .
LG 12-3. Identify off-balance-sheet activities that commercial banks undertake .
LG 12-4. Describe the major categories on a commercial bank’s income statement .
LO12-5 WHY EVALUATE THE PERFORMANCE OF COMMERCIAL BANKS?
LG 12-5. Examine ratios that can be used to analyze a commercial bank
1. The difference between a wholesale bank and a retail bank?
2. What the trade-offs are in holding a large proportion of short-term securities, such as T-bills, versus long-term securities, such as loans?
3. What the trade-offs are in issuing short-term deposit accounts, such as demand deposits and retail CDs, versus long-term deposits and other funding sources, such as wholesale CDs and long-term
4. What the major difference is between a commercial letter of credit and a standby letter of credit?
5. What counterparty risk in a forward contract means?
6. Which is riskier for a bank, loan sales with recourse or loan sales without recourse?
7. What the nature of the relationship is between balance sheet and income statement items?
8. How paying a lower rate for new deposits than for other liabilities impacts a bank’s income statement?
9. Two scenarios in which a high value of ROE may signal a risk problem for a bank?
10. What ratios ROA can be broken down into?
11. What the spread measure means?
12. How a bank’s choice of market niche affects its financial ratios?
13. How a bank’s asset size affects its financial ratios?
1. How does a bank’s report of condition differ from its report of income? ( LG 12-1, LG 12-4 )
2. Match these three types of cash balances with the functions that they serve: ( LG 12-1 )
3. Vault cash (1) Used to meet legal reserve requirements Deposits at (2) Used to purchase services the Federal (3) Used to meet customer withdrawals Reserve Deposits at other FIs Classify the
4. If we examine a typical bank’s asset portion of the balance sheet, how are the assets arranged in terms of expected return and liquidity? ( LG 12-1 )
5. Repurchase agreements are listed as both assets and liabilities in Table 12–1 . How can an account be both an asset and a liability? ( LG 12-1, LG 12-2 )
6. How does a NOW account differ from a demand deposit?( LG 12-2 )
7. How does a retail CD differ from a wholesale CD? ( LG 12-2 )
8. How do core deposits differ from purchased funds?( LG 12-2 )
9. What are the major categories of off-balance-sheet activities?( LG 12-3 )
10. How does a bank’s annual net income compare with its annual cash flow? ( LG 12-4 )
11. How might the use of an end-of-the-year balance sheet bias the calculation of certain ratios? ( LG 12-5 )
12. How does the asset utilization ratio for a bank compare to that of a retail company? How do the equity multipliers compare? ( LG 12-5 )
13. What is the likely relationship between the interest income ratio and the noninterest income ratio? ( LG 12-5)
14. A security analyst calculates the following ratios for two banks. How should the analyst evaluate the financial health of the two banks? ( LG 12-5)Bank A Bank B Return on equity 22% 24%Return on
15. What sort of problems or opportunities might ratio analysis fail to identify? ( LG 12-5)
1. A bank is considering two securities: a 30-year Treasury bond yielding 7 percent and a 30-year municipal bond yielding 5 percent. If the bank’s tax rate is 30 percent, which bond offers the
2. A bank is considering an investment in a municipal security that offers a yield of 6 percent. What is this security’s tax equivalent yield if the bank’s tax rate is 35 percent?( LG 12-4 )
3. The financial statements for First National Bank (FNB) are shown below: ( LG 12-5 )Balance Sheet First National Bank Assets Liabilities and Equity Cash $ 450 Demand deposits $ 5,510 Demand
4. The financial statements for BSW National Bank (BSWNB)are shown below: ( LG 12-5 )Balance Sheet BSW National Bank Assets Liabilities and Equity Cash and due Demand from banks $ 936 deposits $
5. The financial statements for MHM Bank (MHM) are shown below: ( LG 12-5 )Balance Sheet MHM Bank Assets Liabilities and Equity Cash and due Demand from banks $ 1,920 deposits $10,620 Demand deposits
6. The financial statements for THE Bank are shown below:( LG 12-5 )Balance Sheet THE Bank Assets Liabilities and Equity Cash $ 200 Demand deposits $ 2,450 Demand deposits Small time from other FIs
7. Smallville Bank has the following balance sheet, rates earned on its assets, and rates paid on its liabilities.Balance Sheet (in thousands)Rate Earned Assets (%)Cash and due from banks $ 6,000 4
8. Megalopolis Bank has the following balance sheet and income statement. ( LG 12-5 )Balance Sheet (in millions)Assets Liabilities and Equity Cash and due Demand from banks $ 9,000 deposits $ 19,000
9. Anytown bank has the following ratios: ( LG 12-5)Profit margin: 21%Asset utilization: 11%Equity multiplier: 12X Calculate Anytown’s ROE and ROA.
10. Everytown bank has the following ratios: ( LG 12-5)Profit margin: 5%Asset utilization: 20%Equity multiplier: 7.75X Calculate Everytown’s ROE and ROA.
1. What is the most recent value of total assets for Bank of America? How has this changed since 2010 as reported in Table 12–1 ?Go to the Bank of America’s Web site at www.bankofamerica.com .
2. What is the most recent value of net income for Bank of America? How has this changed since 2010 as reported in Table 12–3 ?Go to the Bank of America’s Web site at www.bankofamerica.com . Find
3. From the most recent balance sheet and income statement, calculate the ROA, ROE, equity multiplier, profit margin, and asset utilization ratios. Which ratio has changed the most since 2010 as
Clarify the extent to which investment funds are exposed to liquidity risk? LO.1
Consider the extent to which insurance companies are exposed to liquidity risk? LO.1
Explain why abnormal deposit drains occur? LO.1
Examine the components of a liquidity plan? LO.1
Describe how depository institutions measure liquidity risk? LO.1
Define the two methods financial institutions use to manage liquidity risk? LO.1
Examine the extent to which finance companies are regulated? LO.1
Identify the major assets and liabilities held by finance companies? LO.1
Define the major types of finance companies? LO.1
Identify the main assets and liabilities held by credit unions? LO.1
Describe how credit unions are different from other depository institutions? LO.1
Discuss how savings institutions performed in the 2000s? LO.1
Know who regulates savings institution? LO.1
Identify the main assets and liabilities held by savings institutions? LO.1
Recognize the main regulators of property–casualty insurance companies? LO.1
Identify the main asset and liability items on property–casualty insurance company balance sheets? LO.1
Analyze the major lines of business performed by property–casualty insurance companies.? LO.1
Classify the major regulations governing life insurance companies? LO.1
Identify the major assets and liabilities of life insurance companies? LO.1
Review the four basic lines of business performed by life insurance companies? LO.1
Describe the two types of insurance companies? LO.1
Understand how the various risks faced by financial institutions are related? LO.1
Recognize that insolvency risk is a consequence of the other types of risk. LO.1
Describe the major risks faced by financial institutions. LO.1
Note that this technique also maximizes CDO arrangers’ profits by getting investors to buy CDO tranches that they would not purchase if they had an accurately measured value. LO.1
These investors ignored the fact that the ratings agencies are paid by the CDO arranger and that they have a bias in favor of a rating that is better than the real risk level. Unless CDO tranches
The FDIC does not make the risk-based deposit insurance premium to banks and thrifts sufficiently large to reflect this risk. LO.1

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