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business
financial markets institutions

Questions and Answers of Financial Markets Institutions

17. Why did the S&L. crisis not occur unit] the 1980s?
16. Why is regulatory forbearance a dangerous strategy for a deposit insurance agency?
15. What are the primary advantages enjoyed by credit unions?
14. What are share accounts, share certificates, and share drafts?
13. Are most credit unions larger or smaller than com- mercial banks? Why?
12. Why does the commercial banking lobby object to the nonprofit, tax-exempt status enjoyed by credit unions?
11. Describe the common bond membership rule.
10. What is the purpose of the Credit Union National Association (CUNA)?
9. What type of customers are credit unions focused on servicing?
8. What has been the trend S&L net income since the mid-1990s?
7. What is the most common measure of the capital adequacy of a financial institution?
6. How was the thrift crisis ended?
5. Why did depositors not object to the risky and investments made by savings and loans in tip early and mid-1980s?
3. What are the primary assets Of savings and loan institutions?Name three factors that led to the thrift crisis.
2. What is the primary disadvantage of the mutual form of ownership?
I. How does the mutual form Of ownership differ from tie typical cormarate form or ownership?
15. What will be the likely effect of the Gramm-Leach- Bliley Act on financial consolidation?
14. How did competitive forces lead to the repeal of the Glass-Steagall Act's separation of the banking and the securities industries?
13. "The invention of the computer is the major fac- tor behind the decline of the banking industry." Is this statement true, false, or uncertain? Explain your answer.
12. Why have banks been losing income advantages on their assets in recent years?
11. "If inflation had not risen in the 1960s and 1970s, the banking industry might be healthier today." Is this statement true, false, or uncertain? Explain your answer.
10. Why have banks been losing cost advantages in acquiring funds in recent years?
9. If reserve requirements were eliminated in the future, as some economists advocate, what effects would this have on the size of money market mutual funds?
8. If the bank at which you keep your checking account is owned by Saudi Arabians, should you worry that your deposits are less safe than if the bank were owned by Americans?
7. How could the approval of international banking facilities (IBFS) by the Fed in 1981 have reduced employment in the banking industry in Europe?
6. What incentives have regulatory agencies created to encourage international banking? Why have they done this?
5. Why has there been such a dramatic increase in bank holding companies?
4. Why has new technology made it harder to enforce limitations on bank branching?
3. "The commercial banking industry in Canada is less competitive than the commercial banking indus- try in the United States because in Canada only a few large banks dominate the industry, while in
2. Which regulatory agency has the primary respon- sibility for supervising the following categories of commercial banks?a. National banksb. Bank holding companiesc. Non-Federal Reserve member state
1. Why was the United States one of the last of the major industrialized countries to have a central bank?
2. It is relatively easy to find up-to-date information on banks because of their extensive reporting requirements. Go to http://www2.fdie.gov/qbp/. Sponsored by the Federal Deposit Insurance Cor-
1. Table 1 reports the balance sheet of all commer- cial banks based on aggregate data found in the Federal Reserve website. Compare this table to the balance sheet reported by Wachovia: Go to
18. After roak•ng payments for three years, one of the mortgage borrowers defaults on the mortgage.NewBaok unmediate)y takes possession of the house sells ital. auction far Legal foes amount to
17. If NewBankS target ROE is 4.5%. how much net ree income must it generate to meet this target?
16. If NewBank were required to establish a loan loss reserve at 0.25% of the loan value for commercial loans, how would this be recorded? Recalculate NewBank's ROE and final balance sheet, including
15. Calculate NewBank's ROE and final balance sheet, including its tax liabilities.
14. Calculate NewBank's ROA and NIM for its first month. Assume that net interest equals EBT, and that NewBank is in the 34% tax bracket.
13. What does the month-end balance sheet for New- Bank look like? Calculate this before any income tax consideration.
12. NewBank also pays off its federal funds borrowed. How much cash is owed? How is this recorded?
11. The end of the month finally arrives for NewBank, and it receives all the required payments from its mortgages, commercial loans, and T-bills. How much cash was received? How are these transac-
10. To meet any shortfall in the previous question, NewBank will borrow the cash in the federal funds market. Management decides to borrow the needed funds for the remainder of the month (now 29
9. On the third day of operations, deposits fall by $5 million. What does the balance sheet look like? Are there any problems?
8. NewBank decides to invest $45 million in 30-day T- bills. The T-bills are currently trading at $4986.70 (including commissions) for a $5000 face value instrument. How many do they purchase? What
7. NewBank started its first day of operations with $6 million in capital. $100 million in checkable deposits is received. The bank issues a $25 million commercial loan and another $25 million in
6. A bank estimates that demand deposits are, on average. $100 million a standard deviation Of$3 million. The bank wants to maintain a minimum Of or deposits in reserves at all times. What is the
5. For the week. Nobel National Bank plans to issue 925 million mortgages and purchase SIOO million 31 -day New deposits Of million are expected. and other sources will gen-erate SIS mill:on cash.
4. Refer to the pre".'ious question. 1981 Congress allowed to sell mortgages at a loss and to amortize the loss Over the remaining life Of the mortgage. this were used (Or the previous question, how
3. In mid-1978, Wiggley issued a standard 30•year r.xed rate mortgage at 7.8% for $150,000, Thirty-six months lar,er, mortgage rates jumped to 13%. [f the sells the mortgage, how much 01 a loss is
2. X-Bank reported an ROE 0115% and Of How well capitalized is this bank?
I. The balance sheet Of Tr•Bank Starts with an allowance for loan losses Of SI .33 During the year, TriBank charges off worthless loans of$084 million, recovers SO.æ million on loans pre-vionsly
15. If a bank is falling short of meeting its capital requirements by $1 million, what four things can it do to rectify the situation?
14. What are the benefits and costs for a bank when it decides to increase the amount of its bank capital?
13. If a bank finds that its ROE is too low because it has too much bank capital, what can it do to raise its ROE?
12. If a bank doubles the amount of its capital and ROA stays constant, what will happen to ROE?
11. What does the net interest margin measure, and why is it important to bank managers?
10. Why do equity holders care more about ROE than about ROA?
9. Which components of operating expenses experi- ence the greatest fluctuations? Why?
8. Why has noninterest income been growing as a source of bank operating income?
7. "Banking has become a more dynamic industry because of more active liability management." Is this statement true, false, or uncertain? Explain your answer.
6. "Bank managers should always seek the highest return possible on their assets." Is this statement true, false, or uncertain? Explain your answer.
5. If you are a banker and expect interest rates to rise in the future, would you want to make short-term or long-term loans?
4. Why has the development of overnight loan mar- kets made it more likely that banks will hold fewer excess reserves?
3. If the bank you own has no excess reserves and a sound customer comes in asking for a loan, should you automatically turn the customer down, explain- ing that you don't have any excess reserves to
2. If the president of a bank told you that the bank was so well run that it has never had to call in loans, sell securities, or borrow as a result of a deposit outflow, would you be willing to buy
1. Rank the following bank assets from most to least liquid:a. Commercial loansb. Securitiesc. Reservesd. Physical capital
2. Go to http://www.sec.gov/ and click on "Press releases."a. Summarize the major types of issues that the SEC addresses in these press releases.b. Look over the last three months of releases and
1. Go to http://www.sarbanes-oxley.com/. This site tracks issues and news related to the Sarbanes- Oxley Act.a. Summarize in two or three sentences the pri- mary reason for passage of the
6. Examine the prospectus at the SEC website(htt p•J/www.sec.gov/Arehivevedgarfdatw'1054 721/0000891020-99-001 re-index-html). How mach were the various original worth when Bsquare went public? you
5. How much in commissions can brokers ard dealers expect during first several months? How does this Compare With the money left on the table?
4. Based on what we know following the first day of trading. how many shares and at what price could Bsquare have gone public? Based on this, how effi-cient does the process appear?
3. How much total wealth was available in this IPO for undenvriters to doie 10 their best clients, future clients, and so forth? Another way of asking this is. how much money was left On the table?
2. In percentage terms, whatwas the firwday return?If you were on the "Friends Of Frank" list and received 100 shares, how much cash could you walk away With after the first day?
1. What were the toiai proceeds from this offering?What proceeds were retajned by Bsquare? By the investment banker?
20. Which provisions of the Global Settlement do you think are beneficial and which ones are not?Machine generated alternative text:
19. Which provisions of the Sarbanes-Oxley Act do you think are beneficial and which ones are not?
18. What are the advantages and disadvantages of gov- ernment provision of information as a solution to the problems created by conflicts of interest?
17. What are the disadvantages of separating financial activities into different firms in order to deal with conflicts of interest?
16. How can supervisory oversight help reduce con- flicts of interest?
15. What are the advantages and disadvantages of mandatory disclosure in dealing with conflicts of interest?
14. How can compensation schemes in firms lead to conflicts of interest?
13. When is it more likely that conflicts of interest will be exploited?
12. Give two examples of conflicts of interest that do not seem to have been exploited and thus did not lead to a reduction of reliable information in the financial markets.
11. True, False, or Uncertain: Conflicts of interest always reduce the flow of reliable information.
10. Describe two conflicts of interest that occur in uni- versal banks.
9. Describe two conflicts of interest that occur in credit-rating agencies.
8. Some commentators have attributed the demise of Arthur Andersen to the combining of auditing and consulting activities in the firm. Is this correct?
7. Describe two conflicts of interest that occur in accounting firms.
6. How does spinning lead to a less efficient financial market?
5. Describe two conflicts of interest that occur when underwriting and research are provided by a sin- gle investment banking firm.
4. How can conflicts of interest lead to unethical behavior?
3. How can conflicts of interest make financial mar- kets less efficient?
2. How does the provision of several types of financial services by one firm lead to conflicts of interest?
1. Why can provision of several types of financial ser- vices by one firm lead to a lower cost of information production?
2. This chapter discusses how an understanding of adverse selection and moral hazard can help us better understand financial crises. The greatest financial crisis faced by the United States was
l. In this chapter we discuss the lemons problem and its effect on the efficient functioning of a market This theory was initially developed by George Akerlof, Go to
4. You own a house worth $400,000 OJI H river. If the river floods moderately. the house will be corn•pletely destroyed, This happens about Once every 50 years. If you build a seawall, the river
2. NOW, you believe the deakr knows more about the cars than you. How much are you willing to pay?Why? How can this resolved in a comsxtitive
1. You are in the market for a used car At a used car Jot. you know that the blue book value for the cars you are looking al is between $20,000 and S24.DOOv If you believe the dealer knows as much
15. How can a sharp rise in interest rates provoke a financial crisis?

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