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natural resource economics

Questions and Answers of Natural Resource Economics

11. Recall that under the provisions of the Dodd-Frank Act of 2010, systemically important financial institutions (SIFIs) are required to maintain capital reserves (potentially up to 8% of the
10. What prompted the growth of money market mutual funds?
9. What distinguishes a hedge fund from other types of mutual funds?
8. Considering the evolution of mutual funds fees over the past 20 years, would you say that competition among mutual funds has been a good thing or not?
7. Suppose a mutual fund advertises a yearly return of 12%, for which it charges an upfront fee (a percentage of your initial investment). Another fund advertises the same return, but it charges a 3%
6. How does an index fund differ from an actively managed fund?
5. Discuss why a mutual fund family may find it beneficial to offer 50 or 60 different stock mutual funds.
4. Distinguish between an open-and closed-end mutual fund.
3. After reading Chapter 6 , William realizes that there is no point in paying fees to mutual fund managers for them to choose which stock or securities to buy for him. However, after carefully
2. Suppose that you can deposit at most per month for your savings and that you want to buy securities that are available only in large denominations. What benefit of mutual funds would be
1. What features of mutual funds and the investment environment have led to mutual funds’ rapid growth in the past two decades?
2. Despite the regulations that protect banks from failure, some do fail. Go to www2.fdic.gov/hsob/. Select the tab labeled “Bank Failures.” How many bank failures occurred in the United States
1. Go to www2.fdic.gov/SDI/SOB. Select “Historical Statistics on Banking,” then “Commercial Bank Reports.” Finally, choose “Number of Institutions, Branches and Total Offices.” In looking
15. How does the Dodd-Frank Act of 2010 compare to the GlassSteagall Act of 1933?
14. How did competitive forces lead to the repeal of the GlassSteagall Act’s separation of the banking and the securities industries?
13. “The invention of the computer is the major factor behind the decline of the banking industry.” Is this statement true, false, or uncertain? Explain your answer.
12. Given the role of the loan originator in the securitization process of a mortgage loan described in the text, do you think the loan originator will be worried about the ability of a household to
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. State the relationship between the process of bank consolidation and the too-big-to-fail policy.
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. In light of the recent financial crisis of 2007–2009, do you think that the firewall created by the Glass-Steagall Act of 1933 between commercial banking and the securities industry proved to be
3. “The banking industry in Canada is less competitive than the banking industry in the United States because in Canada only a few large banks dominate the industry, while in the United States
2. Which regulatory agency has the primary responsibility for supervising the following categories of banks? a. National banks b. Bank holding companies c. Non-Federal-Reserve-member state banks d.
1. Do you think that before the National Bank Act of 1863 the prevailing conditions in the banking industry fostered or hindered trade across states in the United States?
2. The Office of the Comptroller of the Currency is responsible for many of the regulations affecting bank operations. Go to www.occ.treas.gov/. Click on “Law and Regulations” in the farright
1. Go to http://www.fdic.gov/regulations/laws/. This site reports on the most significant pieces of legislation affecting banks since the 1800s. Summarize the most recently enacted bank regulation
11. Oldhat borrows million in the overnight federal funds market to meet its reserve requirement. What is the new balance sheet for Oldhat? How well capitalized is the bank?
10. The bad news about the mortgages is featured in the local newspaper, causing a minor bank run. million in deposits is withdrawn. Examine the bank’s condition after this occurs.
9. Oldhat decides to invest the million in excess reserves in commercial loans. What will be the impact on its capital ratio? Its risk-weighted capital ratio?
8. Congress allowed Oldhat to amortize the loss over the remaining life of the mortgage. If this technique had been used in the sale, how would the transaction have been recorded? What would be the
7. Bank regulators force Oldhat to sell its mortgages to recognize the fair market value. What is the accounting transaction? How does this affect its capital position?
6. The next day, terrible news hits the mortgage markets, and mortgage rates jump to 13%. What is the market value of Oldhat’s mortgages? What is Oldhat’s “market value” capital ratio?
5. Calculate the risk-weighted assets and risk-weighted capital ratio after Oldhat’s first day.
4. Oldhat Financial started its first day of operations with million in capital. million in checkable deposits are received. The bank issues a million commercial loan and another million in
3. Refer to the previous problem. Is this bank complying with the risk-weighted capital requirements set by Basel 1?Problems 4 through 11 relate to a sequence of transactions at Oldhat Financial.
2. Consider a bank with the following balance sheet: Assets Liabilities Required reserves million Checkable deposits million Excess reserves million Bank capital million Municipal bonds million
1. Consider a failing bank. A deposit of is worth how much if the FDIC uses the payoff method given the typical recovery rate? How much is the same deposit worth if the purchase-andassumption method
15. Given the set of new regulations included in the Dodd-Frank Act of 2010, do you think this was an easy bill to pass? Discuss reasons why financial industry lobbyists argued against the passing of
14. How could higher deposit insurance premiums for banks with riskier assets benefit the economy?
13. Do you think that removing the impediments to a nationwide banking system will be beneficial to the economy? Explain.
12. In what way might consumer protection regulations negatively affect a financial intermediary’s profits? Can you think of a positive effect of such regulations on profits?
11. Suppose that after a few mergers and acquisitions, only one bank holds 70% of all deposits in the United States. Would you say that this bank would be considered too big to fail? What does this
10. Why has the trend in bank supervision moved away from a focus on capital requirements to a focus on risk management?
9. What steps were taken in the FDICIA legislation of 1991 to improve the functioning of federal deposit insurance?
8. What forms does bank supervision take, and how do they promote a safe and sound banking system?
7. Would you recommend the adoption of a system of deposit insurance, like the FDIC in the United States, in a country with weak institutions, prevalent corruption, and ineffective regulation of the
6. What special problem do off-balance-sheet activities present to bank regulators, and what have they done about it?
5. What are the costs and benefits of a too-big-to-fail policy?
4. Suppose that you have in deposits at a bank. After careful consideration, the FDIC decides that this bank is now insolvent. Which method would you like to see the FDIC apply? What if your deposit
3. Creation of the FDIC encouraged reluctant depositors to put their money into the banking system. Aside from the benefit of reducing the probability of a bank run, what other positive impact has
2. If casualty insurance companies provided fire insurance without restrictions, what kind of adverse selection and moral hazard problems might result?
1. Give one example each of moral hazard and adverse selection in private insurance arrangements.
2. It is relatively easy to find up-to-date information on banks because of their extensive reporting requirements. Go to http:// www2.fdic.gov/qbp/. This site is sponsored by the Federal Deposit
1. Table 17.1 reports the balance sheet of all commercial banks based on aggregate data found in the Federal Reserve Bulletin. Compare this table to the balance sheet reported by BB&T in its latest
18. After making payments for three years, one of the mortgage borrowers defaults on the mortgage. NewBank immediately takes possession of the house and sells it at auction for . Legal fees amount to
17. If NewBank’s target ROE is 4.5%, how much net fee 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,
15. Calculate NewBank’s ROE and final balance sheet.
14. Calculate NewBank’s ROA and NIM for its first month. Assume that net interest equals earnings before taxes, and that NewBank is in the 34% tax bracket.
13. What does the month-end balance sheet for NewBank look like?
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
10. To meet any shortfall in the previous problem, NewBank will borrow in the federal funds market. Management decides to borrow the needed funds for the remainder of the month (now 29 days). The
9. On the third day of operations, deposits fall by million. What does the balance sheet look like? Are there any problems?
8. NewBank decides to invest million in 30-day T-bills. The Tbills are currently trading at (including commissions) for a face value instrument. How many do they purchase? What does the balance
7. NewBank started its first day of operations with million in capital. million in checkable deposits is received. The bank issues a million commercial loan and another million in mortgages, with the
6. A bank is considering two investment portfolios composed of a mix of government securities (federal and municipal securities). The first portfolio has a return of 6% with probability 0.9 and
5. Victory Bank reports an EM of 25, while Batovi Bank reports an EM equal to 14. Which bank is better prepared to respond against large losses on loans?
4. Refer to the previous problem. Calculate both banks’ net profit after taxes and equity capital if both banks’ assets are equal to million.
3. Nice Horizon Bank has the following measures of bank profitability: EM = 14 and ROA = 1.05%. Gold Coast Bank’s measures are EM = 12.3 and ROA = 1.15%. Which bank has a higher ROE?
2. Excess reserves act as insurance against deposit outflows. Suppose that on a yearly basis Malcom Bank holds million in excess reserves and million in required reserves. Suppose that Malcom Bank
1. Angus Bank holds no excess reserves but complies with the reserve requirement. The required reserves ratio is 9%, and reserves are currently million. Determine the amount of deposits, the reserve
15. If a bank is falling short of meeting its capital requirements by million, what three 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. Explain how the net interest margin (NIM) would respond to increased competition for funds by the financial intermediation industry.
10. Why do equity holders care more about ROE than about ROA?
9. Which components of operating expenses experience the greatest fluctuations? Why?
8. After July 2010, bank customers using a debit card had to specifically opt-in to the bank’s overdraft protection plan. Explain the effect of this regulation on bank’s noninterest 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 markets 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, explaining that you don’t have any excess reserves to
2. If no decent lending opportunity arises in the economy, and the central bank pays an interest rate on reserves that is similar to other low-risk investments, do you think banks will be willing to
1. Some central banks do not pay interest on required reserves. Some bankers see this as a tax on their business. Can you explain why?
1. The International Monetary Fund stands ready to help nations facing monetary crises. Go to www.imf.org. Click on the tab labeled “About the IMF.” What is the stated purpose of the IMF? How
4. If the dollar begins trading at per euro, with the same interest rates given in problem 3, and the ECB raises interest rates so that the rate on euro deposits rises by 1 percentage point, what
3. If the interest rate is 4% on euro deposits and 2% on dollar deposits, while the euro is trading at per euro, what does the market expect the exchange rate to be one year from now?
2. Suppose that for a given country the demand for imports can be expressed as IM = 1,250 + 0.05E and the demand for exports can be expressed as X = 750 − 0.08E, where E is the exchange rate (units
1. Calculate the overvaluation of the Thai baht (THB) if you can get 34.6 THB per USD at the exchange counter, but a lunch menu that costs 25 USD in Boston sells for 948.25 THB in Bangkok.
20. What steps should an international lender of last resort take to limit moral hazard?
19. The IMF does not enjoy a great reputation in many countries that were recipients of IMF loans or bailouts. Explain why many citizens were not happy with the role played by the IMF.
18. Why might central banks in emerging market countries find that engaging in a lender-of-last-resort operation might be counterproductive? Does this provide a rationale for having an international
17. Discuss the pros and cons of controls on capital inflows.

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