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93 Cards in this Set
- Front
- Back
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The most important source of total funding for US manufacturing firms is:
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Cash flow from operations
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Majority of exernal financing arranged by US industrial and manufacturing firms is of which type?
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New Loans
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To be effective financial intermediaries, banks must be able to provide deposit liabilities with __(4 things)___ than the direct financial claims (loans and securities) they purchase.
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Greater liquidity, Smaller denominations, lower risk, and lower transactions costs.
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Banks are able to offer liquid deposit liabilities to fund illiquid loans because of their advantage in
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Pooling and rolling over or replacing their shorter maturity and smaller denominations deposit liabilities that they offer
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Banks are able to reduce their risk of the liabilities they offer to new deposit customers by (3 things)
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1. Using their expertise in evaluating credit risk
2. Being willing to spend more on obtaining information to eliminate the adverse selection problem 3. being able to take advantage of their ability to diversify their portfolio of earning assets |
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The federal agency that charters national banks is
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The office of the comptroller of the currency
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Are national banks required to have a federal charter?
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Yes
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Are national banks required to join the federal reserve system?
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Yes
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Are national banks required to have deposit insurance from the FDIC?
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yes
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Are national banks required to use the term "national" in their organization's name?
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Yes
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Banks originally organized and affiliated with multi-bank holding companies because many states either did not allow or restricted a bank's ability to branch.
True or false? |
True
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Why have the number of banks in the united states decreased significantly since the 1980's?
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The large number of mergers and acquisitions
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Which monetary policy tools does the FED rely upon to hit it's bank reserve and interest rate targets and manage the growth of the money supply?
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Open market purchases and sales of US treasury securities
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The risk exposure of a bank when it does not fund its assets with liabilities of the same or similar maturities is known as:
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interest rate risk
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The biggest contributor to both financial and overall bank risk is
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Credit risk
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The recent rise in mortgage payments and the fall in housing prices has caused many subprime borrowers to default on their mortgage loans. This is an example of:
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Credit risk
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Over one week after the september 11th attack on the world trade center, the bank of new york was still unable to re-establish crucial communication lines. this is an example of:
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Operational risk
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The risk that a bank may not have sufficient equity capital to absorb or offset a sudden or unexpected loss in the value of its assets is known as:
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Capital (solvency) risk
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The decision by iceland's prime minister not to repay loans made to iceland by the UK and france during the recent worldwide financial crisis is an example of
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sovereign risk
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The risk that a sudden and unexpected loss of deposits may require banks to liquidate assets quickly and at a loss of value is known as
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liquidity risk
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Mastercard spent $50 million to develop the MONDEX smart card but tests showed very little customer interest in using them. This is an example of:
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technology risk
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Financial risks such as credit, market and structural asset/liability risks, contribute approximately ___% to total or overall bank risk?
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70%
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What is the purpose of the financial system?
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Provide a channel that will allow funds to flow efficiently from those that have them to those that need them.
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What are the two basic channels for the financial system?
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Direct exchange (direct finance) and Indirect exchange (Indirect finance)
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How can banks reduce credit risk?
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Diversify their loans to different industries
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What are 4 key services provided by intermediaries?
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1. Information production and distribution (reduce asymmetric info)
2. Risk sharing (resolve mismatch) 3. Liquidity and maturity (resolve mismatch) 4. Reduce costs of financial exchange (reduce transactions costs) |
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Under the Glass-Steagall Act of 1933, what two characteristics make up the legal definition of a commercial bank?
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Commercial banks are the only financial intermediaries that
1. accept demand deposits 2. make commercial loans |
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What are the three types of banks?
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Retail, Wholesale, and investment
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What is a Bank Holding Company?
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Corporations that are established to hold controlling interest in one or more independently chartered commercial banks
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When were financial holding companies first allowed?
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By the Financial Services modernization act of 1999, AKA Gramm-Leach-Bliley Act
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What did the McFadden Act of 1927 do?
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Gave states the power to regulate branch banking (for both state and federally chartered banks)
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What did the Glass-Steagall Act of 1933 do?
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It separated commercial from investment banking
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What did the Riegle-Neal act of 1994 do?
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It permitted full interstate banking. Today it allows you to go to any branch nationwide and use their facilities
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What di the Financial Services modernization act of 1999 (aka. Gramm-Leach-Bliley Act) do?
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It removed the last of the Glass-Steagall restrictions and established financial holding companies
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What does the Office of the Comptroller of the Currency do?
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Charters and Examines national banks an approves merger applications involving national banks
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What are the five types of monetary policy tools?
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1. Discount rate policy
2. Reserve Requirements 3. Margin Requirements 4. Open Market Operations 5. Interest rate payable on bank reserves. |
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What are the 3 Federal responsibilties and duties?
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1. Provide for price stability
2. Full employment 3. Stable L-T GDP |
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What monetary policy tool does the federal govt rely on?
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open market operations (buying and selling treasury bills)
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What does CAMELS stand for?
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Capital Adequacy
Asset Quality Management Quality Earnings Liquidity Interest rate Sensitivity |
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What are the 3 types of credit risk?
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Counter party, concentration risk, systemic risk
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What are the two ways that banks can acquire liquidity?
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Liquidation of assets
borrowing at an increased cost |
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What is the definition of risk?
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The likelihood or probability that outcomes will deviate significantly from expectations
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What is the Price and Provision for loan and lease losses?
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An account to cover expected losses during a time period. Represents the amount that is to be added to RLLL. On the Income statement
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Out of a bank's total risk amount, which represents more risk? Financial or non financial risk?
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Financial (70%), nonfinancial (30%)
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Out of a bank's financial risks (market, credit and structural), which holds the most risk? the least?
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Credit risk (46%)
Structural Risk (18%) Market Risk (6%) |
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Out of a bank's non financial risks, (operational and business risks) which holds more risk?
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Business risk (18%)
Operational Risk (12%) |
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What are the two types of structural risk?
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Interest Rate Risk
Liquidity Risk |
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What are the three types of credit risk?
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Counterparty (other party does not hold their side of the contract)
Concentration (lack of diversification of credit risk) Systemic (increase in defaults in one area will spread to others) |
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What are the two types of business risks?
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Technological
Reptuational |
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What is the definition of market risk?
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Earnings impact associated with adverse price movements in the bank's principal trading positions
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What is an example of market risk?
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Foregin exchange risk
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What is the definition of credit risk?
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Credit risk is the risk that the borrower will not make interest and/or principal payments on time or ever.
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What is the definition of interest rate risk?
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L-T liabilities have fixed interest rates. Banks fear that rates will rise causing the bank to pay more and profit less.
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What is the definition of Capital (Solvency) risk?
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The risk of a suffiently large loss that cannot be absorbed by capital and leads to financial distress and bankruptcy (Liab > Assets)
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What is the definiton of operational risk?
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The risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events
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What is the definition of technology risk?
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the risk of loss from failing to adopt the most efficient technology for the bank's business model
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What is the definition of business risk?
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The potential for losses from residual sources of non-financial earnings volatility.
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What are some examples of business risks?
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A drop in demand, a cost spike, technological obsolescence, regulatory change, price wars and failed strategies
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How does liquidity risk arise?
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When liability holders demand immediate cash in exchange for their deposits
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How does market risk generally arise?
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from changes in:
-consumer confidence -GDP growth -Interest rate changes -Foregin exchange rates changes -Equity, commodity and security prices changes |
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What must large banks conduct to assess the risk of loss with their trading account portfolios?
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Value-at-risk-analysis.
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What is the VaR?
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The probability of losing more than, X during any given time period, T
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What is interest rate uncertainty (volatility) associated with?
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1. federal reserve's influence on interest rate through daily market operations
2. Effect of increased globalization of financial market 3. economic and financial market conditions |
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What are the conventional measures of interest rate risk?
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Repricing gap (earnings)
Duration gap (net worth) |
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What is the RLLL? (Reserve for Loan and Lease Losses)
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A contra-asset account on the balance sheet with a running balance. It is reduced when a loan is written off as uncollectable.
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How do you calculate the RLLL?
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Beginning Balance of RLLL
-Net write offs during current period +PLLL = Current RLLL balance |
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What does Basle II require banks to do?
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Hold regulatory capital against potential losses from
-credit risk -market risk -operational risk |
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What will Basle III most likely add to capital requirements?
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Liquidity risk
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What are the three key financial statements of banks?
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Report of condition (balance sheet)
Report of income (income statement) Flow of funds |
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What does the balance sheet reflect?
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It is a reflection of the decisions that a bank mangement has already made
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What does the income statement reflect?
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It is a reflection of the outcome of previous decisions that management has already made
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What two questions does the Flow of Funds statement answer?
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1. Where did the funds a financial institution uses come from over some specified time period
2. How these funds were used over that same time period |
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Where does the Flow of funds statement draw it's information from?
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The balance sheet and income statement
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What does the flow of funds statement show?
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The sources of a bank's funds and how they were used over a given period of time
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What are the two kinds of operational risk?
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1. high frequency, low loss
2. low frequency, high loss |
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What is the RP market? (repurchase)
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Similar to the fed funds market. THe bank buys treasury security from another bank and agrees to re-purchase it at a later date at a set price
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What two things are deposit insurance premiums based on?
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1. Bank's risk rating
2. Bank's capitalization |
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What is the equation for total capital?
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Tier 1 + Tier 2 capital
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What are the advantages of treasury bonds?
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Low default risks, low interest rate, diversification
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What are advantages of Municipial bonds?
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Tax free interest, but must be a BBB or higher rated bond
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What are Short term treasury bills used for?
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Liquidity. It is a ready source of pledgable securities to go to the fed discount window
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How do you compute the Net loans and leases?
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Gross Loans and leases
- Reserve for Loans and Lease losses (RLLL) = Net loans and leases |
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What is FAS 5?
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A general reserve for loans not classified as impaired. This account recognizes potential losses on current loans
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What does a bank do once it is determined a loan is impaired?
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They take what can be recovered, subtract that from the loan amount and put the remainder in the FAS114 account
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What is EAD? and what does it do?
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Exposure at Default - Total amount of that specific type of loan you have
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What is the formula for calculating expected loss on loans or a category of loans?
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PD% (probability of default)
x LGD% (loss given at default) x EAD$ (exposure on default) |
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How do you calculate the LGD? (loss given at default)
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1- % of recovery
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What are 3 items that are considered core deposits?
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DD's, NOW and Retail CD's
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What is the Provision for Loan and Lease losses? (PLLL)
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A current period expense reported on the Income Statement. Represents the amount of money that is to be added to the RLLL.
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How do you calculate the PLLL?
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Beginning balance
+Net write offs -Total RLLL required |
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Banks purchase securities that are:
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Riskier, Longer term, Less Liquid.
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Banks issue securities that are:
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Low risk, short term, and more liquid
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