Financial Institutions Management A Risk Management Approach 6th Edition Anthony Saunders, Marcia Cornett - Solutions

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1.Who are the main regulators of the life insurance industry?
1.Why do life insurance companies invest in long-term assets?
1.What other risks do life insurance companies face?
1.What are the main sources of income for life insurers?
1.What is the major source of life insurance underwriting risk?
1.Go to the APRA website and update the balance sheets shown in this chapter for banks, building societies and credit unions. LO 2.3 , 2.6
1.Go to APRA’s website and find the latest information on Australian bank, building society and credit union asset concentration. LO 2.6
1.Bold Bank has the following ratios:a profit margin 21 b asset utilisation 11 c equity multiplier 12 times Calculate Bold Bank’s return on equity and return on assets. LO 2.3 , 2.4
1.Given the following balance sheet and income statement for Mega Bank, calculate: LO 2.3 , 2.4 return on equity return on assets asset utilisation equity multiplier profit margin interest expense ratio provision for loan loss ratio non-interest expense ratio tax expense ratio. Mega Bank balance
1.What is the likely relationship between the interest income ratio and the non-interest income ratio? LO 2.4
1.What is the key focus of DI regulation? LO 2.8
1.How has the regulation of building societies and credit unions changed since 1999? LO 2.8
1.What is the Australian Prudential Regulation Framework and what does it aim to do? LO 2.7
1.What are the similarities and differences between the three major groups of authorised deposit-taking institutions in Australia? LO 2.1 , 2.2 , 2.6
1.Describe the factors influencing the decline in the number of building societies. LO 2.5
1.What is driving the banks’ changing capital base, and in particular the emphasis on common equity? LO 2.3 , 2.8
1.Why was the structure of Australian banks’ liabilities in 2008 found to be a weakness? What have the banks done to change this? LO 2.3
1.Why did bank net interest margin fall from 2000 to 2013? Why wasn’t bank ROE affected? LO 2.4
1.Contrast the activities of the four major Australian banks with those of the regional banks. LO 2.2 , 2.3
1.What are the major sources of funds for banks in Australia? What are the major uses of funds for banks in Australia? LO 2.3
1.Describe the structure of the banking industry and discuss the reasons for any changes. LO 2.1 , 2.2
1.How have the risks and products sold by the financial services industry changed since 1950? LO 2.1
1.What are the key areas of regulation of DIs by APRA and why are these areas of specific interest to APRA?
1.What are the key objectives of APRA’s capital, liquidity and credit-related prudential statements?
1.What are PAIRS and SOARS and what part do they play in APRA’s supervision of FIs?
1.What are the five sections of APRA’s prudential supervision framework?
1.What are the regulatory agencies overseeing the activities of depository institutions in Australia?
1.What have been the main influences in the rationalisation of the CUBS industry during the 2000s?
1.What have been the key changes to the structure of the CUBS sector since 1990?
1.What factors have driven the performance (in terms of profitability and market share) of building societies and credit unions since deregulation of the financial system in the 1980s?
1.Bank ROE has remained stable, whereas interest margins have fallen. Explain this.
1.Why do banks undertake off-balance-sheet activities?
1.Why and how did the Australian government assist bank funding during the GFC?
1.What are the major sources of funding for Australian banks?
1.What are the major assets held by banks?
Go to the website of the Reserve Bank of Australia and find details of the way the RBA implements monetary policy. See www.rba.gov.au/monetarypolicy/about.html , for example, and answer the following questions:What are the tools used by the RBA to implement monetary policy?How does a decrease in
Watch the Inside Business interview with ANZ Bank CEO Mike Smith at www.abc.net.au/insidebusiness/content/2013/s3882862.htm . Smith’s response to a question about the bank’s returns from its Asian business provides some insight into the reasons for its global strategy. Why does the ANZ have an
Go to the APRA website, and list the features and bank ‘specialness’ described in this chapter, and identify the related regulation and legislation for each of the ‘specialness’ features. LO 1.3 , 1.4
How did the boom in the housing market in the early and mid-2000s exacerbate FIs’ transition away from their role as specialists in risk measurement and management? LO 1.4 , 1.5
What significant events in the US in particular, but which spread globally, resulted from the trend for banks to shift from the traditional banking model of ‘originate and hold’ to a model of ‘originate and distribute’? LO 1.4 , 1.5
What reasons have been given for the growth of superannuation funds and investment companies at the expense of ‘traditional’ banks and life insurance companies? LO 1.3
How do regulations regarding barriers to entry and the scope of permitted activities affect the charter value of FIs? LO 1.3 , 1.4
What are some examples of credit allocation regulation? How can this attempt to produce social benefits create costs for a private institution? LO 1.3, 1.4
In the transmission of monetary policy, what is the difference between inside money and outside money? How does the Reserve Bank of Australia try to control the amount of inside money? How can this regulatory position create a cost for depository institutions? LO 1.3 , 1.4
What forms of protection and regulation do the regulators of FIs impose to ensure their safety and soundness? LO 1.3 , 1.4
Why are FIs among the most regulated sectors in the world? When is the net regulatory burden positive? LO 1.3 , 1.4
If financial markets operated perfectly and without cost, would there be a need for FIs? LO 1.1 , 1.2 , 1.3
What is negative externality? In what ways does the existence of negative externalities justify the extra regulatory attention received by FIs? LO 1.3 , 1.4
What is denomination intermediation? How do FIs assist in this process? LO 1.2
What are two of the most important payment services provided by FIs? To what extent do these services efficiently provide benefits to the economy?LO 1.2 , 1.3
Which intermediaries best fulfil the intergenerational wealth transfer function? What is this wealth transfer process? LO 1.2
What is meant by ‘credit allocation regulation’? What social benefit is this type of regulation intended to provide? LO 1.3
How do depository institutions such as banks assist in the implementation and transmission of monetary policy? LO 1.3
What are five areas of institution-specific FI specialness and which types of institutions are most likely to be the service providers? LO 1.2
What is maturity intermediation? What are some of the ways in which the risks of maturity intermediation are managed by FIs? LO 1.2
How can individual savers use FIs to reduce the transaction costs of investing in financial assets? LO 1.2
How can FIs invest in high-risk assets with funding provided by low-risk liabilities from savers? LO 1.2
How do FIs help individual savers diversify their portfolio risks? Which type of financial institution is best able to achieve this goal? LO 1.2
How do FIs alleviate the problem of liquidity risk faced by investors who wish to invest in the securities of corporations? LO 1.2
How do large FIs solve the problem of high information collection costs for lenders, borrowers and financial markets in general? LO 1.2
What are agency costs? How do FIs solve the information and related agency costs when household savers invest directly in securities issued by corporations? What is the ‘free-rider’ problem? LO 1.2
What are five general areas of FI specialness that are caused by providing various services to sectors of the economy? LO 1.2
Explain how FIs act as delegated monitors. What secondary benefits often accrue to the entire financial system because of this monitoring process?LO 1.2
In what sense are the financial claims of FIs considered secondary securities, while the financial claims of commercial corporations are considered primary securities? How does the transformation process, or intermediation, reduce the risk, or economic disincentives, to savers? LO 1.2
Identify and explain the two functions in which FIs may specialise that would enable the smooth flow of funds from household savers to corporate users. LO 1.1 , 1.2
Identify and explain three economic disincentives that probably would dampen the flow of funds between household savers of funds and corporate users of funds in an economic world without FIs. LO 1.2
Explain how economic transactions between household savers of funds and corporate users of funds would occur in a world without FIs. LO 1.1 , 1.2
What are five risks common to financial institutions? LO 1.1
What were the causes of the global financial crisis?
What are the fastest growing FIs in Australia?
Is the share of bank, building society and credit union assets growing as a proportion of total FI assets in Australia?
How did the GFC affect the market share of FIs in Australia?
What are the fastest growing FIs in Australia?
Is the share of depository institution assets growing as a proportion of total FI assets in Australia?
What five major types of regulation do FIs face?
In what ways can managed funds assist in denomination intermediation?
Why do FI payment services make depository institutions special?
What FI functions other than the flow of funds theory and intermediation lead to specialness?
What are two major differences between brokers (such as security brokers) and depository institutions (such as banks)?
Comprehend the causes of the sub-prime crisis in the US and how this led to the global financial crisis.
Understand how the failure of FIs to perform the specialist functions of risk measurement and management can lead to systemic risk in the domestic and global financial systems.
Gain knowledge of how regulation can and does affect the efficiency with which FIs produce financial services.
Discover why FIs’ very specialness results in increased regulation and regulatory oversight that other corporations do not require, which imposes a regulatory burden on financial institutions.
Learn how financial institutions—especially banks—provide a special set of services to households and firms, and the uniqueness of these services.
Understand why financial institutions (FIs) are different from commercial firms (which is why, for example, the failure of a large bank may have more serious effects on the economy than the failure of a large steel or car producer).
1. Go to the Federal Deposit Insurance Corporation’s Web site ( www.fdic.gov ) and Click on “Analysts.” Click on “Statistics on Banking.” Click on “Assets and Liabilities,” and then “Run Report.” Using information in this file update Table 17–1 . How have the assets and
1. A mutual fund has $1 million in cash and $9 million invested in securities. It currently has 1 million shares outstanding.What is the net asset value (NAV) of this fund?Assume that some of the shareholders decide to cash in their shares of the fund. How many shares at its current NAV can the
1. A mutual fund has the following assets in its portfolio: $40 million in fixed-income securities and $40 million in stocks at current market values.In the event of a liquidity crisis, the fund can sell the assets at 96 percent of market value if they are disposed of in two days. The fund will
1. How is the liquidity problem faced by investment funds different from that faced by DIs and insurance companies? How does the liquidity risk of an open-end mutual fund compare with that of a closed-end fund?
1. What are the levels of defense against liquidity risk for a life insurance company? How does liquidity risk for a property–casualty insurer differ from that for a life insurance company?
1. What government safeguards are in place to reduce liquidity risk for DIs?
1. The following is the balance sheet of a DI (in millions):Assets Liabilities and Equity Cash $ 2 Demand deposits $50 Loans 50 Plant and equipment 3 Equity 5 Total $55 Total $55 The asset–liability management committee has estimated that the loans, whose average interest rate is 6 percent and
1. What is a bank run? What are some possible withdrawal shocks that could initiate a bank run? What feature of the demand deposit contract provides deposit withdrawal momentum that can result in a bank run?
1. How can an FI’s liquidity plan help reduce the effects of liquidity shortages?What are the components of a liquidity plan?
1. Plainbank has $10 million in cash and equivalents, $30 million in loans, and$15 million in core deposits.Calculate the financing gap.What is the financing requirement?How can the financing gap be used in the day-to-day liquidity management of the bank?
1. Conglomerate Corporation has acquired Acme Corporation. To help finance the takeover, Conglomerate will liquidate the overfunded portion of Acme’s pension fund. The face values and current and one-year future liquidation values of the assets that will be liquidated are given below.Liquidation
1. A DI has the following assets in its portfolio: $20 million in cash reserves with the Fed, $20 million in T-bills, and $50 million in mortgage loans. If the assets need to be liquidated at short notice, the DI will receive only 99 percent of the fair market value of the T-bills and 90 percent
1. A DI has $10 million in T-bills, a $5 million line of credit to borrow in the repo market, and $5 million in excess cash reserves (above reserve requirements) with the Fed. The DI currently has borrowed $6 million in fed funds and $2 million from the Fed’s discount window to meet seasonal
1. Define each of the following four measures of liquidity risk. Explain how each measure would be implemented and utilized by a DI. Sources and uses of liquidity. Peer group ratio comparisons. Liquidity index. Financing gap and financing requirement.
1. A DI has assets of $10 million consisting of $1 million in cash and $9 million in loans. The DI has core deposits of $6 million, subordinated debt of $2 million, and equity of $2 million. Increases in interest rates are expected to cause a net drain of $2 million in core deposits over the year.

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Financial Institutions Management A Risk Management Approach 6th Edition Anthony Saunders, Marcia Cornett - Solutions

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