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financial institutions management
Financial Institutions Management A Risk Management Approach 6th Edition Anthony Saunders, Marcia Cornett - Solutions
== A FI has issued a one-year loan commitment of $2 million for an up-front fee of 25 basis points. The back-end fee on the unused portion of the commitment is 10 basis points. The FI requires a compensating balance of 5 percent as demand deposits. The FI’s cost of funds is 6 percent, the
== A FI makes a loan commitment of $2.5 million with an up-front fee of 50 basis points and a back-end fee of 25 basis points on the unused portion of the loan. The takedown on the loan is 50 percent. What total fees does the FI earn when the loan commitment is negotiated? What are the total fees
== What are the characteristics of a loan commitment that an FI may make to a customer? In what manner and to whom is the commitment an option? What are the various possible pieces of the option premium? When does the option or commitment become an on-balance-sheet item for the FI and the borrower?
== What role does Schedule L play in reporting off-balance-sheet activities? Refer to Table 13–5 . What was the annual growth rate over the 14-year period 1992–2006 in the notional value of off-balance-sheet items compared with on-balance-sheet items? Which contingencies have exhibited the
== What factors explain the growth of off-balance-sheet activities in the 1980s through the early 2000s among U.S. FIs?
== An FI has purchased options on bonds with a notional value of $500 million and has sold options on bonds with a notional value of $400 million. The purchased options have a delta of 0.25, and the sold options have a delta of 0.30. What is (a) the contingent asset value of this position, (b) the
== Why are contingent assets and liabilities like options? What is meant by the delta of an option? What is meant by the term notional value?
== Contingent Bank has the following balance sheet in market value terms (in millions of dollars). Assets Liabilities Cash $ 20 Deposits $220 Mortgages 220 Equity 20 Total assets $240 Total liabilities and equity $240 In addition, the bank has contingent assets with $100 million market value and
== How does one distinguish between an off-balance-sheet asset and an off-balance-sheet liability?
== Classify the following items as (1) on-balance-sheet assets, (2) on-balancesheet liabilities, (3) off-balance-sheet assets, (4) off-balance-sheet liabilities, or (5) capital account. Loan commitments. Loan loss reserves. Letter of credit. Bankers acceptance. Rediscounted bankers acceptance.
= An FI has a loan portfolio of 10,000 loans of $10,000 each. The loans have a historical average default rate of 4 percent, and the severity of loss is 40 cents per dollar. Over the next year, what are the probabilities of having default rates of 2, 3, 4, 5, and 8 percent? What would be the dollar
= A five-year fixed-rate loan of $100 million carries a 7 percent annual interest rate. The borrower is rated BB. Based on hypothetical historical data, the probability distribution given below has been determined for various ratings upgrades, downgrades, status quo, and default possibilities over
= The questions and problems that follow refer to Appendixes 12A and 12B. Refer to the information in Appendix 12A for problems 20 and 21. From Table 12A–1 , what is the probability of a loan upgrade? A loan downgrade? What is the impact of a rating upgrade or downgrade? How is the discount rate
= An FI is limited to holding no more than 8 percent of its assets in securities of a single issuer. What is the minimum number of securities it should hold to meet this requirement? What if the requirements are 2 percent, 4 percent, and 7 percent?
= What rules on credit concentrations has the National Association of Insurance Commissioners enacted? How are they related to modern portfolio theory?
= Over the last ten years, a bank has experienced the following loan losses on its C&I loans, consumer loans, and total loan portfolio. Year C&I Loans Consumer Loans Total Loans 2009 0.0080 0.0165 0.0075 2008 0.0088 0.0183 0.0085 2007 0.0100 0.0210 0.0100 2006 0.0120 0.0255 0.0125 2005 0.0104
= Assume that, on average, national banks engaged primarily in mortgage lending have their assets diversified in the following proportions: 20 percent residential, 30 percent commercial, 20 percent international, and 30 percent mortgage-backed securities. A local bank has the following distribution
= Information concerning the allocation of loan portfolios to different market sectors is given below. Allocation of Loan Portfolios in Different Sectors (%) Sectors National Bank A Bank B Commercial 30% 50% 10% Consumer 40 30 40 Real Estate 30 20 50 Bank A and Bank B would like to estimate how
= How can they be used to analyze credit concentration risk?
= What databases are available that contain loan information at the national and regional levels?
= CountrySide Bank uses the KMV Portfolio Manager model to evaluate the risk-return characteristics of the loans in its portfolio. A specific $10 million loan earns 2 percent per year in fees, and the loan is priced at a 4 percent spread over the cost of funds for the bank. Because of collateral
= A bank vice president is attempting to rank, in terms of the risk-reward tradeoff, the loan portfolios of three loan officers. Information on the portfolios is noted below. How would you rank the three portfolios? Portfolio Expected Return Standard Deviation A 10% 8% B 12 9 C 11 10
= The obvious benefit to holding a diversified portfolio of loans is to spread risk exposures so that a single event does not result in a great loss to the bank. Are there any benefits to not being diversified?
= The Bank of Tinytown has two $20,000 loans with the following characteristics: Loan A has an expected return of 10 percent and a standard deviation of returns of 10 percent. The expected return and standard deviation of returns for loan B are 12 percent and 20 percent, respectively. If the
= If the average historical losses in the mining sector total 15 percent, what is the maximum loan a manager can make to a firm in this sector as a percentage of total capital? An FI has set a maximum loss of 2 percent of total capital as a basis for setting concentration limits on loans to
= A manager decides not to lend to any firm in sectors that generate losses in excess of 5 percent of capital. If the average historical losses in the automobile sector total 8 percent, what is the maximum loan a manager can lend to a firm in this sector as a percentage of total capital?
= What does loan concentration risk mean?
= What are its shortcomings?
= How do FIs use it to measure credit risk concentration?
= What is migration analysis?
= How do loan portfolio risks differ from individual loan risks?
1. What is the bank’s capital adequacy level (under Basel II) if the par value of its equity is $225,000, the surplus value of equity is $200,000, and the qualifying perpetual preferred stock is $50,000? Does the bank meet Basel (Tier I) adequate capital standards? Does the bank comply with the
1. Using the leverage ratio requirement, what is the minimum regulatory capital required to keep the bank in the well-capitalized zone?
1. What are the bank’s Tier I and total risk–based capital requirements under Basel II?
1. What is the bank’s risk-adjusted asset base under Basel II?
1. Go to the Web site of the Bank for International Settlements at www.bis.org. Under “Basel Committee on Bank Supervision,” click on “Basel II.” This will download a file onto your computer that contains information on the most recent set of capital requirements for depository
1. If the firm currently has $7 million in capital, what should be its surplus to meet the minimum capital requirement?
1. A property–casualty insurance company has estimated the following required charges for its various risk classes (in millions):Risk Description RBC Charge R0 Affiliated P/C $ 2 R1 Fixed income 3 R2 Common stock 4 R3 Reinsurance 3 R4 Loss adjustment expense 2 R5 Written premiums 3 Total $17 What
1. How do the risk categories in the risk-based capital model for property–casualty insurance companies differ from those for life insurance companies? What are the assumed relationships between the risk categories in the model?
1. How much capital must be raised to meet the minimum requirements?
1. What is the required risk-based capital for the life insurance company?If the total surplus and capital held by the company is $9 million, does it meet the minimum requirements?
1. A life insurance company has estimated the following capital requirements for each of the risk classes: asset risk ( C1) $5 million, insurance risk ( C2) $4 million, interest rate risk ( C3) $1 million, and business risk ( C4) $3 million.
1. Identify and define the four risk categories incorporated into the life insurance risk-based capital model.
1. How does the net capital rule for investment banks differ from the capital requirements imposed on commercial banks and other depository institutions?
1. What should the FI do to maintain the net minimum required liquidity?
1. Does the investment bank have sufficient liquid capital to cushion any unexpected losses per the net capital rule?
1. An investment bank specializing in fixed-income assets has the following balance sheet (in millions). Amounts are in market values, and all interest rates are annual unless indicated otherwise.Assets Liabilities and Equity Cash $ 0.50 5% 1-year Eurodollar deposits $ 5.0 8% 10-year Treasury
1. A securities firm has the following balance sheet (in millions):Assets Liabilities and Equity Cash $ 40 Five-day commercial paper $ 20 Debt securities 300 Bonds 550 Equity securities 500 Debentures 300 Other assets 60 Equity 30 Total assets $900 Total liabilities and equity $900 The debt
1. According to SEC Rule 15C 3–1, what adjustments must securities firms make in the calculation of the book value of net worth?
1. Does the bank have sufficient capital to meet the Basel requirements? How much in excess? How much short?
1. What are the risk-adjusted on-balance-sheet assets of the bank as defined under Basel II?
1. Third Fifth Bank has the following balance sheet (in millions), with the risk weights in parentheses.Assets Liabilities and Equity Cash (0%) $ 20 Deposits $130 Mortgage loans (50%) 50 Subordinated debt (>5 years) 5 Consumer loans (100%) 70 Equity 5 Total assets $140 Total liabilities and equity
1. If not, what minimum Tier I or total capital does it need to meet the requirement?
1. What is the total capital required for both off- and on-balance-sheet assets?Does the bank have enough capital to meet the Basel requirements?
1. What are the risk-adjusted on-balance-sheet assets of the bank as defined under the Basel Accord?
1. How does the leverage ratio test impact the stringency of regulatory monitoring of bank capital positions?Third Bank has the following balance sheet (in millions), with the risk weights in parentheses.Assets Liabilities and Equity Cash (0%) $ 20 Deposits $175 OECD interbank deposits (20%) 25
1. What is the contribution to the credit risk–adjusted asset base of the following items under the Basel II requirements? Under the U.S. capital–assets ratio?$10 million cash reserves.$50 million 91-day U.S. Treasury bills.$25 million cash items in the process of collection.$5 million U.K.
1. Identify and discuss the problems in the risk-based capital approach to measuring capital adequacy.
1. How does the risk-based capital measure attempt to compensate for the limitations of the static leverage ratio?
1. Why do regulators not allow banks to benefit from positive current exposure values?
1. Why are the credit conversion factors for the potential exposure of foreign exchange contracts greater than they are for interest rate contracts?
1. What is the difference between the potential exposure and the current exposure of over-the-counter derivative contracts?
1. Why do exchange-traded derivative security contracts have no capital requirements?
1. What is counterparty credit risk?
1. Explain how off-balance-sheet market contracts, or derivative instruments, differ from contingent guaranty contracts.
1. On what basis are the risk weights for the credit equivalent amounts differentiated?
1. What is the basis for differentiating the credit equivalent amounts of contingent guaranty contracts?
1. The bank repurchases $100,000 of common stock with cash.The bank issues $2 million of CDs and uses the proceeds to issue mortgage loans.The bank receives $500,000 in deposits and invests them in T-bills.The bank issues $800,000 in common stock and lends it to help finance a new shopping mall.
1. Onshore Bank has $20 million in assets, with risk-adjusted assets of $10 million. Tier I capital is $500,000, and Tier II capital is $400,000. How will each of the following transactions affect the value of the Tier I and total capital ratios?What will the new values of each ratio be?
1. National Bank has the following balance sheet (in millions) and has no off-balance-sheet activities.Assets Liabilities and Equity Cash $ 20 Deposits $ 980 Treasury bills 40 Subordinated debentures 40 Residential mortgages 600 Common stock 40 Business loans (BB rated) 430 Retained earnings 30
1. What are the appropriate risk weights for each category?
1. What assets are included in the five categories of credit risk exposure under Basel II?
1. Explain the process of calculating risk-adjusted on-balance-sheet assets.
1. What components are used in the calculation of risk-adjusted assets?
1. What are the definitional differences between Tier I and Tier II capital?
1. Identify the five zones of capital adequacy, and explain the mandatory regulatory actions corresponding to each zone.
1. What is the total risk–based capital ratio?
1. What is the major feature in the estimation of credit risk under Basel II capital requirements?
1. What is the Basel Agreement?
1. Identify and discuss the weaknesses of the leverage ratio as a measure of capital adequacy.
1. What is the significance of prompt corrective action as specified by the FDICIA legislation?
1. How is the leverage ratio for an FI defined?
1. What are the arguments for and against the use of market value accounting for FIs?
1. What is the new market to book value ratio if State Bank has 1 million shares outstanding?
1. What is the impact on the balance sheet after the necessary adjustments are made according to book value accounting? According to market value accounting?
1. State Bank has the following year-end balance sheet (in millions):The loans primarily are fixed-rate, medium-term loans, while the deposits are either short-term or variable-rate deposits. Rising interest rates have caused the failure of a key industrial company, and as a result, 3 percent of
1. Why is the market value of equity a better measure of an FI’s ability to absorb losses than book value of equity?
1. Under FASB Statement No. 115, what would be the effect on equity capital(net worth) if interest rates increased by 30 basis points? The T-notes are held for trading purposes; the rest are all classified as held to maturity.Under FASB Statement No. 115, how are the changes in the market value of
1. A financial intermediary has the following balance sheet (in millions), with all assets and liabilities in market values.Assets Liabilities and Equity 6 percent semiannual fouryear Treasury notes (par value $12) $10 5 percent two-year subordinated debt(par value $25) $20 7 percent annual
1. How does book value accounting recognize the adverse effects of credit and interest rate risk?
1. How does economic value accounting recognize the adverse effects of credit and interest rate risk?
1. What are the differences between the economic definition of capital and the book value definition of capital?
1. Why are regulators concerned with the levels of capital held by an FI compared with those held by a nonfinancial institution?
1. Identify and briefly discuss the importance of the five functions of an FI’s capital.
1. How do the NAIC’s model risk-based capital requirements for PC insurers differ from the life insurance industry’s RBC?
1. What types of risks are included by the NAIC in estimating the RBC of life insurance firms?
1. How do the capital requirements for securities firms differ from the book value capital rules employed by DI regulators?
1. Identify one asset in each of the five credit risk weight categories.
1. What is the difference between Tier I capital and Tier II capital?
1. What are three problems with the simple leverage ratio measure of capital adequacy?
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