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financial institutions management
Financial Institutions Management A Risk Management Approach 6th Edition Anthony Saunders, Marcia Cornett - Solutions
1. What amount of reserves can be carried over to the next maintenance period either as excess or as shortfall?
1. Is the bank in compliance with the reserve requirements?
1. The average demand deposit balance of a local bank during the most recent reserve computation period is $225 million. The amount of average daily reserves at the Fed during the reserve maintenance period is $16 million, and the average daily vault cash corresponding to the computation period
1. Assume that the 14-day reserve computation period for problem 8 above extended from May 18 through May 31.What is the corresponding reserve maintenance period under the rules effective in 2006?Given your answers to parts (a) and (b) of problem 8, what would the average required reserves need to
1. If the bank had transferred $20 million of its deposits every Friday over the two-week computation period to one of its offshore facilities, what would be the revised average daily reserve requirement?
1. What is the average daily balance of reserves held by the bank over the maintenance period? By what amount were the average reserves held higher or lower than the required reserves?
1. Under the rules effective in 2006, what is the amount of average daily reserves required to be held during the reserve maintenance period for these demand deposit balances?
1. City Bank has estimated that its average daily demand deposit balance over the recent 14-day computation period was $225 million. The average daily balance with the Fed over the 14-day maintenance period was $11 million, and the average daily balance of vault cash over the two-week period prior
1. Define the reserve computation period, the reserve maintenance period, and the lagged reserve accounting system.
1. How do liquid asset reserve requirements enhance the implementation of monetary policy? How are reserve requirements a tax on DIs?Rank these financial assets according to their liquidity: cash, corporate bonds, NYSE-traded stocks, and T-bills.
1. Bank A Assets Bank B Assets Cash $ 10 Cash $ 20 Treasury securities 40 Consumer loans 30 Commercial loans 90 Commercial loans 90 Total assets $140 Total assets $140 What concerns motivate regulators to require DIs to hold minimum amounts of liquid assets?
1. Consider the assets (in millions) of two banks, A and B. Both banks are funded by $120 million in deposits and $20 million in equity. Which bank has the stronger liquidity position? Which bank probably has a higher profit?
1. How is an FI’s liability and liquidity risk management problem related to the maturity of its assets relative to its liabilities?
1. What are the benefits and costs to an FI of holding large amounts of liquid assets? Why are Treasury securities considered good examples of liquid assets?
1. Give two reasons an investment bank needs liquidity.
1. What is a bank call loan?
1. Why would property–casualty insurers hold more short-term liquid assets to manage liquidity risk than life insurers hold?
1. Discuss two strategies insurance companies can use to reduce liquidity risk.
1. Look at Table 18–5. How has the liability composition of banks changed over the 1960–2006 period?
1. Look at Table 18–4. How has the ratio of traditional liquid to illiquid assets changed over the 1960–2006 period?
1. What are the major differences between fed funds and repurchase agreements?
1. Since transaction accounts are subject to both reserve requirements and deposit insurance premiums, whereas fed funds are not, why should a DI not fund all its assets through fed funds? Explain your answer.
1. Describe the withdrawal risk and funding cost characteristics of some of the major liabilities available to a modern DI manager.
1. Describe the trade-off faced by an FI manager in structuring the liability side of the balance sheet
1. How are liquidity and liability management related?
1. What explains the decline in the level of required reserves held by DIs between 1990 and November 2006 (see Table 18–3)?
1. Since 1998, U.S. DIs have operated under a lagged reserve accounting system in which the reserve computation period ends 17 days before the reserve maintenance period begins. Does the reserve manager face any uncertainty at all in managing a DI’s reserve position? Explain your answer.
1. For a DI that undershoots its reserve target, what ways are available to a reserve manager to build up reserves to meet the target?
1. In addition to the target reserve ratio, what other pieces of information does the DI reserve manager require to manage the DI’s reserve requirement position?
1. In general, would it be better to hold three-month T-bills or 10-year T-notes as buffer assets? Explain.
1. Can we view reserve requirements as a tax when the consumer price index (CPI) is falling?
1. Why do regulators set minimum liquid asset requirements for FIs?
1. Go to the BIS Web site at www.bis.org and find the most recent data on the volume and value of worldwide wire transfer systems (Table 16–5). Click on “Committee on Payment and Settlement Systems.” Under “Publications by year,” click on the most recent years. Click on the most recent
1. Go to the BIS Web site at www.bis.org and find the most recent data on the volume and value of payment system transactions in the United States(Table 16–2) using the following steps. Click on “Committee on Payment and Settlement Systems.” Under “Publications by year,” click on the most
1. What actions has the BIS taken to protect depository institutions from insolvency due to operational risk?
1. How has technology altered the competition risk of FIs?
1. What are usury ceilings? How does technology create regulatory risk?
1. What has been the impact of rapid technological improvements in the electronic payment systems on crime and fraud risk?
1. Why do FIs in the United States face a higher degree of international technology risk than do the FIs in other countries, especially some European countries?
1. How does Regulation F of the 1991 FDICIA reduce the problem of daylight overdraft risk?
1. What is a daylight overdraft? How do an FI’s overdraft risks incurred during the day differ for each of the two competing electronic payment systems, Fedwire and CHIPS? What provision has been taken by the members of CHIPS to introduce an element of insurance against the settlement risk
1. What are the differences between the Fedwire and CHIPS payment systems?
1. Why does the United States lag behind most other industrialized countries in the proportion of annual electronic noncash transactions per capita? What factors probably will be important in causing the gap to decrease?
1. What are some of the conclusions of empirical studies on economies of scale and scope? How important is the impact of cost reductions on total average costs? What are X-inefficiencies? What role do these factors play in explaining cost differences among FIs?
1. What is the difference between the production approach and the intermediation approach to estimating cost functions of FIs?
1. A survey of a local market has provided the following average cost data:Mortgage Bank A(MBA) has assets of $3 million and an average cost of 20 percent. Life Insurance Company B (LICB) has assets of $4 million and an average cost of 30 percent. Corporate Pension Fund C (CPFC) has assets of $4
1. What are diseconomies of scope? How could diseconomies of scope occur?
1. A commercial bank with assets of $2 billion and costs of $200 million has acquired an investment banking firm subsidiary with assets of $40 million and expenses of $15 million. After the acquisition, the costs of the bank are $180 million and the costs of the subsidiary are $20 million. Does
1. Buy Bank had $130 million in assets and $20 million in expenses before the acquisition of Sell Bank, which had assets of $50 million and expenses of $10 million. After the merger, the bank had $180 million in assets and $35 million in costs. Did this acquisition generate either economies of
1. What information on the operating costs of FIs is provided by the measurement of economies of scope? What implications do economies of scope have for regulators?
1. What are diseconomies of scale? What are the risks of large-scale technological investments, especially to large FIs? Why are small FIs willing to outsource production to large FIs against which they are competing? Why are large FIs willing to accept outsourced production from smaller FI
1. What information on the operating costs of FIs does the measurement of economies of scale provide? If economies of scale exist, what implications do they have for regulators?
1. Distinguish between economies of scale and economies of scope.
1. Identify and discuss three benefits of technology in generating revenue for FIs.
1. City Bank upgrades its computer equipment every five years to keep up with changes in technology. Its next upgrade is two years from today and is budgeted to cost $1 million. Management is considering moving up the date by two years to install some new computers with a breakthrough software
1. The operations department of a major FI is planning to reorganize several of its back-office functions. Its current operating expense is $1.5 million, of which$1 million is for staff expenses. The FI uses a 12 percent cost of capital to evaluate cost-saving projects.One way of reorganizing is
1. Compare the effects of technology on an FI’s wholesale operations with the effects of technology on an FI’s retail operations. Give some specific examples.What are some of the risks inherent in being the first to introduce a financial innovation?
1. Calculate the annual growth rates in the various income, expense, earnings, and asset categories from 1991 to 2005. If part of the growth rates in assets, earnings, and expenses can be attributed to technological change, in what areas of operating performance has technological change appeared
1. Table 16–1 shows data on earnings, expenses, and assets for all insured banks.
1. Explain how technological improvements can increase an FI’s interest and noninterest income and reduce interest and noninterest expenses. Use some specific examples.
1. What steps have been or are being taken to ensure privacy and protection against fraud in the use of personal and financial consumer information placed on the Internet?
1. What are the three approaches proposed by the Basel Committee on Banking Supervision for measuring capital requirements associated with operational risk?
1. What risk management efforts are involved in controlling operational risk?
1. What are some examples of operational risk coming from employees, customer relationships, capital assets, and external risk?
1. What steps have the members of CHIPS taken to lower settlement, or daylight overdraft, risk?
1. Why do daylight overdrafts create more of a risk problem for banks on CHIPS than on Fedwire?
1. Describe the six risks faced by FIs with the growth of wire transfer payment systems.
1. What conclusion is suggested by recent studies that have focused on the dispersion of costs across banks of a given asset size?
1. What does the empirical evidence reveal about economies of scale and scope?
1. How does the intermediation approach differ from the production approach?
1. Describe the basic concept behind the production approach to testing for economies of scale and economies of scope.
1. Make a list of the potential economies of scope or cost synergies if a commercial bank merged with an investment bank?
1. If there are diseconomies of scope, do specialized FIs have a relative cost advantage or disadvantage over product-diversified FIs?
1. Does the existence of economies of scale for FIs mean that in the long run small FIs cannot survive?
1. What is the link between interstate banking restrictions and the retail demand for electronic payment services?
1. What are two risk factors involved in an FI’s investment of resources in innovative technological products?
1.Describe some of the automated retail payment products available today. What advantages do these products offer the retail customer?
1.Describe some of the wholesale financial services provided to corporate customers that have been improved by technology.
1. What are some of the advantages of an efficient technological base for an FI? How can it be used to directly improve profitability?
1. Looking at Table 16–1, determine if noninterest expenses and noninterest income have been increasing or decreasing as a percent of total bank costs over the 1991–2006 period?
Dark Star Bank has estimated its average VAR for the previous 60 days to be $35.5 million. DEAR for the previous day was $30.2 million. Under the latest BIS standards, what is the amount of capital required to be held for market risk? Dark Star has $15 million of Tier 1 capital, $37.5 million of
What conditions were introduced by BIS in 1998 to allow large banks to use internally generated models for the measurement of market risk? What types of capital can be held to meet the capital charge requirements?
Explain the BIS capital charge calculation for unsystematic and systematic risk for an FI that holds various amounts of equities in its portfolio. What would be the total capital charge required for an FI that holds the following portfolio of stocks? What criticisms can be levied against this
Explain how the capital charge for foreign exchange risk is calculated in the BIS standardized model. If an FI has an $80 million long position in euros, a $40 million short position in British pounds, and a $20 million long position in Swiss francs, what will be the capital charge required against
An FI has the following bonds in its portfolio: long 1-year U.S. Treasury bills, short 3½-year Treasury bonds, long 3-year AAA-rated corporate bonds, and long 12-year B-rated (nonqualifying) bonds worth $40, $10, $25, and $10 million, respectively (market values). Using Table 10–7 , determine
In the BIS standardized framework for regulating risk exposure for the fixedincome portfolios of banks, what do the terms specific risk and general market risk mean? Why does the capital charge for general market risk tend to underestimate the true interest rate or price risk exposure? What
How is Monte Carlo simulation useful in addressing the disadvantages of back simulation? What is the primary statistical assumption underlying its use?
What is the primary disadvantage of the back simulation approach in measuring market risk? What effect does the inclusion of more observation days have as a remedy for this disadvantage? What other remedies can be used to deal with the disadvantage?
Export Bank has a trading position in Japanese yen and Swiss francs. At the close of business on February 4, the bank had ¥300 million and SF10 million. The exchange rates for the most recent six days are given below. Exchange Rates per U.S. Dollar at the Close of Business 2/4 2/3 2/2 2/1 1/29
What are the advantages of using the back simulation approach to estimate market risk? Explain how this approach would be implemented.
Calculate the DEAR for the following portfolio with the correlation coefficients and then with perfect positive correlation between various asset groups. Estimated DEAR (S,FX) (S,B) (FX,B) Stocks (S) $300,000 −0.10 0.75 0.20 Foreign Exchange (FX) 200,000 Bonds (B) 250,000 What is the amount
Jeff Resnick, vice president of operations of Choice Bank, is estimating the aggregate DEAR of the bank’s portfolio of assets consisting of loans (L), foreign currencies (FX), and common stock (EQ). The individual DEARs are $300,700; $274,000; and $126,700, respectively. If the correlation
Bank of Alaska’s stock portfolio has a market value of $10 million. The beta of the portfolio approximates the market portfolio, whose standard deviation (m) has been estimated at 1.5 percent. What is the five-day VAR of this portfolio using adverse rate changes in the 99th percentile?
Bank of Southern Vermont has determined that its inventory of 20 million euros (:) and 25 million British pounds (£) is subject to market risk. The spot exchange rates are $0.40/: and $1.28/£, respectively. The s of the spot exchange rates of the : and £, based on the daily changes of spot
Bank Alpha has an inventory of AAA-rated, 15-year zero-coupon bonds with a face value of $400 million. The bonds currently are yielding 9.5 percent in the over-the-counter market. What is the modified duration of these bonds? What is the price volatility if the potential adverse move in yields is
In what sense is duration a measure of market risk?
The mean change in the daily yields of a 15-year, zero-coupon bond has been five basis points (bp) over the past year with a standard deviation of 15 bp. Use these data and assume that the yield changes are normally distributed. What is the highest yield change expected if a 90 percent confidence
What is meant by value at risk (VAR)? How is VAR related to DEAR in J. P. Morgan’s RiskMetrics model? What would be the VAR for the bond in problem 4 for a 10-day period? What statistical assumption is needed for this calculation? Could this treatment be critical?
Follow Bank has a $1 million position in a five-year, zero-coupon bond with a face value of $1,402,552. The bond is trading at a yield to maturity of 7.00 percent. The historical mean change in daily yields is 0.0 percent, and the standard deviation is 12 basis points. What is the modified
What is meant by daily earnings at risk ( DEAR )? What are the three measurable components? What is the price volatility component?
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