Questions and Answers of Contemporary Financial Intermediation

What are the main objectives of bank regulation? Discuss each.
How inherent is the need for bank regulation? Relate your answer to the raison d’être for banks.
What is the main conceptual difference between micro-prudential and macro-prudential regulation?
Why do we have reserve requirements? What are their drawbacks?
What is the purpose of the discount window?
Why do we have capital requirements? What are the components of a good capital standard?
What improvements does the Basel III Accord seek to make relative to the Basel II accord?
Discuss the key elements of safety regulation in banking. What specific role does each play in ensuring bank safety?To what extent are these regulations complements or substitutes in this regard?
Provide a comparative analysis of the regulatory structures in the United States, United Kingdom, Japan, and the EU.
What are the key milestones of bank regulation in the United States?
What are the pros and cons of market value accounting?
What are the pros and cons of “expanded” banking powers?
Do regulators always maximize social welfare? Why or why not? Can anything be done about this?
Discuss the key elements of FDICIA and provide a critique of it.
What is the main objective of the Dodd Frank Act?
Which measures in the Dodd Frank Act directly address systemic risk?
How would you reform our banking system?
What are the main legislative initiatives in the EU?
The following is an excerpt from a conversation. Critique it.Appleton:If banks don’t do it, someone else will.Butterworth:I’m sure that’s true, but the question is one of comparative advantage
What are the supply- and demand-side forces stimulating securitization?
Which are the main agencies of bank regulation in the United States, and what is the function of each?
Critique the Basel I Accord on internationally harmonized capital standards.
Discuss the economics of branching and BHC legislation in the United States.
What impact has vagueness in BHC legislation had on the behavior of U.S. banks?
Discuss the division of a bank’s capital into Tier-1 and Tier-2 capital. Contrast this with the usual definition of capital in a nonfinancial firm. Why do you think banks have this more elaborate
Why do regulators need to regulate market structure and competition in banking?
What are the pros and cons of consumer protection regulation?
If deposit insurance is deemed necessary, what steps should be taken to reform the system?
Can you shed light on the following facts and explain their possible interrelationships?a. Commercial paper issues by nonfinancial corporations in the United States have grown six fold in the last 20
What is ERM? Why is it needed?
What is “tail-risk”? Why have tail risks proved so difficult to manage?
How should ERM be organized within the bank? Explain the two triads of ERM.
Suppose that A’s assets will be worth $100 for sure at the end of the period. The value of B’s end-of-period assets will be $200 with probability 0.5 and zero with probability 0.5. The project (A
What are “expert systems” and what are banks attempting to achieve with them as part of credit analysis?
Consider a firm that has a bank loan outstanding that requires the firm to repay $900 one period hence. The firm has $300 in retained earnings that can either be paid out as a dividend to the
To examine this issue, imagine that banks can charge any borrower 150 basis points above the interest rate at which the bank would break even (in an expected value sense) on that borrower. This is a
Consider a firm that has three types of debt: a bank loan with the highest priority, senior debt owned by bondholders with the next highest priority, and junior debt owned by bondholders with the
It has been claimed that a bank loan commitment has an isomorphic correspondence with a common stock put option. How valid is this claim?
Discuss a commercial L/C, a standby L/C, and a bankers acceptance.
What is an interest rate swap and how does it work?
What is the role of a swap broker in an interest rate swap transaction?
Discuss three variations of the “plain vanilla” swap.
What are swaptions, caps, collars, and floors?
What are the advantages and disadvantages of an interest rate swap relative to a futures contract as a hedging instrument?
What is the advantage of a swap over direct fi nancing for hedging interest rate risk?
Suppose a borrower knows at t = 0 that it will have available at t = 1 an opportunity to invest $175 in a risky project that will pay off at t = 2. The borrower knows that it will be able to invest
The following is an excerpt from a conversation. Critique it.Appleton : That’s simple, Mike. The BIS stipulations are minimum levels, whereas the Treasury proposal gives banks choices above the BIS
What are the similarities and the differences between loan sales and securitization?
What are CMOs and REMICs?
What are the main economic features of the demand deposit contract and how do these features discipline management when deposits are uninsured?
To see that diversification helps in this case, suppose Calculate the variance of a portfolio of assets A and B, assuming first that the returns of the individual assets are perfectly positively
Suppose that there are two possible states of the economy next period: high (H) and low (L). Available in the capital market are two risky securities, R1 and R2, and a riskless bond, B. The
Consider a used car market in which differences in the care with which owners use their cars lead to quality differences among cars that started out identical. It is natural to suppose that the owner
Suppose that cars of different qualities have different probabilities of engine failure within a given time period, and that these differences are reflected in their values of 0, $5, and $10. Suppose
Consider a firm that will liquidate one period hence at time t = 1. There are no taxes and the firm can invest $30 in a risky venture at t = 0 using retained earnings. If the investment is not made,
Suppose there are two prisoners who jointly committed a crime. There is insufficient evidence to convict either of them, unless one or both disclose information. The police, in an attempt to break
Suppose you wish to determine the television channel on which you should watch the evening news to learn about the next day’s weather. There are two main channels (say 1 and 2) that you can choose
Given below is an excerpt from a conversation. Who do you agree with? Provide a thorough discussion of the theoretical and empirical underpinnings of your opinion.Appleton: Absolutely! I believe that
Discuss what is meant by brokerage and asset transformation. What factors determine the value of brokerage services?
List five distinct types of financial intermediaries, explain what they do, and provide a comparison/contrast of the basic intermediation services they provide.
Find information on capital-to-total-assets ratios for several nonfinancial firms and compare them to those for financial firms. Why the differences?
From the information in Table 2.6 , what can you conclude about the risk in holding a representative bank’s equity compared to that in holding equity in a diversified market portfolio?Table 2.6
Explain how a bank evolves from a primitive goldsmith and the roles played by asymmetric information and moral hazard in this evolution.
Can banking ever become completely deregulated? Why or why not?
What do we mean by a “hierarchy of financing sources”? What determines a borrower’s choice of financing source?
What is the difference between a “stock” and a “mutual”? Explain the differences in the resolutions of agency problems for these two types of organizations.
It has been said that the health of a nation’s banking system is inversely related to the speed and efficiency of information flows in the economy. Explain.
In what way are banks “unique”? What is the empirical evidence on this issue?
What are the economic incentives for financial intermediaries to grow large?
How do banks help to make nonbank contracting more efficient?
Given below is an excerpt from a conversation. Comment critically on it.Moderator: Fine, but as long as you have fractional reserve banking, you’re never going to eliminate the possibility of
How does monetary policy affect the (short-term) growth path of an economy?
What are the differences between transaction and relationship loans and what is the relevance of the distinction?
Explain how the financial system works to promote economic growth?
Compare and contrast “core” and “ancillary risks.”
What are the three major financial risks banks face?
What is risk culture and why is it fundamental?
Suppose there are three zero-coupon bonds that are identical in all respects except maturity. Each bond has a face value of $10 million. One of them matures a year from now and is currently selling
Consider an interest rate environment in which the one-period annual yield is 10% and the two-period annual yield is 9.7824%, and suppose we have two riskless bonds (each with a 2-year maturity) that
Suppose we have a 10-year zero-coupon bond that is risk free, has a par value of $1000, and is priced to yield 10%. What is its duration and how well will duration predict price changes if the yield
Under certainty, if the term structure is determined to preclude riskless arbitrage, what is the relationship between the yields on bonds of different maturities and why?
What is duration and why is it a more valid metric to consider for coupon-paying bonds than maturity? What is the relation between duration and price volatility for bonds with the same maturity?
What is convexity? Discuss its potential usefulness in evaluating bonds.
Discuss the pros and cons of duration mismatching for a depository institution. Suppose there are three zero-coupon bonds, identical in all respects except maturity. Each bond has a face value of
The annualized YTM on a single-period pure discount bond is 12% and that on a two-period pure discount bond is 10.45%. There are two bonds. One is a two-period, pure discount bond that promises a
Given below is an excerpt from a conversation between two people. Provide a critique.Moderator: So, what do you people think? Will we ever really understand what happened to the American banking
What is liquidity risk and how is it linked to interest rate and credit risks? What is the role of asymmetric information in creating liquidity risk?
How can liquidity risk be managed? What are some of the impediments faced by banks in implementing an integrated risk-management system that managers credit risk, liquidity risk, and interest rate
What factors lead to an increase in the bank’s liquidity risk and why is it important for the economy that banks take on liquidity risk?
Suppose you are a bank lending officer at the Midtown National Bank considering a loan request from Miller Manufacturing company for $1.05 million. The firm currently has $1 million in equity and its
Suppose we have a firm that needs $150 to invest in a project that will yield a random payoff one period hence. The firm knows the probability distribution of the project’s cash flow, but no one
Suppose Brown Bakery needs a $100 loan to finance a project that will pay off next period. Brown can choose between two projects: S (safe) and R (risky). The bank knows this but is unable to directly
Consider a firm, Johnson Supplies, that can invest $100 at the start of the period ( t = 0) in a project that will pay off at the end of the period ( t = 1) $400 if successful (state S1) and zero if
Consider an entrepreneur, Mr. David Barnes, who borrows $100 at t = 0 (the start of the period) and invests the loan in a project that will pay off at t = 1 an amount $300 in the successful state
What are the different types of assets on a bank’s balance sheet?
What is a “bank loan”? What are the different ways in which a bank can acquire loans?
Discuss the similarities and differences between loans and securities.
What are the major informational problems in loan contracts?
What is the purpose of credit analysis? Compare and contrast capital budgeting within a nonfinancial firm with credit analysis within a bank.
What are “the 5 Cs of credit”? What do we mean by a borrower’s “character” and why is it important?

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