12 - award: 1 C- out of ' 10 points On a bank's balance...

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Unformatted text preview: award: 1 C- out of ' 10 points On a bank's balance sheet; assets represent a ofi‘unds and include a_’ r- use; reserves;Treasur].rbi||s; andloans r source; reserves; real estate loans; and checking deposits r- use; checking deposits; savings deposits; and borrowing from the Fed (- source; reserves; Treasury securities; and borrowing from the Fed MultipleChoice Section: The Balance Sheet ofCommercial Banks Consider a bankwrth the balance sheetshown below The bank pays an interest rate of5 5% on its deposits; earns 0% on reserves; E 5% on loans and E 5% on securities in addition; it has fee income afler costs of$100;000 What is the return on assets?i Assets Liabilities Reserves $10,000,000 Deposits $100,000,000 Loans $70,000,000 Borrowing 50 Securities $30,000,000 BankCapitai 510.000.000 gap 23% (- 22% r‘ 250% (- 240% MuitipieCnoice Section The Balance Sheet ofCommercial Banks ffunds and include es represent re use; reserves,Treasunr bills, and loans r- source; reserves, Treasury securities, and borrowing from the Fed ad re source; checking deposits, savings deposits, and borrowing from the Fed r- use; checking deposits, savings deposits, and borrowing from the Fed MultipleClIoice Section: The Balance Sheet ofCommercial Banks :3 w a rd 4 0 out of °_ :- borrowtngs r deposits 3“ loans :- securities Multiplechoice Section The Balance Sheet ofCommercial Banks award: 5_ 0 out of .............. Jmmemmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmm When a financial intermediary issues a loan commitmentto a long—time customer, r the size ofthe commitment is entered immediately onto the intermediary's balance sheet. r the intermediary's only source ofprofit is when the loan is drawn down and the borrower makes interest payments. 3* r the intermediarytakes on riskthat is not apparent on its balance sheet. r the intermediary must go through the usual collection ofinformation on the customerto protect itselfagainst adverse selection. MultipleChoice Section: The Balance Sheet ofCommercial Banks 5 '.'.' a rd: 6_ l} out of ............... lfa family plans to renovate its house, it may need to obtain a: 9H r- homeownerline ofcredit. r standby letter of credit. re letter of credit. r- business line of credit. Multiple Choice Section: The Balance Sheet ofCommercial Banks award 0 out of Which statement istrue? °_ r Operational risk occurs when bank managers tailto place backup systems t'arfrom allthe bank's ofi'ices. {- Credit risk occurs when customers draw on their lines of credit during a recession. Ir- Liquidity risk occurs when borrowers fail to repay loans. leaving the bank short on funds. :- Sovereign risk occurs when exchange rate movements alterthe value ofassets denominated in terms ofa foreign currency compared to the value ofliabilities denominated in local currency Mnltiplecnoice Section: Bank Risk: Where It Comes from and What to Do about it a w a rd: 8_ flout-of 10 From the perspective ofa bank balance sheet, when an economic downturn makes it more dimcult for borrowers to meet loan payments, the bankfaces increased. °_. 1* credit risk. 1* trading risk. 1* liquidity risk. 1* interest rate risk. MultipleCIIoice Section: Elank Risk: Where It Comes from and Whatto Do about It a w a rd . 9 0 out of A bank may try profits from its-cap'ital'by'hiring traders to sell various financial-instruments. gives these trade-risnbo'n'iJses when their but absorbs the-loss'e's'b'therwise, then" bank needsto solve °_ F a moral hazard problem re an adverse selection problem r afreesriderbroblern r- aprincipal-agentproblem. MultipleClIoice Section Elank Risk Where ItComes from andWhatto Do about It Considerthe lollowmg balance sheet ofa bankwith rate sensitive (RS) and rate insensitive (RI) assets and liabilities The interest rate on both RS and RI assets is initiallyS'De and the rate on both RS and RI liabilities is initially4% Then the interest rate on RS assets rises to 11% and the rate on RS liabilities rises to7% Holding other items on the balance sheetfixed (and so suppressingthem on the balance sheet below). what happens to the bank's net interestincome'r‘ Balance Sheet Assets Liabilities RS Assets $100 RS Liabilities $50 RI Assets $100 RI Liabilities $150 (- Rises by $5 50 (- Falls by $150 (- ls unaffected by the change in rates °_ r“ Rises by $1 50 Multipleclloice Section' Bank Risk' Where It Comesfrom and Whatto Do about It ...
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This note was uploaded on 09/07/2011 for the course ECO 412 taught by Professor Staff during the Spring '05 term at Kentucky.

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12 - award: 1 C- out of ' 10 points On a bank's balance...

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