homework question and answer

homework question and answer - Chapters 15, 17, 18, 20...

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Unformatted text preview: Chapters 15, 17, 18, 20 Questions and Answers 1 Things to Remember 1. Difference between adverse selection and moral hazard. 2. 4 ways banks can raise reserves. 3. How to calculate the shortfall in reserves if there is a deposit outflow. 4. 3 ways to raise the capital ratio. And how to calculate the capital ratio. 2 Chapter 15 notes 2.1 Adverse Selection One party in a transaction has better information than the other party 2.2 Moral Hazard Occurs when behave differently once an agreement is made between parties 2.3 Tools to Help Solve Adverse Selection (Lemons) Problems Private Production and Sale of Information Government Regulation to Increase Information Financial Intermediation Collateral and Net Worth 1 2.4 Tools to Help Solve the Principal-Agent Problem Production of Information: Monitoring Government Regulation to Increase Information Financial Intermediation (e.g, venture capital) Debt Contracts 2.5 Factors Causing Financial Crises 1. Increases in Interest Rates Adverse selection Increase debt payments 2. Increases in Uncertainty 3. Asset Market Effects on Balance Sheets Stock market effects on net worth Unanticipated deflation Cash flow effects 4. Problems in the Banking Sector 5. Government Fiscal Imbalances 3 Chapter 17 notes 3.1 BANK MANAGEMENT 1. Liquidity management 2. Asset management 2 3. Liability management 4. Managing capital adequacy 3.2 Capital Adequacy ROA = Net Profits/Assets ROE = Net Profits/Equity Capital EM = Assets/Equity Capital ROE = ROA x EM Capital , EM , ROE 3.2.1 How to Lower Capital buy back bank stock pay out higher dividends increase bank assets by acquiring funds. 3.2.2 How to Raise Capital Sell stock reduce dividends decrease bank assets by selling off loans or securities. 4 Chapter 18 notes 4.1 Financial Innovation 1. Response to demand changed 3 2. supply changes 3. Aviod Regulation 4.2 Example of financial innovation junk bonds commercial paper securitization like mortages pools. STRIPS 5 Chapter 20 5.1 Bank Regulation 1. Government Safety Net: Deposit Insurance and the FDIC the payoff method purchase and assumption method 2. Restrictions on Asset Holdings 3. Bank Capital Requirements 5.2 Bank Capital Requirements Details of bank capital requirements: Leverage ratio must exceed 5% to avoid restrictions Capital must exceed 8% of the banks risk-weighted assets and off-balance sheet activ- ities....
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This note was uploaded on 09/13/2011 for the course FIN 353 taught by Professor Cobus during the Spring '08 term at S.F. State.

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homework question and answer - Chapters 15, 17, 18, 20...

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