Chapter%202%20Problems_Solutions

Chapter%202%20Problems_Solutions - Chapter 02 Financial...

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Chapter 02 - Financial Services: Depository Institutions Chapter Two Financial Services: Depository Institutions Solutions for End-of-Chapter Questions and Problems 1. What are the differences between community banks, regional banks, and money-center banks? Contrast the business activities, location, and markets of each of these bank groups. Community banks typically have assets under $1 billion and serve consumer and small business customers in local markets. In 2009, 92.4 percent of the banks in the United States were classified as community banks. However, these banks held only 10.5 percent of the assets of the banking industry. In comparison with regional and money-center banks, community banks typically hold a larger percentage of assets in consumer and real estate loans and a smaller percentage of assets in commercial and industrial loans. These banks also rely more heavily on local deposits and less heavily on borrowed and international funds. Regional banks range in size from several billion dollars to several hundred billion dollars in assets. The banks normally are headquartered in larger regional cities and often have offices and branches in locations throughout large portions of the United States. Although these banks provide lending products to large corporate customers, many of the regional banks have developed sophisticated electronic and branching services to consumer and residential customers. Regional banks utilize retail deposit bases for funding, but also develop relationships with large corporate customers and international money centers. Money center banks rely heavily on non-deposit or borrowed sources of funds. Some of these banks have no retail branch systems, and most money center banks are major participants in foreign currency markets. These banks compete with the larger regional banks for large commercial loans and with international banks for international commercial loans. Most money center banks have headquarters in New York City. 2. Use the data in Table 2-4 for the banks in the two asset size groups (a) $100 million-$1 billion and (b) over $10 billion to answer the following questions. a. Why have the ratios for ROA and ROE tended to increase for both groups over the 1990-2006 period and decrease in 2007-2009? Identify and discuss the primary variables that affect ROA and ROE as they relate to these two size groups. The primary reason for the improvements in ROA and ROE from 1990s through 2006 may be related to the continued strength of the macro economy that allowed banks to operate with reduced bad debts, or loan charge-off problems. In addition, the continued low interest rate environment provided relatively low-cost sources of funds, and a shift toward growth in fee income provided additional sources of revenue in many product lines. Finally, a growing secondary market for loans allowed banks to control the size of the balance sheet by securitizing many assets. You will note some variance in performance in the last three years as the effects of a softer economy and rising interest rates were felt in the financial industry.
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