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MaxMark_Ch02_Correct_Answers - MenuItem2(Topic 2 Commercial...

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MenuItem2: (Topic 2) Commercial banks Question 1: Using total assets as a measure of size, the largest group of institutions in all major financial systems is: A: superannuation funds B: insurance companies C*: commercial banks D: merchant banks Feedback: The banks’ share of the total assets of all financial institutions varies between countries and over time but, using Australia as an example, it is between 40 and 50 per cent which is clearly the largest share held by any of the institutions. More: Financial Institutions, Instruments and Markets 5/e , p. 52 Commercial banks are the main financial institutions operating in all major international financial systems, accounting for the largest share of the assets of all financial institutions. Because of the absolute size of the commercial banks, and their relative importance as the principal institutions in the flow of funds between savers and borrowers, they require detailed study. Question 2: Banks have progressively moved from asset management to liability management. Which of the following statements best describes liability management? A: the loans portfolio is tailored to match the available deposit base B: the ratio of debt to equity is managed to meet capital adequacy requirements C: the deposit base is managed in order to fund loan demand D*: the deposit base and other funding sources are managed to fund loan demand and other commitments Feedback: A bank that focuses on asset management may find that its lending is constrained if the growth of its deposits is not sufficient to fund all the loans that management wishes to make. Instead of declining profitable loan requests, a bank may adopt liability management whereby the bank will actively seek additional funds from deposit and non-deposit sources in order to meet the demand for loans. A and B are clearly incorrect and while C gives a description of liability management, it is incomplete in that it refers only to deposits as a source of funds. The description in D is more comprehensive, making it the correct answer. More: Financial Institutions, Instruments and Markets 5/e , Section 2.1, p. 54 Liability management developed with the removal of restrictive regulation and is the MaxMark t/a Financial Institutions, Instruments and Markets 5e by Viney 1
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normal practice today. Commercial banks now manage their deposit base and other funding sources (liabilities) in order to ensure that they have sufficient funds available to meet loan demand and other commitments. As loan demand increases in line with economic growth expectations, banks simply enter the capital markets and borrow the necessary funds required to meet their forecast loan demand. Banks are no longer dependent on their deposit base for lending. They manage their liability base by borrowing directly from the domestic and international capital markets. As the major banks typically have high credit ratings, they are able to borrow substantial amounts, especially within the international
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MaxMark_Ch02_Correct_Answers - MenuItem2(Topic 2 Commercial...

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