11: Analysis of Financial Institutions

Question 1

The ratios helpful in assessing the quality of allowance for loan losses:

Answer 1

• allowance for loan losses to net loan charge-offs
• allowance for loan losses to non-performing loans
• provision for loan losses to non-performing loans

Question 2

Basel III requires/specifies a bank to:

Answer 2

• specifies the minimum percentage of its risk-weighted assets that a bank must fund with equity capital
• specifies that a bank must hold enough high-quality liquid assets to covers its liquidity needs in a 30-day liquidity stress scenario
• requires a bank to have a minimum amount of stable funding relative to the bank’s liquidity needs over a one-year horizon

Question 3

CAMELS:

Answer 3

• Capital adequacy
• Asset quality
• Management
• Earnings
• Liquidity
• Sensitivity

Question 4

Mutual Banks (vs commercial banks)
* owned by:
* organized as:
* income taxes:
* services:

Answer 4

Mutual Banks vs commercial banks
* owned by: members (not publicly traded)
* organized as: non-profits
* income taxes: do not pay
* services: similar to banks

Question 5

Contagion in financial institutions can arise through:

Answer 5

disruption or failure

Question 6

Financial & Nonfinancial institutions both hold:
difference being:

Answer 6

ST & LT assets
Financial: loans, stocks, & bonds
Nonfinancial: intangibles (PPE)

Question 7

Capital requirements are designed to ensure that in the event of asset write downs (loan losses):

Answer 7

a bank’s equity is not likely to become negative

Question 8

Stable funding requirements specify a minimuim level of stable funds compared to annual liquidity requirements, where stability of funding (stable vs unstable) is based on:

Answer 8

the likelihood that funds will be withdrawn
Stable: LT deposits, customer deposits
Unstable: ST deposits, interbank loans