Chapter 2 Flashcards
1
Q
Why is ROA larger for smaller banks?
A
Because they have a larger spread between the cost of funds and the rate on assets + less severe competition in the localized markets
2
Q
Off-balance-sheet (OBS) definition + examples
A
Contingent commitments to undertake future on-balance sheet investments
- derivatives transactions
- issuing guarantees (letters of credit eg)
- future commitments to lend
3
Q
ROE
A
ROE = ROA * A/E
where A/E is higher for large banks
4
Q
Benefits and risks of OBS activities
A
Benefits: fee income for banks, avoid regulatory costs
Risks: greater overall insolvency exposure
