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Banking Chapter 4 > Chapter 4 > Flashcards

Chapter 4 Flashcards

1
Q

Refers to simultaneous management of both bank assets and liabilities

A

Asset/liability management (ALM)

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2
Q

Purpose of ALM

A
  • maximizing profits
  • mitigating interest rate risk (IRR)
  • providing liquidity
  • assuring its capital adequacy
  • enhancing the market value of the bank
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3
Q

Integral part of bank’s overall planning and risk management processes.

A

Asset/liability management (ALM)

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4
Q

A key part of ALM. It is the difference between interest and dividends earned on interest-bearing assetsand interest paid to depositors and creditors, expressed as a percentage of average earning assets.

A

Net interest margin (NIM)

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5
Q

Refers to unexpected chabges in interest rates and prices.

A

Unfavorably

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6
Q

Present significant risk management challenges to institutions of all sizes. (2)

A
  • current financial market
  • economic conditions
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7
Q

Associated with buying long-term debt securities because the price of the bonds declined.

A

Price Risk

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8
Q

Because of the difficulty of accuratelt forcasting interest rates, many investors prefer to invest to minimize their risk

A

Short-term securities

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9
Q

Short-term debt securities example

A

Commercial paper

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10
Q

Short-term debt securities is also called as

A

Money market instruments

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11
Q

Long-term securities example

A

Stocks and bonds

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12
Q

Long-term securities also called as

A

Capital market instruments

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13
Q

Refers to the risk of losing income when movements in blank borrowing and lending rates are not perfectly synchronized.

A

Income Risk

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14
Q

Banking jargon of income risk

A

Dollar gap problem

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15
Q

Refers to the difference between the dollar amounts of rate-sensitive assets and rate-sensitive liabilities.

A

Dollar gap

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16
Q

Assets and liablities may be classified as

A
  • rate sensitive
  • non-rate sensitive
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17
Q

Refers to the frequency with shich the interest rate on an instrument is adjusted.

A

Interest rate repricing

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18
Q

Assets and liabilitues with one year or less maturity are considered

A

Rate sensitive

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19
Q

Deposits issued by a financial institution and purchasee by an investor through a third-part intermediary called as deposit broker.

A

Brokered deposits

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20
Q

Core deposits are defined in the Uniform Bank Performance Report (UBPR) user’s guide as

A
  • the sum demand of deposits
  • all negotiable orders of withdrawal (NOW)
  • automatic transfer services (ATS) accounts
  • money market deposits accounts (MMDA) savings
  • other savings deposits
  • time deposits under $100,000
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21
Q

Other sources of wholesale funding (3)

A
  • federal funds
  • Federal Home Loan Bank advances
  • Federal Reserve’s primary credit program
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22
Q

UBPR’s are created by bank regulators for (3)

A
  • supervisory
  • examination
  • bank management purposes
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23
Q

Refers to the ability to liquidate an aaset quickly wigh little or no loss in market value and the ability to raise funds through the sale of an asset or by borrowing.

A

Liquidity

24
Q

Risk of earnings and capital related to a financi intermediary’s ability to meet its financial obligations to depositors or borrowers.

A

Liquidity Risk

25
Q

One of the largest banks to require government assistance.

A

Wachovia Bank

26
Q

Became the second largest bank failure after Continenta lllinois Bank

A

IndyMac Bank

27
Q

Confuse the issue of rate sensitivity. (2)

A
  • fixed-rate loans
  • variable-rate loans
28
Q

Are rate-sensitive as sets because they are repriced every day.

A

Fixed-rate loans

29
Q

Resets the interest rates once every three years is not a rate-sensitive asset.

A

Variable-rate loans

30
Q

Repurchase agreements known as

A

repos

31
Q

Asre short-term contracts to sell and re-purchase financial assets, such as Treasury securities, at a future date.

A

Repurchase agreements or repos

32
Q

The seller repurchases the securities at the price at which they were sold and pays interest for the use of the funds

A

Repo rate

33
Q

From the point of view of the institution buying the security

A

Reverse repo

34
Q

The interest rate at which central banks, such as the Federal Reverse, repurchases government securities from banks.

A

Repo rate

35
Q

Minimum liquidity standards called the

A

Liquidity coverage ratio (LCR)

36
Q

Requires banks to have “high quality liquid assets” that should be equal to or greater than theie net cash outflows over 30days.

A

Liquidy Coverage Ratio

37
Q

The most liquid assets

A

Cash
Centrak bank reserves
Marketable securities
Government or central bank debt

38
Q

Liquid assets

A

High-quality corporate debt
Covered bonds
Governmemt
public sector assets

39
Q

Requires bank’s “available stable funding” should at least equal its “required stable funding”

A

Net Stable Funding Ratio (NSFR)

40
Q

The difference between rate-sensitive assets (RSA) and rate-sensitive liabilities (RSL) expressed in dollars

A

Dollar gap

41
Q

Dollar gap is widely used as

A

A measure of interest rate sensitivity.

42
Q

Interest income less interest expense.

A

Net interest income (NII)

43
Q

Affects net interest income and the valur of banks.

A

Interest rate risk

44
Q

Focuses on a bank’s short-term net interest income

A

Dollar gap

45
Q

Takes a longer view and focuses on the economic value of equity.

A

Duration gap

46
Q

The weighted average time to maturity to recieve all cash flows from a financial instrument.

A

Duration

47
Q

Is measured in terms of years and months.

A

Time

48
Q

Widely used measure of interest rate sensitivity

A

Duration

49
Q

Compares the effects of changes in interest rates in the duration of a bank’s assests and liabilities to determine the economic value of stockholder’s equity.

A

Duration gap

50
Q

The theoretical value of the bank’s equity, taking into account the duration of both the assets and liabilities.

A

Economic value

51
Q

Occurs when the duration of a bank’s assets and liabilities is equal to zero.

A

Immunization

52
Q

Useful tool for ALM (Asset/liability management)

A

Duration

53
Q

Duration is a useful tool for ALM but it has limitations because of these issues (4)

A

Embedded Options
Nonparallel Shifts in the Yield Curve
Duration Drift
Problem Loans

54
Q

Are ckmputer-generated scenarios about the future that permit banks to analyze interest risk and business strategies in a static or dynamic framework.

A

Simulations

55
Q

Have the advantage that they can be used to simulate the effects of changes in interest rates

A

Dynamic simulation techniques

56
Q

A critical tool used by banks as part of their internal risk management and capital planning

A

Stress testing

Banking Chapter 4 (2 decks)

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