Chapter 4 Non-interest Income and Non-interest Expense

Question 1

Why has interest income declined over the years?

Answer 1

Increased competition

Question 2

Why has non-interest income increased over the years?

Answer 2

Increased fiduciary activities

Question 3

Why is NIM smaller at big banks?

Answer 3

Smaller banks don’t offer as many services as large bans such as

• Trading Revenue
• Securitization
• Investment Bank Advisory & Underwriting
• Private Banking
• Wires, LOCs and FX

Question 4

What is the purpose of Reg. Q and Glass Steagall

Answer 4

To limit competition
* Reg Q limits the interest rate banks can pay
for deposits

• Glass Steagall separated lending activities from investment banking activities at commercial banks by prohibiting commercial banks from underwriting
  corporate securities.

Question 5

What is the purpose of Volcker Rule?

Answer 5

To prevent banks from proprietary trading.

Question 6

How did the creation of money market funds impact NIM and and deposit volitility?

Answer 6

Financial innovation increased competition, $ moved from deposits to money markets and mutual funds, this caused NIMs to decrease

Question 7

Do you want a high or low Burden Ratio?

Answer 7

A low ratio is better

Question 8

Name 3 ways to reduce the Burden Ratio

Answer 8

1. Reduce non-interest expense
2. Increase non-interest revenue
3. Increase total average assets

Question 9

Does the Burden Ratio focus on Expense Control and/or Productivity?

Why do we use Average Assets, not ending Assets?

Answer 9

Expense Control

Question 10

Do you want a high or low efficiency ratio?

What does this ratio measure?

What type of ratio is this?

Answer 10

You want a low efficiency ratio

It measures the amount of non-interest expense paid to earn $1.00 of total revenue net of interest expense.

It is a performance ratio

Question 11

Name 3 ways to reduce it the efficiency ratio

Answer 11

1. Reduce expenses
2. Increase net interest income
3. Increase non-interest income

Question 12

Do you want a high or low Operating Risk Ratio?

What does it indicate?

Answer 12

Lower

Lower indicates bank generates more $ from non-interest income and fees which are more stable and valuable

Question 13

Name 3 ways to reduce the operating risk ratio.

Answer 13

1. Reduce non-interest expense
2. Increase non-interest income
3. Increase net-interest margin

Question 14

Does the Operating Risk Ratio focus on Expense Control, Profitability, and/or Productivity?

Answer 14

Profitability and Productivity

Question 15

Do you want a high or low Assets per Employee ratio?

Name 3 ways to increase it.

Answer 15

High

1. Increase assets
2. Reduce number of full-time employees

Question 16

Does the Assets per Employee ratio focus on Expense Control, Profitability, and/or Productivity?

Answer 16

Productivity

Question 17

Do you want a high or low Average Personnel Expense?

Answer 17

Low

Question 18

Does the Average Personnel Expense focus on Expense Control, Profitability, and/or Productivity?

Answer 18

Productivity

Question 19

Do you want a high or low Loans Per Employee ratio?

What type of ratio is this?

Answer 19

High because it indicates greater productivity.

It is a productivity ratio

Question 20

Do you want a high or low Net Income Per Employee ratio?

Answer 20

High

Question 21

Give some examples of non-interest income and non-interest expenses

Question 22

What is NIM

Answer 22

Ratio of Net Interest Income to Total Earning Assets