Chapter 9 Slideshow

Question 1

Balance sheet equation

Answer 1

Total assets = total liabilities + capital

assets - uses of funds, securities and loans

liabilities - sources of funds, borrowing

Question 2

Assets include

Answer 2

• Reserves
  – Cash items in the process
  of collection
  – Deposits at other
  banks
  – Securities
  – Loans
  – Other assets

Question 3

Liabilities Include

Answer 3

• checkable deposits
• non-transaction deposits (time dep. savings dep. CDs)
• borrowings
• bank capital

Question 4

Asset transformation

Answer 4

selling liabilities with one set of characteristics and using the proceeds to buy assets w/ diff characteristics

Question 5

the bank borrows _____ and lends _____

Answer 5

short, long

Question 6

Principles of Bank management to maximize profit

Answer 6

• liquidity
• asset
• liability
• capital adequacy
• credit risk
• int rate risk

“mgmt”

Question 7

liquidity management

Answer 7

to ensure
that the bank
has enough
cash on hand
to pay its
depositors
when there
are deposit
outflows.

Question 8

asset management

Answer 8

to ensure
that assets
have low
level of risk
and rate of
default.

Question 9

liability management

Answer 9

to acquire funds w/ low cost

Question 10

capital adequacy management

Answer 10

to ensure
that bank
maintain
adequate
capital

Question 11

credit risk management

Answer 11

the
probability
that
borrowers
default.

Question 12

interest rate risk management

Answer 12

the riskiness of
returns on assets
because of changes
in interest rates.

Question 13

4 options to meet deposit outflows:

Answer 13

1. borrowing
2. securities sales
3. Federal reserve in discount loans
4. Reduce loans

Question 14

Purpose of excess reserves

Answer 14

insurance against the costs associated with deposit outflows

Question 15

3 goals to maximize profit

Answer 15

1. seek highest possible returns on loans and securities
2. reduce risk
3. have adequate liquidity

Question 16

4 tools to maximize profits

Answer 16

1. find borrowings that pay high int with low default
2. purchase securities with high returns and low risk
3. lower risk by diversifying assets, loans, and customers
4. balance need for liquidity against increased returns from less liquid assets

Question 17

main trade-off in liability management

Answer 17

higher returns vs lower risk

Question 18

How has liability management changed since 1960s

Answer 18

before 1960s, checkable deposits were major source of funds

after 1960s, large banks sold CDs, engaged in borrowing, used overnight loans

Question 19

why is capital adequacy important? (3)

Answer 19

1. bank capital helps prevent bank failure
2. amt of capital affects return for owners of the bank
3. a minimum amt is required by regulatory authority

Question 20

ROA formula

Answer 20

net profit after taxes / assets

Question 21

ROE formula

Answer 21

net profit after taxes / equity capital

Question 22

Equity multiplier, definition and formula

Answer 22

amt of assets per dollar of equity capital

EM = assets / equity capital

Question 23

Relationship between ROE, EM, and ROA

Answer 23

ROE = ROA * EM

Question 24

trade offs concerning bank capital

Answer 24

benefit: safer investments and reduces chances of bankruptcy

cost: higher bank capital, lower ROE

Question 25

How to manage interest rate risk

Answer 25

rearrange balance sheet using duration, develop financial instruments w/o rearranging balance sheets

Question 26

5 steps to managing credit risk

Answer 26

1. screening and monitoring
2. LT customer relation
3. loan commitments
4. collateral and compensating
5. credit rationing

Question 27

Off balance sheet activities

Answer 27

loan sales, generation of fee income, trading activites and risk mgmt techniques

Question 28

When is a bank failure less likely to occur?

Answer 28

when it has more bank capital