Midterm 1 Flashcards
Regulators use CAMELS system to analyze bank risk. Match each of the listed financial ratios with the each CAMELS factor:
- Core Deposits / Assets
- Net Interest Margin
- Equity / Assets
- Loan Charge-offs / Loans
- (Repriceable Assets - Repriceable Liabilities) / Assets
- All Ratios
- C = Equity / Assets
- A = Loan Charge-offs / Loans
- M = All Ratios
- E = Net Interest Margin
- L = Core Deposits / Assets
- S = (Repriceable Assets - Repriceable Liabilities) / Assets
A synonym for the NIM is
Interest Rate Spread
Which ratio would be used in an evaluations of Earnings Quality?
- Current Ratio
- Equity Multiplyer
- Loan to Deposit Ratio
- Efficiency Ratio
Efficiency Ratio
The largest category of Liabilities on a Commercial Bank’s Balance Sheet is typically what?
Customer deposits
The Federal Reserve’s definition of “Operational Risk” could encompass all of the following issues EXCEPT for:
- The risk that the value of the dollar may decline against that of foreign currencies
- The risk that internal procedures or controls could result in the bank accepting deposits from criminal sources
- The risk of a cyberattack on the bank’s confidential customer records
- The risk that through a clerical error a wire transfer may be made to the wrong account
The risk that the value of the dollar may decline against that of foreign currencies.
For all of the following bank financial ratios, an INCREASE is an improvement, expect for which ratio?
- NIM
- Efficiency Ratio
- ROA
- Net Margin
- ROE
Efficiency Ratio
Which of the following is the correct formula?
- ROE x EM = ROA
- ROA x ROE = EM
- EM/ROA = ROE
- ROA x EM = ROE
- ROA/EM = ROE
ROA x EM = ROE
What is the Efficiency Ratio of a bank with the following financial data? Total Interest Income $500 Million Total Interest Expense $150 Million Non Interest Income $50 Million Non Interest Expense $250 Million Average Assets $3 Million
62.5%
All of the following are Non Cash Expenses for a bank, except for which one?
- Write-off of uncollectable loans
- Loan Loss Provision
- Payment of Dividends
- Increase to ALLL
Payment to Dividends
What is the UBPR?
Uniform Bank Performance Report
“Sovereign Risk” could refer to all of the following risks EXCEPT for…
- The risk of foreign gov’t bonds declining in value due to economic crisis in that county
- The risk of the assets of a bank branch in another county being frozen by a terrorist takeover
- The risk of a foreign gov’t defaulting on its bonds that the bank has invested in
- The risk of the bank’s CEO giving oversized bonuses to the executives who are friends and family
The risk of the bank’s CEO giving oversized bonuses to the executives who are friends and family
When we use the phrase “dual banking system”, the two types of banks being referred to are:
State banks and national banks
When regulators examine a bank’s Liquidity Risk, they are evaluating which one of the following?
- Ability of the bank to estimate its loan loss reserves accurately
- Ability of the bank to change interest rates quickly if inflation changes
- The ability of the bank to access cash quickly if needed
- Ability of the bank to expand overseas into foreign markets
- Ability of the bank to secure its information systems in the event of a cyberattack
The ability of the bank to access cash quickly if needed
The Federal Reserve makes “open market purchases” when
It is trying to stimulate the economy
All of the following are regulatory agencies overseeing aspects of the Banking industry except for…
- Securities & Exchange Commission
- Federal Reserve
- Standard and Poors
- Office of the Comptroller of the Currenty
- Federal Deposit Insurance Company
Standard and Poors
The Federal Reserve raises the Discount Rate when…
It wants to slow down the economy
When regulators evaluate a bank’s Sensitivity to Market Risk (the “S” in CAMELS), they are looking at which of the following risks:
- The risk that the bank’s competitors may introduce more advanced new financial products
- The risk that the bank has given insiders below-market rates on loans
- The risk that bank’s stock price may decline
- The risk of the bank’s cost of funds increasing if interest rates in the economy rise
- The risk the bank’s profitability will be hurt if its branches are located in declining markets
The risk of the bank’s cost of funds increasing if interest rates in the economy rise
The Federal Reserve can raise or lower the Reserve Rate. A consideration which puts a limit on how much it can be reduced to is…
- The expected inflation rate in coming years
- The current Prime Rate
- The risk of banks not having adequate reserves in economic downturns
- How much gold the federal gov’t has in Fort Knox
- Concerns that banks may run out of vault cash
The risks of banks not having adequate reserves in economic downturns
The C in CAMELS stands for…
Capital Adequacy
The A in CAMELS stands for Asset Quality. The risk that this is intended to evaluate is…
The risk that loans the bank has made will default on interest and / or principal payments.
Calculate a bank’s interest rate spread based on the following financial data:
Cash in Vault: $100 Million Accounts Payable
Loans @ 5% $1 Billion Deposits @ 1%
PP&E $100 Million Borrowings @ 7%
Intangibles/
Goodwill $300 Million Equity
Total Assets $1.5 Billion Total Liab. & Eqty
3.4%
Which one of the following would IMPROVE a Bank’s Interest Rate Spread?
- Negotiating reduced rent for the branch offices
- Raising the rate it charges on loans
- Raising the rate it pays to depositors
- Reducing the number of employees at headquarters
- Charging higher fees on checking accounts
Raising the rate it charges on loans
What is the Expense Ratio of a bank with the following financial data? Total Interest Income $50 Million Total Interest Expense $20 Million Non-Interest Income $5 Million Non-Interest Expense $25 Million Average Assets $400 Million
6.25%
The FDIC insures bank accounts up to the amount of…
$250k
The largest category of Assets on a Commercial Bank’s Balance Sheet is typically which one of the following?
- Loans from the Federal Reserve
- Property, Plant & Equipment
- Vault Cash
- Customer Deposits
- Loans to Customers
Loans to customers
