Module 2 Bank Performance Analysis Flashcards
What are the basic bank financial statements discussed in the module 2?
The basic bank financial statements discussed are the balance sheet and income statement.
What framework is provided for analyzing bank performance over time and relative to peer banks?
The framework includes analyzing key financial ratios to evaluate profitability and risks faced by banks.
What performance measures differentiate between small, independent banks and larger banks within holding companies?
Performance measures such as return on assets (ROA) and return on equity (ROE) may differ between small and large banks.
Name the types of bank risks distinguished in the chapter.
The types of bank risks include credit risk, liquidity risk, interest rate risk, capital risk, operational risk, and reputational risk.
What is the significance of regulatory CAMELS ratings for banks?
CAMELS ratings assess a bank’s capital adequacy, asset quality, management quality, earnings, liquidity, and sensitivity to market risk.
How are data analysis applications applied to sample banks’ financial information?
Data analysis is applied to evaluate financial performance, trends, and comparisons among sample banks.
Describe the performance characteristics of different-sized banks.
Different-sized banks may exhibit variations in profitability, asset composition, risk exposure, and operational efficiency.
How can banks manipulate financial information to ‘window-dress’ performance?
Banks may manipulate financial data by accelerating revenue recognition, deferring expenses, or selectively reporting gains or losses.
What is the fundamental trade-off discussed in bank management between profitability, liquidity, asset quality, market risk, and solvency?
Bank management must balance these factors because increasing profitability often involves assuming higher risks.
What are the five basic types of risk faced by banks in day-to-day operations?
The five types of risk are credit risk, liquidity risk, market risk, operational risk, and reputational risk.
What is the duPont system of financial ratio analysis, and how does it relate to a bank’s return on equity (ROE)?
The duPont system decomposes ROE into its components, helping analysts evaluate a bank’s performance and compare it with peers.
How do different-sized commercial banks exhibit different operating characteristics and performance measures?
Small banks may have higher ROAs due to higher asset yields and lower funding costs, while large banks may benefit from fee income.
How does financial leverage impact a bank’s return on equity (ROE)?
Financial leverage magnifies ROE when profits are high but exacerbates losses during downturns.
What is the formula for calculating ROE, ROA, and Equity Multiplier (EM)?
ROE = Net Income / Stockholders’ Equity, ROA = Net Income / Total Assets, EM = Total Assets / Stockholders’ Equity.
The risk that a bank cannot meet payment obligations in a timely and
cost-effective manner is known as:
a) credit risk
b) capital risk
c) market risk
d) operating risk
e) liquidity risk
Liquidity risk
