Questions with difficulty

Question 1

How do you calculate burden in $$

Answer 1

=non interest expense - non interest revenue

Question 2

what is the efficiency ratio

Answer 2

= (non interest operating cost)/(NII-non interest income-PLL)

Question 3

how can an insurance company report a loss?

Answer 3

1) increase loss rate
2) increase expenses
3) decrease investment returns

Question 4

what are acturial liabilities

Answer 4

% of premiums put a side to pay out benefit

Question 5

what is combined ratio

Answer 5

= (loss ratio + loss adj expense ratio)/ premiums earned

Question 6

what is an annuity

Answer 6

sum of funds given to insurance they hold on to it and pay you interest

Question 7

how to calculate pure loss and explain

Answer 7

= premium - benefit
not necessarily a loss, measures how much you pay out compared to collecting

Question 8

define expense ratio

Answer 8

cost of operating/running business

Question 9

what are interactions of risk

Answer 9

-interdependent : risk is brought upon by another
-discrete: risk doesnt bring upon another

Question 10

what is technology risk

Answer 10

risk that investment in tech doesnt bring upon anticipated savings

Question 11

what is interest rate risk

Answer 11

risk of mismatched securities

Question 12

what are weaknesses of repricing model?

Answer 12

1) over aggregation
2) ignores affects of run off

Question 13

when does profitability of bank get affected

Answer 13

1) as soon as interest rates go up or down on repriceable
2) mismatched securities

Question 14

what is the repricing model formula

Answer 14

rate sensitive assets - rate sensitive liabilities

Question 15

what does banks look for in mismatched securities

Answer 15

negative gap in the short term
positive gap in the long term

Question 16

what is the loanable fund theory

Answer 16

interest rates depend on demand and supply for money
- Supply for money is low = interest rates are low
- Demand for money is high = interest rates are low

Question 17

what happens to duration when you have a refinance risk and rates go up

Answer 17

refinance: loans> assets
NII goes up, duration goes down
(making more income, faster to break even)

Question 18

what does altman score of z=1.81 tell us

Answer 18

when score is greater than 1.81, it means less probability of default

Question 19

what does these symbols stand for
k = (of +(BR+m)/(1-(b(1-rr))

Answer 19

K= total return
OF= originating fee
BR= base lending rate
m= premium
b= compensating balance
rr= required reserve

Question 20

what are the 5 factors that affect return

Answer 20

1) fees
2) premium
3) interest rates
4) collateral
5) other non cash terms

Question 21

what is large exposure limit analysis

Answer 21

tells bank how much risk they are exposed to a single borrower

Question 22

what is concentration limit formula

Answer 22

max loss as a % of capital x (1/loss rate)

Question 23

what are the factors that tell us if loan is risky

Answer 23

1) SD
2) Fees
3) prob of default
4) loss of probability
5) collateral

Question 24

how to calculate SD of loan

Answer 24

= sqrt((prob of default* no prob of default)) (loss of capital)

Question 25

how to calculate return of a loan

Answer 25

= (spread+fees) - (prob of default * loss of capital)

Question 26

what is stored liqudity management

Answer 26

liquid assets that you already own to meet cash needs

Question 27

what are the liquidity risk exposures from (high, mod , low)

Answer 27

high: banks
mod: life insurance
low: property + casaulty

Question 28

What is JPM risk metrics?

Answer 28

measures how much one would lose in a single day due to changes in market

Question 29

what are OBS activities

Answer 29

-loan commitment
-standby letter of credit

Question 30

what is gvmt concerned with, with off balance sheet

Answer 30

-required reserves
-deposit insurance premiums
-capital adequacy requirement

Question 31

what is settlement risk

Answer 31

intraday credit risk, risk that recipient wont receives funds through CHIPS

Question 32

how does one manage liability

Answer 32

-deposit: cheap but liquidity risk
-gic: costly but no liquidity risk

Question 33

what is the funding risk vs cost tradeoffs

Answer 33

not enough deposits may mean that you cannot give loans

Question 34

what causes depository fund insolvency?

Answer 34

moral hazard: taking on unnecessary risk bc you know deposits are covered

Question 35

what are the main causes of FI insolvency

Answer 35

• rise in interest rates
• collapse of oil, real estate, other commodities
• increase competition

Question 36

what indicates quality of capital?

Answer 36

use of retained earnings or common equity