Questions with difficulty Flashcards
How do you calculate burden in $$
=non interest expense - non interest revenue
what is the efficiency ratio
= (non interest operating cost)/(NII-non interest income-PLL)
how can an insurance company report a loss?
1) increase loss rate
2) increase expenses
3) decrease investment returns
what are acturial liabilities
% of premiums put a side to pay out benefit
what is combined ratio
= (loss ratio + loss adj expense ratio)/ premiums earned
what is an annuity
sum of funds given to insurance they hold on to it and pay you interest
how to calculate pure loss and explain
= premium - benefit
not necessarily a loss, measures how much you pay out compared to collecting
define expense ratio
cost of operating/running business
what are interactions of risk
-interdependent : risk is brought upon by another
-discrete: risk doesnt bring upon another
what is technology risk
risk that investment in tech doesnt bring upon anticipated savings
what is interest rate risk
risk of mismatched securities
what are weaknesses of repricing model?
1) over aggregation
2) ignores affects of run off
when does profitability of bank get affected
1) as soon as interest rates go up or down on repriceable
2) mismatched securities
what is the repricing model formula
rate sensitive assets - rate sensitive liabilities
what does banks look for in mismatched securities
negative gap in the short term
positive gap in the long term
what is the loanable fund theory
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
what happens to duration when you have a refinance risk and rates go up
refinance: loans> assets
NII goes up, duration goes down
(making more income, faster to break even)
what does altman score of z=1.81 tell us
when score is greater than 1.81, it means less probability of default
what does these symbols stand for
k = (of +(BR+m)/(1-(b(1-rr))
K= total return
OF= originating fee
BR= base lending rate
m= premium
b= compensating balance
rr= required reserve
what are the 5 factors that affect return
1) fees
2) premium
3) interest rates
4) collateral
5) other non cash terms
what is large exposure limit analysis
tells bank how much risk they are exposed to a single borrower
what is concentration limit formula
max loss as a % of capital x (1/loss rate)
what are the factors that tell us if loan is risky
1) SD
2) Fees
3) prob of default
4) loss of probability
5) collateral
how to calculate SD of loan
= sqrt((prob of default* no prob of default)) (loss of capital)
how to calculate return of a loan
= (spread+fees) - (prob of default * loss of capital)
what is stored liqudity management
liquid assets that you already own to meet cash needs
what are the liquidity risk exposures from (high, mod , low)
high: banks
mod: life insurance
low: property + casaulty
What is JPM risk metrics?
measures how much one would lose in a single day due to changes in market
what are OBS activities
-loan commitment
-standby letter of credit
what is gvmt concerned with, with off balance sheet
-required reserves
-deposit insurance premiums
-capital adequacy requirement
what is settlement risk
intraday credit risk, risk that recipient wont receives funds through CHIPS
how does one manage liability
-deposit: cheap but liquidity risk
-gic: costly but no liquidity risk
what is the funding risk vs cost tradeoffs
not enough deposits may mean that you cannot give loans
what causes depository fund insolvency?
moral hazard: taking on unnecessary risk bc you know deposits are covered
what are the main causes of FI insolvency
- rise in interest rates
- collapse of oil, real estate, other commodities
- increase competition
what indicates quality of capital?
use of retained earnings or common equity
