Test 2

Question 1

1) On a bank balance sheet what are the a. sources of funds, and b. uses of funds?

Answer 1

a. Liabilities, deposits, capital

b. Assets, loans, securities

Question 2

2) Dividing the capital of a bank by its assets produces the?

Answer 2

Leverage Ratio:

capital/assets

Question 3

3) An individual who is charged a higher life insurance premium due to chronic health conditions is said to be?

Answer 3

Rated

Question 4

4) Having an insufficient amount of assets in a premium plan to meet its future payment obligation to retirees causes the plan to be?

Answer 4

Underfunded

Question 5

5) Retirement benefits which are non forfeitable are said to be?

Answer 5

Vested

Question 6

6) Briefly discuss the use of market value accounting as opposed to book value accounting for financial institutions.

Answer 6

Market value = mark to mark value
Book value = original value
Marketable securable bonds are easy to be established at market value. But loans with collateral are not.

Question 7

7) Briefly discuss a reform of deposit insurance for financial instruments

Answer 7

• Risk based premiums at 27cents per $100
• Co-insurance or deductible insurance
• No insurance on brokered deposits

Question 8

8) Briefly discuss one bank product subject to financial innovation of securitization

Answer 8

• Mortgages

- Student loans under Sally May

Question 9

9) Discuss how money market mutual funds led to a decline of banking.

Answer 9

MMMF could offer interest while banks could not before the repeal of Reg Q.
People would put their money into MMF which offered checking. The Reg Q. was repealed and banks started to pay interest on checking accounts, which was costly, so
they started to make risky loans which did bad.

Question 10

10) Briefly discuss GAP Analysis

Answer 10

Cash Flow Matching of assets and liabilities, including variable rate assets for profitability. Time period buckets, 30 days, one month, 6 months, matching assets
to liabilities. Standardized analysis, match your assets and liabilities.
Duration = buying a long-term with a higher interest rate security which effectively
matures early, which increases your profitability, and you can match up your
assets/liabilities.

Question 11

11) Briefly discuss credit rationing.

Answer 11

a. Make a smaller loan
b. Don’t make a loan
c. Never accept a higher interest rate to make a loan

Question 12

12) Asset management of a bank attempts to “achieve the highest possible returns with the lowest possible risk”. Specifically, how does a bank accomplish this?

Answer 12

a. Make a high quality loan with a high interest rate

b. Buy a security that has a higher yield with little interest rate risk

Question 13

13) What are the five major categories of bank assets?

Answer 13

a. Loans
- Commercial
- Consumer
b. Securities
- U.S. Treasuries
c. Required Reserve
- Vault cash
d. Cash & Cash items in collection
- Check you have sent out to collect from other banks
e. Deposits at other banks
f. Building & Branches

Question 14

14) Selling portions of high interest rate loan to another bank at a slightly higher price is known as

Answer 14

Loan participation

Question 15

15) A speculative debt instrument of a corporation with a lower than investment grade rating is generally referred to as a

Answer 15

Junk bond

Question 16

16) The initial portion of a loss paid by the insured prior to coverage by a property and casualty insurance policy is called a

Answer 16

Deductible

Question 17

17) Temporary insurance with no cash value is called

Answer 17

Term insurance

Question 18

18) A life insurance retirement product is an

Answer 18

Annuity

Question 19

19) A Mutual Fund without sales charges is called

Answer 19

A no load fund

Question 20

20) Those who trade in stocks based upon non-public information are called

Answer 20

Insider trading

Question 21

life insurance policy which allows the insured to choose mutual funds for investment of cash value is a

Answer 21

Variable policy

Question 22

22) A life insurance policy which allows the insured to have premiums paid from the cash value is a

Answer 22

Universal policy

Question 23

23) List four federal regulatory authorities for financial institutions and the specific entities they regulate

Answer 23

Securities & Exchange Commission
-	Regulates corporations, brokers, and dealers
	Office of Comptroller & Currency
-	Regulates national banks
	Federal Deposit Insurance Corporation

Financial Industry Regulation Authority -	Regulates licensing, compliance, and arbitration

Question 24

25) List and briefly discuss two consumer protection acts involving financial institutions

Answer 24

a. Truth in Lending Act
- Disclosure act that requires banks to inform the consumer about all costs and terms associated with borrowing
b. Equal Credit Opportunity Act
- Protection of women and minorities for equal loaning opportunity

Question 25

26) List the two agencies which charter banks and the specific banks they charter

Answer 25

a. Office of Comptroller & Currency
- National banks
b. State Department Commissions
- State banks

Question 26

27) Briefly discuss restrictions on assets of banks

Answer 26

a. Banks cannot own common stocks, or directly purchase them

b. They cannot have a concentration as to the types of loans of individual borrowers

Question 27

28) Discuss, in order of severity, the actions which can be taken by a regulatory authority upon discovery of weakness of unsound conditions of a bank

Answer 27

FDIC performs once a year examinations of a banks CAMELS, Capital, Asset quality, Managements, Earnings, Liquidity, and Soundness.
Sanctions:
a. All exceptions are to be incurred, all problems must be fixed within certain timeline
b. Written agreement to comply with sanctions, usually a consent order
c. Cease & Desist Order
-reproceduralize (reorganize)
-change out management/board
-moratorium on any new business (no new business)
d. Close department
e. Close Bank

Question 28

29) Discuss two options the FDIC may implement in regards to a failed bank

Answer 28

a. Liquidation
- Liquidate assets, pay off what is owed to insured depositors, and then pay off the uninsured depositors
b. Purchase and Assumption
- Strong bank assumes the assets/liabilities of a failed bank with FDIC assurances/guarantees (covers)

Question 29

31) Briefly discuss three off balance sheet activities of banks

Answer 29

a. Loan Participations
- High interest rate, risky loans and they sell portions of them at a premium.
- They make their profit by selling them at premium
- Risk of put back/claw back
 You may have to buy the loan back which is not disclosed
b. Fee income Items
- Generating fees but also creating credit risk
- Credit lines for overdraft protection
- Mortgage origination/sales/servicing
 Banks collect principals
c. Standby letters of credit
- Commitment to make a loan, agreement to do it but even if you don’t still collect fee

Question 30

32) Discuss the five major categories of bank assets

Answer 30

a. Required Revenue
- Vault cash
b. Deposits at other banks
- Correspondent banks
c. Brick & Mortar
- Building and branches
d. Cash items in collection (due from banks)
- Checks deposited/clearing
e. Securities & US Treasuries (2nd biggest)
- tax exempt GO’s
f. LOANS (biggest asset)
- commercial
- consumer