Tom Hall Test 3

What is a "community bank"?

Generally smaller banks, defined as having fewer than $1 billiion in assets

In banking, how would you characterize the balance sheet?

Bank Capital = Assets - Liabilities

What is a NOW account?

Negotiable order of withdrawal

In the context of banking, what is true about a CD?

Certificates of Deposit are non-transaction accounts, generally with maturities between 91 days to 10 years

How is a "jumbo" CD different?

The interest rate is negotiable, unlike a standard CD

What is true about bank holdings of cash (paper currency and coin)?

Cash generally accounts for less than 5% of a commercial bank's assets, and can be counted as reserves for prudential regulatory purposes

What is generally true about the asset category "marketable securities" at many banks?

1. They are highly liquid, hence their name

2. If in the form of government securities (e.g., T-bills, notes, and bonds), they have essentially zero default risk, which is why we sometimes refer to a "risk--free rate"

3. As bonds, they inherently contain interest rate risk

What serves as collateral, respectively, for real estate, auto, and student loans?

A house, a car, and there is no collateral for student loans

In banking, what is a CDS?

A credit default swap, allowing banks to "sell" some default risk to an external entity

Which of the following constitute "Cs" for credit risk?

1. Character

2. Capacity

3. Capital

4. Collateral

5. Conditions

Which of these constitute an acceptable approach to determining income sufficiency?

1. The fixed payments approach, which should not amount to more than 50% of the potential borrower's net income

2. The debt-to-income approach, such that the potential borrower's total monthly debt burden, excluding mortgage payments, relative to net monthly income, should be no greater than 20%

In commercial lending, what is a "compensating balance"?

For a business loan, any deposits held in the bank serve to balance the amount lent

What is the "spread" that forms the basis of profitability for typical commercial banks?

The lending rate minus the deposit rate

What is interest rate gap analysis?

Compare the amounts of interest-sensitive assets to interest-sensitive liabilities

How is a bond's duration calculated?

1. In step one, we find the weights for each payment

2. In step two, we plug the weights into a formula for each time period

3. Finally, we sum the weights, arriving at a measure of duration (units of time, not money)

For a bond with a duration of 4 years, how much does its price decline if interest rates increase from 2% to 5%?

Twelve percent (4 years times 3 interest rate points)

For a bond with a duration of three years, how much does its price change if interest rates move 5%?

15%

What is true about Basel III?

1. It requires banks to maintain a certain level of stable funding that depends on the liquidity of their assets and the extent of off-balance exposures over the next 12 months

2. It followed Basle I and Basle II 

3. Many US-based banks objected to some of its features

What is a bank's net interest income?

Gross interest income – gross interest expense

Compared to "normal" industrial firms that produce things like widgets, how are banks "special"?

They face challenges such as moral hazard and adverse selection

In the US, what do you need before you can create a new bank?

A legal document outlining how the bank will be organized and regulated, known as a charter

Why do we say the US has a "dual banking system"

Bank regulators exist at both the state AND the Federal level

In what way does "asymmetric information" affect both lending and depositing?

Borrowers have more information than lenders about repayment likelihood AND depositors have less information than bank management about the bank's operations and safety

What happened to the Glass-Steagall prohibition on mixing deposit-taking and securities issuance?

It was weakened over time by the introduction of bank holding companies and other regulatory work-arounds

What is true about interstate banking?

It was essentially prohibited by the McFadden Act, but allowed under 1994's Riegle–Neal Interstate Banking Act 

How does "readily marketable collateral" inform single-entity lending limits?

It allows banks to lend up to 25% of their loan portfolio to a single borrower

In banking, what are CAMELS?

It is an acronym composed of assessment categories used in banking regulation, such as capital adequacy and management 

What is TBTF?

Too big to fail, a reference to the systemic importance of a few, large banks