Financial Institutions Final

Interest Rate Risk Management

Risk that changes in market interest rates will negatively impact value of Assets and Liabilities

Bond Prices and Interest Rate Relationship

They are inversely related, as bond prices increase, interest rates decrease

When were interstate banking regulations changed and what did it allow

Changed in 1994 and allowed banks more freedom to acquire banks across state lines

Core Transactions

Transaction deposits, savings deposits, time deposits (retail), money market deposit accounts

Non-Core transactions

Federal Funds Purchased, Borrowing from the Federal Reserve Banks, Repurchase Agreements, Eurodollar Savings

Time Deposits

Deposits that cannot be withdrawn until a specified maturity

Certificate of Deposit

requires a specified minimum amount of funds to be deposited for a specified period of time

Negotiable Certificates of Deposit

have a specified maturity and minimum deposit, maturities are typically short-term, and the minimum deposit is $100,000

Highest Source of Funds for Bank as a Proportion of Total Liabilities

Savings Deposits

Savings Deposit %

30%

Lowest Source of Funds for Bank as a Proportion of Total Liabilities

Transaction Deposits

Transaction Deposits %

8%

Working Capital Loan

Designed to support ongoing business operations

Term Loans

finances the purchase of fixed assets

Informal line of credit

allows business to borrow up to a specified amount within a specified period of time

Revolving Credit Loan

obligates banks to offer up to some specified max amount of fund over a specified period of time

Prime Rate

Interest rate charged by banks on loans to their most creditworthy customer

What % do loans make up of Bank Assets

59%

What % do securities account for Bank Assets

27%

Highest % of Banks funds as a proportion of total assets

Securities

Securities %

31%

Lowest % of Banks funds as a proportion of total assets

Consumer Loans

Consumer Loans %

8%

Standby Letters of Credit

Backs a customers obligation to pay to a third party

When was the Glass Steagall Act created

1933

What did the Glass Steagall Act do

created the Federal Deposit Insurance Corporation (FDIC) to insure up to $100,000 customer and business deposits, separated Commercial Banks from other companies

When was the Garn-St Germain Act established

1982

What did the Garn-St Germain Act do

Permitted depository institutions to offer money market deposit accounts, permitted depository institutions to acquire failing institutions across geographic boundaries

What are the insurance limits on deposits

increased from $100,000 to $250,000 as a part of Emergency Economic Stabilization Act

What bonds can banks invest in

Banks can only invest in bonds that are investment-grade Baa rating or higher by Moody’s or a BBB rating or higher by S&P

Off-Balance sheet transactions

Proprietary trading, credit default swaps

When was the Financial Services Modernization Act established

1999

What did the Financial Services Modernization Act do

It repealed the Glass-Steagall Act, led to consolidation of financial institutions as Commercial Banks, Insurance Companies, and Investment Banking companies joined together

What does the Basel III Framework Recommend

It recommends that banks maintain Tier I capital of at least 6% of total risk-weighted assets

What does CAMELS Ratings stand for

Capital adequacy, Asset quality, Management, Earnings, Liquidity, Sensitivity

What was the cause of the 2008 crisis

Predatory lending in the form of subprime mortgages and no-doc mortgages, lack of regulatory oversight

What is a Commercial Banks Value

It is the present value of its expected future cash flows

What is the effect of a change in Risk-free interest rate

if risk-free rate decreases, other market rates decline, which may result in a stronger demand for the commercial bank’s loan, when risk-free rate increases, so does return required by investors

What does a Bank have direct control over

They control management abilities

What is COGS on a Bank’s IS

Interest expense

What is Depreciation on Banks IS

Provision

What is interest expense on a Banks IS

Non-interest expense

What is gross interest income

Interest income generated from all assets

What is net interest income

the difference between gross interest income and interest expenses and is often measured as a percentage of assets

What is ROA influenced by

It is influenced by all income statement items and the policies that affect those items

What is ROE influenced by

The same income statement items that affect ROA and by the bank;s degree of financial leverage