Commercial Banking Chapter 6-9

$18 million. Answers: $18 million. $20 million. $17 million. $21 million.

An FI has $5 million in cash reserves with the Fed in excess of its reserve requirements, $5 million in unpledged T-Bills, and a credit line of $10 million to borrow in the repo market. It currently has borrowed $2 million from that credit line. The bank's net liquidity position is

False

Asset-side liquidity management involves storing liquid assets on the balance sheet while liability-side liquidity management involves holding significant levels of common and preferred stock.

False Answers: True False

Assets with more credit risk have lower weights when computing risk weighted assets.

it is the best at absorbing bank losses Answers: all these answers are correct in the aggregate, Tier 1 capital is liquid and holders of the capital can redeem their financial instrurments even if a bank fails and (insured) Tier 1 deposits cannot be repaid, the FDIC is there to protect depositors it is the best at absorbing bank losses

Bank capital is categorized into two tiers: Tier 1 and Tier 2. Tier 1 capital is considered the highest quality capital because

False Answers: True False

Beetween 2007 and 2020, the share of total loans held as real estate loans by banks and thrifts has increased.

False Answers: True False

In bond pricing language, a bond's "yield" is the same as its "coupon rate."

False

Insured deposits pose a significant liquidity risk for community banks because these funds are the most likely liabilities to be withdrawn if the bank faces a solvency crisis.

all these answers are correct Answers: all these answers are correct increases with a BHC's stock of highly liquid assets assesses the ability of a BHC to maintain sufficient liquidity fo fund short-term (30 days or less) liquidity needs. is a risk-weighting approach to liquidity scenario analysis.

Insured deposits pose a significant liquidity risk for community banks because these funds are the most likely liabilities to be withdrawn if the bank faces a solvency crisis.

True Answers: True False

Owners' with more "skin in the game" will manage their banks more prudently because their own funds are at risk of loss.

True Answers: True False

Prompt Corrective Action minimum capital ratios require bank supervisors to take specific actions that become increasingly stringent as a bank falls into progressively lower capital zones.

AnswersSelected Answer perpetual preferred stock 1. common stock and surplus 3-month FDIC insured certificate of deposit 2. perpetual preferred stock 5-year uninsured certificiate of deposit 3. 5-year uninsured certificiate of deposit common stock and surplus 4. 3-month FDIC insured certificate of deposit

Rank these financial instruments from best (1) to worst (4) in their ability to absorb bank losses to protect the deposit insurance fund.

cumulative perpetual preferred stock qualifying subordinated debt allowance for credit losses Answers: cumulative perpetual preferred stock common stock qualifying subordinated debt allowance for credit losses retained earnings

Select each of these financial instruments that are defined as Tier 2 capital.

$5 million Answers: $0 $5 million $10 million $25 million $50 million

A bank has extended a standby letter of credit for $50 million to a local government to back up a repyament on a local bond. The credit equivalency is 20%, and the risk weight is 50%. How much does this off balance sheet item add to the bank's risk-weighed assets?

453

A bank has the followng assets in millions: Vault cash $108 Fed funds sold $28 Deposits at the Fed $345 U.S. Treasury securities $549 How many legal reserves does the bank hold? (Enter the value as an integer with no formatting or symbols).

Selected Answer: 1.57

A bank holds $4 million in legal reserves during the reserve maintenace period.It also had the following average deposit balances during the reserve computation period:NOW Accounts $47 millionDemand Deposits $51 millionCDs $144 millionThe legal reserve requirements set by the Fed are the following: Deposit Balance ($mil) Reserve Requirement < $16.9 0% $16.9 - $127.5 3% > $127.5 10% Calculate thequantity ofexcessreserves(in $millions) that the bank held during the reserve maintenance period. Enter the value as a number rounded to two decimals using no dollar signs (e.g. $30 million is entered as 30.00).

all these answers are correct Answers: be used as collateral for other transactions provide a source of asset-side liquidity earn a steady interest income stream, which typically has far less credit risk than the loan portfolio all these answers are correct

A bank investment portfolio can

Past-due 30-89 days Answers: Performing Past-due 30-89 days Nonperforming Chargeoff

A bank loan is two months past due, but the bank expects that the borrower will resume making the required interest payments in the near future. How is this loan best classified?

True Answers: True False

A bank may use securities investments as "window dressing" by selling securities with big capital gains in years in which net income is otherwise low.

is the interest rate that equates the present value of the stream of cash flows with the bond's price Answers: can only be calculated for bonds that do not have periodic interest payments is the interest rate that equates the present value of the stream of cash flows with the bond's price all these answers are correct all else equal, rises as the bond price rises Thursday, March 31, 2022 10:58:13 AM CDT

A bond's yield to maturity

all these answers are correct Answers: absorb losses all these answers are correct provide funds for firms to get started protect the deposit insurance fund

A goal of regulatory capital is to

can obtain cash quickly at a reasonable cost when needed Answers: can obtain cash quickly at a reasonable cost when needed has high liquidity risk uses insured brokered deposits as its primary source of liquidity all these answers are correct

A liquid bank is one that

that is 90 days or more past due or in nonaccrual status Answers: that is 90 days or more past due or in nonaccrual status that the bank has determined will not be repaid in full all these answers are correct that is simultaneously categorized as 30 to 89 days past due

A nonperforming loan is a loan

True Answers: True False

A useful feature of investment securities is that they can be pledged or used as collateral. For example, a bank can sell them to another bank with the intent to repurchase them the next day.

Selected Answer: 6

Compute the Tier 1 Leverage ratio for this bank. Express your answer as a percentage and round it to one decimal. Do not include any symbols in the answer (i.e. 0.0642, which is 6.42% is entered as 6.4). Assets Liabilities Cash 6 Deposits US Treasury securities 6 Subordinated Debt 2 Fannie Mae MBS 10 Residential mortgages 25 Retained earnings 4 Small business loans 53 Common stock 2

Selected Answer: 15.2

Compute the Total risk-based capital ratio for this bank. Express your answer as a percentage and round it to one decimal. Do not include any symbols in the answer (i.e. 0.0642, which is 6.42% is entered as 6.4). Assets Liabilities Cash 2 Deposits X US Treasury securities 6 Subordinated Debt 2 Fannie Mae MBS 12 Residential mortgages 21 Retained earnings 4 Small business loans 53 Common stock 4

Cash $13 US Treasury securities $6 Fannie Mae MBS $18 Residential mortgages $17 Small business loans $43 Selected Answer:55.1

Compute the risk-weighted asset value of this bank. Round your answer to one decimal, and do not include any symbols in the answer (i.e. $75.10 is entered as 75.1).

FHCs and investment banks using submprime mortgage assets as collateral in REPO transactions could no longer obtain funding for CDO securitization because the value of the collateral was called into question Answers: there was a run on deposits held at both healthy and troubled large commercial banks all these answers are correct FHCs and investment banks using submprime mortgage assets as collateral in REPO transactions could no longer obtain funding for CDO securitization because the value of the collateral was called into question the Federal Reserve raised interest rates in 2008 to slow down the housing market growth

During the financial crisis of 2007-2009, a liquidity crisis occurred when

A. Loans to banks typically secured by real estate collateral. B. Deposits obtained from a third-party placement. C. Deposits above the FDIC insurance limit. D. Short-term loans from other banks.

Match each funding source with its description. QuestionSelected Match Brokered deposits B. Deposits obtained from a third-party placement. Jumbo CDs C. Deposits above the FDIC insurance limit. FHLB advances A. Loans to banks typically secured by real estate collateral. Federal funds purchased D. Short-term loans from other banks.

All Answer ChoicesA. A bond needs to be sold quickly, but few buyers can be found. B. A mortgage-backed security is paid off early as refinancing surges. C. A bond with a 5% yield is retired early by the issuer when rates fall. D. A bond's purchasing power erodes over time due to a decline in the purchasing power of the dollar

Match each type of risk with its description. QuestionSelected Match Call risk C. A bond with a 5% yield is retired early by the issuer when rates fall. Liquidity risk A. A bond needs to be sold quickly, but few buyers can be found. Inflation risk D. A bond's purchasing power erodes over time due to a decline in the purchasing power of the dollar Prepayment risk B. A mortgage-backed security is paid off early as refinancing surges.

False Answers: True False

Most investment securities at banks are held to maturity, which means they cannot be used as sources of stored liquidity.

all these answers are correct Answers: the yield of the tax-free bond will decrease the price of the tax-free bond will increase all these answers are correct the ultimate adjustments will lead to the bonds having tax-equivalent yields

Suppose the price of a tax-free municipal bond and the price of an identical taxable bond are equal. What will happen in the bond market for these bonds?

True Answers: True False

The Basel capital guidelines require banks to hold capital against off-balance sheet items. The reason for this is because these items carry credit risk that is hidden until the item moves on to the balance sheet.

increases when a bank replaces its mortgage-backed securities with U.S. Treasuries must equal or exceed 1 Answers: ensures that BHCs maintain sufficient liquidity over at least a 5-year horizon increases when a bank replaces insured deposits with uninsured deposits increases when a bank replaces its mortgage-backed securities with U.S. Treasuries must equal or exceed 1

The liquidity coverage ratio

to act as a shock absorber so that adverse shocks to a bank don't quickly lead to crises Answers: to ensure that banks can meet their daily cash needs to act as a shock absorber so that adverse shocks to a bank don't quickly lead to crises to make sure reserve requirements are met to prevent an economic recession

The main reason that bank supervision and regulation requires banks to hold more than the minimal liquidity needed for normal operations is

True Answers: True False

The nonperforming loan ratio is a better indicator of future chargeoffs at a bank than the net chargeoff ratio.

it requires active management rather than following a set of rules Answers: it requires active management rather than following a set of rules the portfolio consists of 50% equities and 50% bonds it is a balanced approach that moderates earnings and risk all these answers are correct

The rate expectations maturity strategy differs from the other three stategies presented because

screening Answers: credit risk minimization nonperforming risk screening monitoring

What is the term for a bank's process of assessing the ability of a borrower to repay a loan prior to making the loan?

Setting up a line of credit with another bank Answers: Holding a large amount of liquid securities Holding a large amount of federal funds sold Setting up a line of credit with another bank Holding cash well in excess of required reserves

Which of the following balance sheet strategies is not a part of asset-side (stored) liquidity management?

Corporate bonds Mortgage-backed securities Municipal bonds Treasury bills Answers: Cash Corporate bonds Mortgage-backed securities Municipal bonds Treasury bills

Which of these financial instruments are investment securities that banks typically invest in?

Selected Answers: accumulated other comprehensive income preferred stock and surplus common stock and surplus retained earnings Answers: accumulated other comprehensive income preferred stock and surplus allowance for credit losses common stock and surplus retained earnings

Which of these items is part of bank equity?