Finance Part 4

collateral an asset pledged for a secured loan; at the end of the loan term, the asset is "released" from the obligation to the bank haircut banking term for the discount or reduction in value of an asset that is pledged or collateralized for a federal reserve loan program; the reserve discounts the asset values as a means of extra prudence and monetary stability open market operation sale and purchase of securities in the open market by a central bank of the federal reserve primary credit federal reserve term that refers to a lending program for banks that are deemed to be the most creditworthy primary dealers the 12 federal reserve banks of the federal reserve system seasonal credit federal reserve term that refers to a lending program for banks that have seasonal needs, such as banks in states with large agricultural production, such as Iowa or California secondary credit federal reserve term that refers to a lending program for banks that are deemed to be eligible to get federal loans, but for whom their credit is deemed less prime securities lending clearing facility federal bank branch in New York with overnight lending program that keeps all securities issues clearing smoothly, so as not to disrupt monetary policy term auction facility federal reserve banking facility set up to process the temporary loan programs through the Federal Reserve to help banks make it through the fiscal crisis of the mortgage collapse of 2007-2009; this program was closed in 2010

1. federal agency assisting with bank regulation 4 Federal Reserve system's 12 member banks 2. federal bank branch with overnight lending program 3 term auction facility that closed in 2010 3. federal reserve banking facility 1 FDIC 4. primary dealers 2 securities lending facility

credit derivatives a product which consists of bundled debt, like mortgages or other loans, which are then made into a financial product which can be publicly traded; the idea is that a well-managed debt portfolio can bring in a decent return, and by bundling the debt there is risk diversification credit swapping an over-the-counter securities exchange between financial institutions or dealers, using debt instruments; credit is a debt instrument in securities terms U.S. Comptroller for the Treasury appointed office for managing U.S. monetary policy; chief financial officer for the nation

1. liquidity risk 1 Does the bank have enough cash to pay all of its obligation in a timely way? 2. market risk 2 What is the bank's exposure to interest rate change or to fluctuations in the foreign exchange market? 3. operational risk 4 Will the bank lose some customers because of a lawsuit or bad publicity about something they did? 4. reputation risk 3 Is the bank performing as expected, or is a division or a product underperforming?

credit risk option derivative product that guarantees the bank can sell the portfolio even if the loans go into default credit-linked option pays a stipend if the default rate rises above a certain limit junk bonds debt instruments that are below investment grade and thus riskier investments; typically rated as BB or lower by Standard & Poor's standby letters of credit type of warranty or guarantee that the unsecured corporate debt is credit worthy, kind of like a performance guarantee for an unsecured debt

1. step one 4 Assets are sold as a security on the stock exchange. 2. step two 3 The SEC approves the securitization. 3. step three 1 The bank pools a group of income-earning assets. 4. step four 2 Some assets are removed from the bank's balance sheet.

The number of companies receiving money from the U.S. Treasury during the TARP bail out was approximately _____.

1000

conservatorship situation where a judge appoints someone to manage the affairs of a person or entity derivative a security whose price depends on (is derived from) the value of another asset insolvency the condition of not being able to pay debts owed; a situation where a business'total liabilities exceed the market value of its assets transparency clarity, openness

1864: The National Currency and Banks Act established a national currency, the U.S. dollar, and started the process of standardizing banking rules and practices. 1913: The Federal Reserve Act established the authority to create the Federal Reserve Bank, which would have control over all monetary policy, supervise and audit all banks, and create standardized processes for bank activities. 1932: The Glass-Steagall Act separated banking from other financial services and restricted banks from engaging in various financial activities, such as securities or insurance. 1933: The Banking Act established the Federal Deposit Insurance Corporation to protect bank depositors from loss in the event their bank closed. 1991: The Federal Deposit Improvement Act amended the amount of protection for bank depositors by improving bank examination procedures. 1999: The Gramm-Leach-Bliley Act essentially overturned the Glass-Steagall Act, allowing banks to engage in and compete for all financial services from stocks to insurance. 2002: The Sarbanes Oxley Standards Act mandates transparency in financial reporting for all companies including financial services companies. It mandates disclosure of financial holdings for corporate officers as a means to alert consumers to potential conflicts of interest and attaches liability to accountants and corporate officers for the financial statements they produce. 2010: The FINREG Law took the massive student loan program away from private banks and returned it to the federal government, which was already guaranteeing all of the loans. 2010: The Dodd-Frank Wall Street Reform and Consumer Protection Act attempted to reapply some of the provisions of the Glass-Steagall Act. Dodd-Frank is a landmark bill to protect consumers against some of the securities and banking behaviors that contributed to the 2007 financial crisis.

leverage ratio

Bank A has a certain amount of debt, measured in this way

receivables turnover

Bank A is paid relatively quickly by its borrowing this quarter

liquidity requirements

Bank A must keep a certain amount of money in reserve—unused—based on what it lent out to their customers

net stable funding formula

BankA is assessing their liquidity as it relates to their long-term funding obligations

The FDIC was established by the _____.

Banking Act

The bank auditing program overseen by the Federal Reserve is known as _____.

Camels

Legislation that is most closely tied to the housing collapse of 2007 is/are the _____. (Select all that apply.)

Dodd-Frank Wall Street Reform Act Gramm-Leach-Bliley Act

Two key international organizations/positions with an impact on banking regulations are _____. (Select all that apply.)

International Monetary Fund Basel III banking norms

A Wall Street firm that failed in 2008 and is no longer in business in any form is _____.

Lehman Brothers

Bank A is assessing whether they have enough cash to pay all of their obligations on time. This bank is assessing their _____.

Liquidity risk

What are some advantages to putting your money in a saving account?

Money will be safe, money will earn interest

The legislation that first attempted to standardize banking across the nation and establish a federal banking authority was the _____.

NCBA

1. FINREG law 2. Gramm-Leach-Bliley Act 3. Dodd-Frank Wall Street Reform and Consumer Protection Act 4. Sarbanes-Oxley Standards Act

NOT 4 overturned the Glass-Steagall Act 3 makes all financial services companies operate transparently 1 reinstated parts of the Glass-Steagall Act 2 took the student loan program from banks and put it with the federal government

1. Brokerage firm 2. Credit union 3. Investment bank 4. Commercial bank

NOT 4 does not have shareholders and does not work with businesses, but provides banking services to member organizations 2 accepts deposits and makes loans for individuals and commercial businesses 3 works with individual investors, providing money management services (Charles Schwab is one such firm) 1 generates capital by creating initial public stock offerings

An essential monitoring tool used by the Federal Reserve is the _____.

NOT discount window

A bank's asset quality is mainly monitored by _____.

NOT financial analysts hired by the bank

The legislation that created a central currency in the United States is _____.

National Currency and Bank Act

Members of the G20 include _____. (Select all that apply.)

Russia, Mexico

Entities that are most often cited for their failure to police the marketplace—which ultimately led to the collapse of the housing market include _____. (Select all that apply.)

Standard & Poor's Securities and Exchange Commission Federal reserve

The Federal Reserve is responsible for setting our monetary policy. Name two other important functions of the Fed.

The Fed helps maintain high U.S. employment and stable prices for consumer as well as using interest rates to buy and sell U.S. Treasury bonds

Which of the following steps take(s) place when a bank fails to meet the liquidity ratio requirements? (Select all that apply.)

The Federal Reserve would post public notifications. If, after months, the bank still could not perform, it would be closed.

Explain why the banking industry has moved from some big cities (New York, Chicago) to smaller cities (Jacksonville, Pittsburgh).

They have started to move to these smaller cities because not only are these small cities starting to grow but they also are trying to expand their businesses to different parts of the country

Breton Woods Standards were found to be inadequate mainly because _____.

a bank had risky exposure to foreign currency that exceeded the value of the bank

A derivative is _____.

a debt instrument

A credit linked note is _____. (Select all that apply.)

a promissory note structured as a security repays principal plus interest if a credit event occurs

Joyce's loan on her $100,000 new home is for $95,000. Her loan is most likely _____.

a subprime loan

A bank wants to lend money to a new small business owner in a beach town, but does not believe the business will survive the off-season. They decide not to include this loan in their portfolio as they believe the owner to be _____.

an investment risk

Basel I, the first Basel Norm banking accord, dealt mainly with _____. (Select all that apply.)

assessing banks' assets accounting for risks in bank portfolios

NCBA

attempted to standardize banking across the US

The term asset-backed securities loan facility only provided funding for certain types of loans. These included small business administration loans, as well as _____. (Select all that apply.)

auto loans credit card loans student loans

Dale's company is holding a credit-linked note, which repays principal plus a specified rate of interest if a credit event occurs. A credit event could be described as _____. (Select all that apply.)

bankruptcy fall in credit rating

Ways banks raise money are _____. (Select all that apply.)

borrowing from the Federal Reserve securitizing loan portfolios and selling them in a stock exchange credit derivatives

The type of loan that tends to be most difficult to get from a bank is _____.

business loan

A standby letter of credit _____. (Select all that apply.)

can be cashed on demand if payment is not made as promised is often used in international trade transactions

The Dodd-Frank Bill was important because it _____. (Select all that apply.)

created an agency to monitor the financial services industry ended the practice of bailing out large banks ended loopholes for derivatives and some other unregulated securities

FDIC

created to offer security to bank depositors

Those sectors participating in the housing collapse through mortgage securities included _____. (Select all that apply.)

credit rating agencies hedge funds derivatives

It is June of 2008. The price of loans changes _____.

daily

A bank compares the lending program now and before the financial meltdown of 2007−2009 and finds that the price of loans changes _____.

daily rather than weeklydaily

Bank A is being measured to evaluate how successfully it is running its operations. Analysts will mainly look at _____. (Select all that apply.)

deposit turnover and growth receivables aging growth in loans and type of loans in the loan portfolio

GLBA

deregulated banks, allowing them to offer more financial products

A Monte Carlo simulation is most often used with _____.

derivatives

The main reason AIG failed was that they _____.

did not diversify their risk

The major difference between borrowing $1,000 from a bank and borrowing the same amount from a lending store, such as Money Tree, is _____.

difference in interest charges

To calculate a bank's short term liquidity, _____.

divide short term liabilities into total cash or near cash assets

BA

established the FDIC

National Currency and Banks Act

established the U.S. dollar

A bank is selling its loan portfolio. This is similar to securitizing loan assets.

false

A bank's run-off rate is the percentage of accounts receivable that are delinquent in a 30-day period.

false

A standby letter of credit can be traded on some markets.

false

Bank tellers are in high demand as the number of banks increases.

false

Banks, like Wells Fargo and Bank of America, are the only companies who can issue credit cards to its consumers.

false

Bundling loans that are about to become delinquent and selling them as investments is a common way to provide high profits for investors.

false

Credit derivatives were created because most loans have enough similarities that they can be bundled.

false

HUD's No Income Verified Assets Rule could have worked as written if it was lawfully executed.

false

Most banks involved with the housing collapse/bad mortgage loans did not realize the extent of the problem.

false

One bank sells its loan portfolios and another bank securitizes its loan assets. Both are essentially doing the same thing, although one takes longer than the other.

false

People who invest money through a brokerage firm such as Merrill Lynch are protected against loss by the FDIC.

false

Standard and Poor's did not realize substandard mortgages were bad, and did not downgrade the bonds.

false

The ABC Bank has assets of $65 million. That means the Dodd-Frank Act does not apply to them.

false

The Dodd-Frank Act applies to all U.S. banks.

false

The Federal Reserve program's primary credit provides funds at the prime rate to their best customers.

false

The TARP program began during the Great Depression and is still somewhat used today.

false

The U.S. government still owns part of the AIG insurance company.

false

The closer a bank's liquidity coverage ratio is to 50 percent, the more solvent the bank is said to be.

false

The housing market collapse of 2009 could have been largely avoided if Standard and Poor's ratings were not ignored.

false

The main goal of the Dodd-Frank Act was to allow banks to become international financial conglomerates.

false

Frank usually has less than $500 in his bank account. Banks typically do not care for these low-balance depositors.

fasle

The Breton Woods Standards were mainly designed to regulate _____.

foreign exchange

The risk management function of the Good Neighbor Bank will be constantly looking at _____. (Select all that apply.)

identifying risk measuring risk offsetting the negative consequences of risks

FDIA

improved bank examination procedures

Bank ABC is a successful small bank in a rural town in the United States. Two ways the bank most likely makes the most money is from _____. (Select all that apply.)

investing depositors' funds car and personal loans

Washington Mutual Bank failed when other banks didn't, mainly because they were _____.

involved in the subprime lenders for years longer than other banks

Lehman Brothers failed mainly because _____.

it was overexposed to subprime loans through derivatives

Banks have three main ways to raise capital. These main categories include _____. (Select all that apply.)

loan portfolios issued as debt instruments stock issues credit derivatives

Banks provide three basic functions in a financial system. These three functions are _____. (Select all that apply.)

manage currency protect depositors provide funds for capital investments

Bank A is pooling together groups of income-producing assets and issuing securities against them in the open market. It sounds as though they are most likely trying to _____. (Select all that apply.)

manage risk, create securitization

Unregulated financial service entities differ from those that are regulated because they do NOT _____. (Select all that apply.)

manage the country's currency protect depositors

The Black-Scholes model was developed in 1973 and is still used today to figure out a fair price for _____.

maybe options

Facts about the Basel Norms include _____. (Select all that apply.)

members are representatives of the world's leading industrialized nations the norms are nonbinding banking systems adopt the standards to create uniformity in the financial world

A bank is securitizing an asset. This would most typically be made up of _____. (Select all that apply.)

mortgages credit card debt

As banks seek to manage their risk, some of the assets they would seek to securitize are _____. (Select all that apply.)

mortgages credit card loans

The Federal Reserve System consists of a central headquarters in Washington, D. C. and _____.

not 35

Washington Mutual Bank was eventually closed by the _____.

not FDIC

The Term Auction Facility can best be described as _____.

not a loan product managed by the federal reserve

A bank has a LCR of 77 percent. As compared with other banks, that means this bank is _____.

not above

Three categories of loans under the Term Auction Facility provisions are _____. (Select all that apply.)

open market operations primary dealers securities lending clearing facility

Bank A is assessing whether any of its practices, products, or divisions are underperforming and losing money, or if they are performing as expected. It sounds as though this bank is assessing their _____.

operational risk

The Monte Carlo method is used mainly to _____.

perform risk analysis

A Wall Street firm with a strong asset statement is receiving funds from the Treasury. This payment is most likely _____.

primary credit

Analysts are looking at a bank's liquidity ratio. The key information they will be most interested in will most likely be _____.

proportion of high-quality liquid assets

A derivative owner can best hedge her bets on its performance by _____.

purchasing an option to sell the product for a fixed price

Sunshine Bank is a small bank that is being sued by a customer because the bank foreclosed on her home. She feels that more generous terms could have been worked out, especially since she has been out of work. It sounds as though the bank will have to worry now about _____. (Select all that apply.)

reputation risk legal risk

Time-wise, derivatives mainly deal with _____.

returns in the future

GSA

separated banking from other financial services

FRA

started the federal reserve bank

The Federal Deposit Insurance Corporation was a direct result of the _____.

stock market crash of 1929

The FINREG Law of 2010 served to _____. (Select all that apply.)

take the student loan program from banks move the student loan program to the federal government

The open market concept is a monetary tool that is used by _____.

the government

There are an assortment of banking and financial services in our contemporary times, and not all of them are regulated. In general, the less regulated a financial service business is, _____. (Select all that apply.)

the higher the loan interest rate, the more the business will appeal to those without a low credit rating

The No Income Verified Assets Rule did not work because _____. (Select all that apply.)

too many people were able to qualify the mortgages were not sustainable

A bank's liquidity ratio looks at _____. (Select all that apply.)

total liquid assets of the bank total obligations to account holders

Bank A has failed to meet its liquidity ratio requirements. The Federal Reserve will first try to work things out with them before closing the bank.

true

Banks are dependent on small depositors who have checking and savings accounts, because they use that money to invest.

true

Doing business with an international bank from a country that is a part of the International Monetary Fund is less of a risk than a bank from a country that is not part of the fund.

true

Europe was struck with the mortgage banking collapse at the same time the United States was affected: 2007 to 2009.

true

Even though a bank has sold a loan portfolio it will continue to receive a fee or percentage of the loans' interest payments.

true

The deposit insurance assured by the FDIC is underwritten by the federal government.

true

The federal government provides loans to banks to help them assure evenness of operations and availability of credit.

true

Unless there are extraordinary circumstances, banks are only able to get seasonal credit once a year.

true

When evaluating a bank, analysts are most interested in determining the bank's solvency.

true

Financial service entities that are not banks (the Money Store, pawn shops) are able to stay in business by _____. (Select all that apply.)

unregulated interest rates charging service fees

A bank has a LCR of 27 percent. As compared to other banks, this bank is _____.

well below the average