Tutorial 3 - answers

What are the possible arguments for setting up a firewall between investment banks and commercial banks? Do you think a firewall between investment banks and commercial banks can prevent a financial crisis like the subprime loan crisis? Elaborate your answers

Moral hazard caused by Deposit Insurance Schemes refers to: Question 2Answer a. The placing of funds from immoral activities into the banking system. b. The loss exposure faced by an insurer when the provision of insurance encourages the insured to take less risks. c. The loss exposure faced by an insurer when the provision of insurance encourages the insured to take more risks. d. The excess profits earned by banks from insured deposits.

Financial Risk Management QUESTION 1 : Protecting Interest Income/Revenue• From the banker’s point of view, when the banker quotes a floating interest, in doing so, the banker is passing on the interest rate risk to the borrower.• What if the banker has to quote a fixed interest rate but his cost of funds are floating?In this case, the customer/borrower faces no risk but the banker does.• Example: As a Credit Officer bank you have agreed to provide a customer with a fixedrate, 3-month, RM 20 million loan 90 days from today. You had priced the loan at 12%annual interest rate.• The following quotes are available in the market.3-month KLIBOR = 9 %3-month KLIBOR futures = 90.0 (matures in 90 days)How would you protect yourself from a rise interest rates?

Which one is not an incentive for a bank to securitize its mortgage loans? Reduce insurance premium paid to FDIC Meet the regulations on equity capital adequacy Increase the duration of the bank's asset portfolio Reduce the bank's illiquidity exposure hich one is not an incentive for a bank to Securitize its mortgage loans? A Reduce insurance premium paid to FDIC B Meet the regulations on equity capital adequacy Increase the duration of the bank's asset portfolio Reduce the bank's illiquidity exposure

QUESTION 4 The following is true of deposit insurance, except     Depositor no longer has incentives to monitor the activities of the bank           Moral hazard dissuades the bank manager from taking risky projects          In theory, regulators have replaced depositors in the monitoring of banks         Moral hazard encourages the bank manager to take on risky projects

a. What caused the banking crisis? Explainb. Why was the Insurance Guarantee Agency established during/after the banking crisis occurred? What is the reason?

The following is true of deposit insurance, except   a Depositor no longer has incentives to monitor the activities of the bank         b Moral hazard dissuades the bank manager from taking risky projects        c In theory, regulators have replaced depositors in the monitoring of banks       d Moral hazard encourages the bank manager to take on risky projects

Which innovation has caused the most trouble for financial institutions that issue residential mortgage loans?   A. Securitization   B. Junk bonds   C. Commercial paper   D. None of the above

Deposit Insurance a. depositor indifference generates a moral hazard problem that encourages banks to engage in risky activities b. exists only in the USA, not in the oer countries. c. It is a privately owned insurance company. d. successfully helped US to overcome the problems in 1980's S&L crisis and 2008 Financial Crisis.

What risks might commercial bank operations face by funding long-term loans such as mortgages to borrowers (often at fixed interest rates) with short-term deposits from savers? What steps could the financial institution take to reduce these risks?

Discuss the potential market failure in the diamond model of banking regulations

hich one is not an incentive for a bank to Securitize its mortgage loans? A) Reduce insurance premium paid to FDIC B Meet the regulations on equity capital adequacy Increase the duration of the bank's asset portfolio D Reduce the bank's illiquidity exposure

Why were credit unions less affected by the sharp increase in interest rates in the late 1970s and early 1980s than the saving institution industry? What are the three types of finance companies and how do they differ from commercial banks?

Which of the following decreases the likelihood of bank failures by keeping banks from making risky loans? FDIC insurance The discount window Reserve requirements Capital requirements

What are the advantages and disadvantages of direct lending for the bank? How are banks reducing the effect of the disadvantages?

Which of the following has caused banks difficulty in estimating liquidity needs?A. competition for loans from other financial institutionsB. deregulation of interest rate ceilings on depositsC. competition for loans from nonfinancial institutionsD. a, b, and c

QUESTION 1 : Protecting Interest Income/Revenue• From the banker’s point of view, when the banker quotes a floating interest, in doing so, the banker is passing on the interest rate risk to the borrower.• What if the banker has to quote a fixed interest rate but his cost of funds are floating?In this case, the customer/borrower faces no risk but the banker does.• Example: As a Credit Officer bank you have agreed to provide a customer with a fixedrate, 3-month, RM 20 million loan 90 days from today. You had priced the loan at 12%annual interest rate.• The following quotes are available in the market.3-month KLIBOR = 9 %3-month KLIBOR futures = 90.0 (matures in 90 days)How would you protect yourself from a rise interest rates?

What is evergreening in banking and why it may arise as an equilibrium choice of banks. Carefully explain all relevant concepts and mechanisms. Additionally discuss how much of a problem this may present in the aftermath of a banking crisis.

The policy that requires regulator intervention when ____, and it was bank capital falls too low is introduced by the prompt corrective action; Financial Services Modernization Act of 1999 FDIC insurance; FDIC Improvement Act of 1991 prompt corrective action; FDIC Improvement Act of 1991 FDIC insurance; Financial Services Modernization Act of 1999

Problem 1 Does the lender of last resort function of central banks introduce moral hazard into the financial system? Explain. Briefly explain why central bank independence can be a solution to the time- inconsistency problem. What is shadow banking and what was its role in the financial crisis of 2007-2009?

Role of Central Banks and Moral Hazards How does central bank intervention outweigh the risks of moral hazard?

Role of Central Banks and Moral Hazards The consequences of moral hazard. What are the adverse results of moral hazard for the financial system?

What bank regulations are designed to reduce moral hazard problems created by deposit insurance? Willthey eliminate the moral hazard problem?

1. How has deregulation of the financial services industry affected the makeup offinancial intermediaries? How do you think intermediaries’ characteristics willchange in the future? 2. How do banking organizations in the United States differ from banking organizationsin other countries? Why are they different? 3. How is money created in a banking system that has fractional reserve requirements(i.e., a fractional reserve system)? 4. Describe the open market operations undertaken by the Federal Reserve. Whattype of trades would the Fed make if it wanted to increase interest rates? 5. How would funds—that is, the money supply—in the United States be affectedif the Federal Reserve increases reserve requirements? Give an example.