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Banking Chapter 4 > Chapter 4 > Flashcards

Chapter 4 Flashcards

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1
Q

Refers to simultaneous management of both bank assets and liabilities

A

Asset/liability management (ALM)

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2
Q

Purpose of ALM

A
  • maximizing profits
  • mitigating interest rate risk (IRR)
  • providing liquidity
  • assuring its capital adequacy
  • enhancing the market value of the bank
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3
Q

Integral part of bank’s overall planning and risk management processes.

A

Asset/liability management (ALM)

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4
Q

A key part of ALM. It is the difference between interest and dividends earned on interest-bearing assetsand interest paid to depositors and creditors, expressed as a percentage of average earning assets.

A

Net interest margin (NIM)

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5
Q

Refers to unexpected chabges in interest rates and prices.

A

Unfavorably

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6
Q

Present significant risk management challenges to institutions of all sizes. (2)

A
  • current financial market
  • economic conditions
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7
Q

Associated with buying long-term debt securities because the price of the bonds declined.

A

Price Risk

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8
Q

Because of the difficulty of accuratelt forcasting interest rates, many investors prefer to invest to minimize their risk

A

Short-term securities

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9
Q

Short-term debt securities example

A

Commercial paper

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10
Q

Short-term debt securities is also called as

A

Money market instruments

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11
Q

Long-term securities example

A

Stocks and bonds

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12
Q

Long-term securities also called as

A

Capital market instruments

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13
Q

Refers to the risk of losing income when movements in blank borrowing and lending rates are not perfectly synchronized.

A

Income Risk

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14
Q

Banking jargon of income risk

A

Dollar gap problem

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15
Q

Refers to the difference between the dollar amounts of rate-sensitive assets and rate-sensitive liabilities.

A

Dollar gap

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16
Q

Assets and liablities may be classified as

A
  • rate sensitive
  • non-rate sensitive
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17
Q

Refers to the frequency with shich the interest rate on an instrument is adjusted.

A

Interest rate repricing

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18
Q

Assets and liabilitues with one year or less maturity are considered

A

Rate sensitive

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19
Q

Deposits issued by a financial institution and purchasee by an investor through a third-part intermediary called as deposit broker.

A

Brokered deposits

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20
Q

Core deposits are defined in the Uniform Bank Performance Report (UBPR) user’s guide as

A
  • the sum demand of deposits
  • all negotiable orders of withdrawal (NOW)
  • automatic transfer services (ATS) accounts
  • money market deposits accounts (MMDA) savings
  • other savings deposits
  • time deposits under $100,000
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21
Q

Other sources of wholesale funding (3)

A
  • federal funds
  • Federal Home Loan Bank advances
  • Federal Reserve’s primary credit program
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22
Q

UBPR’s are created by bank regulators for (3)

A
  • supervisory
  • examination
  • bank management purposes
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23
Q

Refers to the ability to liquidate an aaset quickly wigh little or no loss in market value and the ability to raise funds through the sale of an asset or by borrowing.

24
Q

Risk of earnings and capital related to a financi intermediary’s ability to meet its financial obligations to depositors or borrowers.

Study These Flashcards
A

Liquidity Risk

25
One of the largest banks to require government assistance.
Wachovia Bank
26
Became the second largest bank failure after Continenta lllinois Bank
IndyMac Bank
27
Confuse the issue of rate sensitivity. (2)
- fixed-rate loans - variable-rate loans
28
Are rate-sensitive as sets because they are repriced every day.
Fixed-rate loans
29
Resets the interest rates once every three years is not a rate-sensitive asset.
Variable-rate loans
30
Repurchase agreements known as
repos
31
Asre short-term contracts to sell and re-purchase financial assets, such as Treasury securities, at a future date.
Repurchase agreements or repos
32
The seller repurchases the securities at the price at which they were sold and pays interest for the use of the funds
Repo rate
33
From the point of view of the institution buying the security
Reverse repo
34
The interest rate at which central banks, such as the Federal Reverse, repurchases government securities from banks.
Repo rate
35
Minimum liquidity standards called the
Liquidity coverage ratio (LCR)
36
Requires banks to have "high quality liquid assets" that should be equal to or greater than theie net cash outflows over 30days.
Liquidy Coverage Ratio
37
The most liquid assets
Cash Centrak bank reserves Marketable securities Government or central bank debt
38
Liquid assets
High-quality corporate debt Covered bonds Governmemt public sector assets
39
Requires bank's "available stable funding" should at least equal its "required stable funding"
Net Stable Funding Ratio (NSFR)
40
The difference between rate-sensitive assets (RSA) and rate-sensitive liabilities (RSL) expressed in dollars
Dollar gap
41
Dollar gap is widely used as
A measure of interest rate sensitivity.
42
Interest income less interest expense.
Net interest income (NII)
43
Affects net interest income and the valur of banks.
Interest rate risk
44
Focuses on a bank's short-term net interest income
Dollar gap
45
Takes a longer view and focuses on the economic value of equity.
Duration gap
46
The weighted average time to maturity to recieve all cash flows from a financial instrument.
Duration
47
Is measured in terms of years and months.
Time
48
Widely used measure of interest rate sensitivity
Duration
49
Compares the effects of changes in interest rates in the duration of a bank's assests and liabilities to determine the economic value of stockholder's equity.
Duration gap
50
The theoretical value of the bank's equity, taking into account the duration of both the assets and liabilities.
Economic value
51
Occurs when the duration of a bank's assets and liabilities is equal to zero.
Immunization
52
Useful tool for ALM (Asset/liability management)
Duration
53
Duration is a useful tool for ALM but it has limitations because of these issues (4)
Embedded Options Nonparallel Shifts in the Yield Curve Duration Drift Problem Loans
54
Are ckmputer-generated scenarios about the future that permit banks to analyze interest risk and business strategies in a static or dynamic framework.
Simulations
55
Have the advantage that they can be used to simulate the effects of changes in interest rates
Dynamic simulation techniques
56
A critical tool used by banks as part of their internal risk management and capital planning
Stress testing

Banking Chapter 4 (2 decks)

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