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Econ 330 > Chapter 9: Banking and Management of Financial Institutions > Flashcards

Chapter 9: Banking and Management of Financial Institutions Flashcards

1
Q

what is the equation of balance sheets?

A

total assets = total liabilities + capital

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2
Q

non-transaction deposits

A

the primary source of bank funds
- savings and CDs

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3
Q

Bank capital

A

the bank’s net worth (total assets - liabilities = net worth)

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4
Q

correspondent banking

A

small banks with deposits at larger banks

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5
Q

secondary reserves

A

high liquidity, short term US government securities

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6
Q

deposit outflows

A

when deposits are lost
because depositors make withdrawals and demand payment

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7
Q

liquidity management

A

keep enough cash to meet obligations to depositors

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8
Q

asset management

A

purchase assets to maximize profits while managing credit and interest risk

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9
Q

liability management/liquidity risk

A

acquiring funds at low cost

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10
Q

capital adequacy management

A

maintain sufficient capital to prevent bank failure

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11
Q

credit risk

A

the risk arising because borrowers may default

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12
Q

interest rate risk

A

the riskiness of earnings and returns on bank assets caused by interest-rate changes

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13
Q

return on assets (ROA)

A

the net profit after taxes per dollar of assets
- ROA = net profit after tax/assets

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14
Q

return on equity (ROE)

A

the net profit after taxes per dollar of equity (bank) capital
- net profit after taxes/equity

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15
Q

equity multiplier (EM)

A

the amount of assets per dollar of equity capital
- assets/equity

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16
Q

loan commitment

A

a bank’s commitment to provide a firm with loans up to a given amount at an interest rate that is tied to some market interest rate

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17
Q

compensating balances

A

A firm receiving a loan must keep a required minimum amount of funds in a checking account at the bank

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18
Q

credit rationing

A

refusing to make loans even though borrowers are willing
to pay the stated interest rate, or even a higher rate

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19
Q

basic gap analysis

A

gap = RSA - RSL
change in net worth = gap * change in interest

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20
Q

duration analysis

A

-(duration A x A - duration L x L) change in interest

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21
Q

Off-balance-sheet activities

A

activities that affect bank profits but do not appear on bank balance sheets

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22
Q

loan sale

A

a secondary loan participation

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23
Q

screening process

A

underwriting, checking credit score

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24
Q

monitoring process

A

checking that loan is not being used for high risk things

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25
Q

loan department

A

stopping bad credit risks from becoming borrowers

26
Q

collections department

A

stopping borrowers from becoming bad credit risks

27
Q

type I error

A

denying a good CR “framing an innocent man”

28
Q

type II error

A

approving a bad CR “freeing a guilty man”

29
Q

underwriting standards check…?

A

loan-to-value ratios, credit scores, and income ratios

30
Q

loan-to-value ratios

A

physical security

31
Q

income ratios

A

financial capabilities

32
Q

3 Cs of lending

A

collateral, capacity, character

33
Q

housing expense

A

(principle + interest + property tax + insurance)/gross income

34
Q

total debt expense

A

auto loans + credit loans + student loans

35
Q

what happens in the housing market when people are denied loans?

A

housing prices fall because demand for houses fall

36
Q

mortgage crisis

A
  • lending to high risk borrowers
  • large amounts of money that they could not afford
  • inflated appraisals
  • inflated non-verified income
37
Q

FICO

A

fair Isaac corporation
- credit score model to measure risk of default creditworthiness (range of 300-850)

38
Q

What makes up a credit score

A

payment history 35, credit utilization 30, length of credit history 15, types of credit used 10, credit inquiries 10

39
Q

what are the 3 factors of why real interest rates are low?

A
  1. rising propensity to save
  2. slowing investment demand
  3. central bank actions
40
Q

factors of why there is a rise in propensity to save

A
  • aging population saving for retirement
  • China increasing world’s pool of saving
41
Q

factors of why there is slow investment demands

A
  • slowing economic trend growth
  • falling real cost of plant and equipment
  • value of firms shifting to intangible assets
42
Q

why has the central banks’ actions affected interest rates?

A
  • low short term interest rates for 8 years cause low long-term rates
  • quantitative easing - buying long term bonds causes low long-term rates
43
Q

3 reasons why banks manage capital levels

A
  • prevent bank failure
  • adjust ROE
  • regulatory requirements
44
Q

3 ways to raise capital-to-assets

A
  • increase capital by issuing equities (more shares)
  • increase capital by decreasing dividends
  • reduce assets by selling loans/securities and paying off liabilities
45
Q

what is the problem with issuing more equity?

A

reduces current equity

46
Q

3 ways to lower capital-to-asset

A
  • buy back bank stocks
  • increase dividend payout
  • increase assets by issuing CDs and acquiring loans/investments (increasing liabilities)
47
Q

how does increasing/decreasing dividends affect capital?

A

changes retained earnings

48
Q

capital-to-assets growth rate analysis

A

the growth rate of a ratio is the difference between numerator and denominator growth rates, (for small growth rate)
- %Change(C/A) = change C/C - change A/A

49
Q

If change C/C = change A/A, what is the % change C/A?

A

0

50
Q

If change C/C = change A/A, what is the return on assets?

A

ROA = Change A/A * Change C/A

51
Q

Equation for finding max withdrawal from bank

A

(Total Reserve - Outflow)/(Deposit - Outflow) >= Required reserve ratio

52
Q

when a bank has insufficient reserves it may:

A
  1. borrow from other banks or corporations
  2. sell securities
  3. reduce loans
  4. borrow from Fed (discount loan)
53
Q

maturity bucket approach to gap analysis

A

measure the gap for several maturity subintervals

54
Q

standardized gap analysis

A

accounts for the differing degrees of rate sensitivity among rate-sensitive assets and liabilities

55
Q

total reserves

A

required reserves + excess reserves = deposits at the Fed + vault cash

56
Q

net interest margin

A

ROA - COF

57
Q

shadow banking

A

another way to get funds from savers to borrowers

58
Q

Term asset back security loan facility (TALF)

A

restore credit flows to HHs and firms through the securitization market

59
Q

disintermediation

A

reducing use of intermediaries

60
Q

Repos are made up of two transactions

A

cash transaction and forward contract

61
Q

Repos

A

when Bank A gives Bank B bonds and agrees to buy back at a later date

62
Q

Reverse repos

A

when Bank A buys back their bonds from Bank B

Econ 330 (17 decks)

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