Exam Ii Review Sheet
Exam II
Review Questions
Chapter 13 1. a) A bank has risk-weighted assets of $175 and equity of $12.5. If regulators require a minimum risk-weighted capital ratio of 5% given the current level of equity, how many new assets with a 100% risk weight can the bank add? How many with a 50% risk weight? b) If the bank had 20% more equity, how many new assets with a 100% risk weight could the bank add? How many with a 50% risk weight? How does having more equity affect a bank's ability to grow? How is this growth affected by the riskiness of the bank's assets?
2. Cite one law or regulation per each of the following categories:
* Safety and Soundness Regulation * Monetary Policy Regulation * Credit Allocation Regulation * Consumer Protection Regulation * Investor Protection Regulation
3. How do risk-based deposit insurance premiums and risk-based capital requirements help reduce the moral hazard problem of deposit insurance? (Hint: Moral hazard means that because of deposit insurance, banks may take on excessive amounts of risk.)
4. Look at the following simplified bank balance sheet. Assume that the bank has no off-balance-sheet commitments.
5. Using the three capital adequacy ratios, determine if the bank is well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, or critically undercapitalized.
Chapter 14 6. Explain why low interest rates and strong mortgage markets help keep profitability high at savings institutions. 7. A savings institution (SI) has funded $12 million of 30-year fixed-rate mortgages with an average interest rate of 5.75%. These assets are funded with time deposits with an average maturity of six months. The deposits are currently paying 3.5%. In six months' time, however, the Fed has raised interest rates twice and the depositors now must be paid 4.25%. What will happen to the SI's ROA and NIM? How would your answer change if the SI normally sells the
Review Questions
Chapter 13 1. a) A bank has risk-weighted assets of $175 and equity of $12.5. If regulators require a minimum risk-weighted capital ratio of 5% given the current level of equity, how many new assets with a 100% risk weight can the bank add? How many with a 50% risk weight? b) If the bank had 20% more equity, how many new assets with a 100% risk weight could the bank add? How many with a 50% risk weight? How does having more equity affect a bank's ability to grow? How is this growth affected by the riskiness of the bank's assets?
2. Cite one law or regulation per each of the following categories:
* Safety and Soundness Regulation * Monetary Policy Regulation * Credit Allocation Regulation * Consumer Protection Regulation * Investor Protection Regulation
3. How do risk-based deposit insurance premiums and risk-based capital requirements help reduce the moral hazard problem of deposit insurance? (Hint: Moral hazard means that because of deposit insurance, banks may take on excessive amounts of risk.)
4. Look at the following simplified bank balance sheet. Assume that the bank has no off-balance-sheet commitments.
5. Using the three capital adequacy ratios, determine if the bank is well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, or critically undercapitalized.
Chapter 14 6. Explain why low interest rates and strong mortgage markets help keep profitability high at savings institutions. 7. A savings institution (SI) has funded $12 million of 30-year fixed-rate mortgages with an average interest rate of 5.75%. These assets are funded with time deposits with an average maturity of six months. The deposits are currently paying 3.5%. In six months' time, however, the Fed has raised interest rates twice and the depositors now must be paid 4.25%. What will happen to the SI's ROA and NIM? How would your answer change if the SI normally sells the