Question 1

Discuss the S&L crisis focusing your discussion upon the funding problem of lending long and borrowing short.

Accepted Answer

Until the early 1980s, S&Ls and all other lenders financed housing through traditional mortgages at interest rates fixed for the life of the loan. The period of the loan was typically long, frequently up to 30 years. Funding for these loans, by regulation, came from deposits having a maturity considerably shorter than the loans. This is the funding problem of lending long and borrowing short. It is extremely risky - although regulators took a long time to understand it. There is no problem, of course, if interest rates are stable or declining, but if interest rates rise above the interest rate on the mortgage loan, a negative spread will result, which must result eventually in insolvency. Regulators at first endeavored to shield the S&L industry from the need to pay high interest rates without losing deposits by imposing a ceiling on the interest rate that would be paid by S&Ls and by their immediate competitors, the other depository institutions. But the approach did not and could not work.

Question 2

Discuss how the risk-based capital guidelines attempt to recognize credit risk by segmenting and weighting requirements.

Accepted Answer

First, capital is defined as consisting of Tier 1 and Tier 2 capital. Minimum requirements are established for each tier. Tier 1 capital is considered core capital; it consists basically of common stockholders' equity, certain types of preferred stock, and minority interest in consolidated subsidiaries. Tier 2 capital is called supplementary capital; it includes loan-loss reserves, certain types of preferred stock, perpetual debt (debt with no maturity date), hybrid capital instruments and equity contract notes, and subordinated debt.
Second, the guidelines establish a credit risk weight for all assets. The weight depends on the credit risk associated with each asset. There are four credit risk classifications for banks:0%, 20%, 50%, and 100%, arrived at on no particular scientific basis. The below table lists examples of assets that fall into each credit risk classification.

Question 3

Because of their important role, ________ are afforded special privileges such as access to federal deposit insurance and access to a government entity that provides funds for liquidity or emergency needs..

Accepted Answer

A)  NOW accounts 
B)  repository institutions 
C)  depository invitations 
D)  depository institutions 
A)  NOW accounts 
B)  repository institutions 
C)  depository invitations 
D)  depository institutions D

Question 4

Depository institutions are ________ because of the important role that they play in the country's financial system.

Accepted Answer

A)  lowly regarded 
B)  highly regulated 
C)  highly deregulated 
D)  lowly regulated. 
A)  lowly regarded 
B)  highly regulated 
C)  highly deregulated 
D)  lowly regulated.

Question 5

The market where banks can borrow or lend reserves is called the federal funds market. The interest rate charged to borrow funds in this market is called the federal funds rate.

Accepted Answer

A) True 
 B)False

Question 6

Besides facing credit risk and interest rate risk, a depository institution must be prepared to satisfy withdrawals of funds by depositors and to provide loans to customers.

Accepted Answer

A) True 
 B)False

Question 7

Realizing the need for banks to obtain liquidity during periods of economic stress, the federal government wanted to establish a banking system that would have an entity that banks could borrow from. The U.S. Congress accomplished this with the passage of the ________.

Accepted Answer

A)  National Bank Act in 1863 
B)  Office of the Comptroller of the Currency Act 
C)  Federal Reserve Act of 1913 
D)  Financial Institutions Reform, Recovery, and Enforcement Act of 1989 
A)  National Bank Act in 1863 
B)  Office of the Comptroller of the Currency Act 
C)  Federal Reserve Act of 1913 
D)  Financial Institutions Reform, Recovery, and Enforcement Act of 1989

Question 8

Savings banks are institutions similar to, although much younger than, S&Ls.

Accepted Answer

A) True 
 B)False

Question 9

Time deposits, also called certificates of deposit, have a fixed maturity date and pay either a fixed or floating interest rate.

Accepted Answer

A) True 
 B)False

Question 10

Explain the following three concepts: discount window, type of collateral (to borrow from Fed), and discount rate.

Accepted Answer

The Federal Reserve Bank is the banker's

Question 11

Risk-based capital guidelines establish a ________ weight for all assets where a weight depends on the credit risk associated with each asset.

Accepted Answer

A)  commercial bank risk 
B)  scientific-based 
C)  credit risk 
D)  guideline-based 
A)  commercial bank risk 
B)  scientific-based 
C)  credit risk 
D)  guideline-based

Question 12

In comparing savings banks and S&Ls, which of the below comparisons is FALSE?

Accepted Answer

A)  Although the total deposits at savings banks are less than those at S&Ls, savings banks are typically larger institutions. 
B)  Asset structures of savings banks are always greater than S&Ls. 
C)  Because states have permitted more portfolio diversification than was permitted by federal regulators of S&Ls, savings bank portfolios weathered funding risk far better than S&Ls. 
D)  Typically, the ratio of deposits to total assets is greater for savings banks than for S&Ls. 
A)  Although the total deposits at savings banks are less than those at S&Ls, savings banks are typically larger institutions. 
B)  Asset structures of savings banks are always greater than S&Ls. 
C)  Because states have permitted more portfolio diversification than was permitted by federal regulators of S&Ls, savings bank portfolios weathered funding risk far better than S&Ls. 
D)  Typically, the ratio of deposits to total assets is greater for savings banks than for S&Ls.

Question 13

Traditionally, the only assets in which S&Ls were allowed to invest include ________.

Accepted Answer

A)  mortgages, mortgage-backed securities, and foreign enterprises 
B)  mortgages, mortgage-backed securities and U.S. government securities. 
C)  mortgage-backed securities, non-U.S. government securities and mortgages. 
D)  mortgages, foreign securities and U.S. government securities. 
A)  mortgages, mortgage-backed securities, and foreign enterprises 
B)  mortgages, mortgage-backed securities and U.S. government securities. 
C)  mortgage-backed securities, non-U.S. government securities and mortgages. 
D)  mortgages, foreign securities and U.S. government securities.

Question 14

________ are institutions similar to, although much older than, S&Ls.

Accepted Answer

A)  Federal Reserve Banks 
B)  Partnerships 
C)  Corporations 
D)  Savings banks 
A)  Federal Reserve Banks 
B)  Partnerships 
C)  Corporations 
D)  Savings banks

Question 15

All banks must maintain a specified percentage of their deposits in a non-interest-bearing account at one of the twelve Federal Reserve Banks. These specified percentages are called required reserves, and the dollar amounts based on them that are required to be kept on deposit at a Federal Reserve Bank are called reserve ratios.

Accepted Answer

A) True 
 B)False

Question 16

Prior to 1863, banks were regulated only at the ________ level.

Accepted Answer

A)  local 
B)  state 
C)  federal 
D)  international 
A)  local 
B)  state 
C)  federal 
D)  international

Question 17

Most global banking activities generate ________ rather than ________.

Accepted Answer

A)  dividend income; interest income 
B)  fee income; dividend income 
C)  interest income; fee income 
D)  fee income; interest income 
A)  dividend income; interest income 
B)  fee income; dividend income 
C)  interest income; fee income 
D)  fee income; interest income

Question 18

The maximum interest rate that is permitted on deposit accounts has been phased out by the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA).

Accepted Answer

A) True 
 B)False

Question 19

The three sources of funds for banks are ________.

Accepted Answer

A)  salaries, nondeposit borrowing, common stock, and retained earnings. 
B)  deposits, nondeposit borrowing, common stock, and retained earnings. 
C)  deposits, salaries and wages, common stock, and retained earnings. 
D)  deposit borrowing, bonds, and retained earnings. 
A)  salaries, nondeposit borrowing, common stock, and retained earnings. 
B)  deposits, nondeposit borrowing, common stock, and retained earnings. 
C)  deposits, salaries and wages, common stock, and retained earnings. 
D)  deposit borrowing, bonds, and retained earnings.

Question 20

Contrast the differences and similarities between savings banks and S&Ls.

Accepted Answer

Savings banks are institutions similar t

Exam 3: Depository Institutions: Activities and Characteristics

Discuss the S&L crisis focusing your discussion upon the funding problem of lending long and borrowing short.

Discuss how the risk-based capital guidelines attempt to recognize credit risk by segmenting and weighting requirements.

Because of their important role, ________ are afforded special privileges such as access to federal deposit insurance and access to a government entity that provides funds for liquidity or emergency needs..

Depository institutions are ________ because of the important role that they play in the country's financial system.

The market where banks can borrow or lend reserves is called the federal funds market. The interest rate charged to borrow funds in this market is called the federal funds rate.

Besides facing credit risk and interest rate risk, a depository institution must be prepared to satisfy withdrawals of funds by depositors and to provide loans to customers.

Realizing the need for banks to obtain liquidity during periods of economic stress, the federal government wanted to establish a banking system that would have an entity that banks could borrow from. The U.S. Congress accomplished this with the passage of the ________.

Savings banks are institutions similar to, although much younger than, S&Ls.

Time deposits, also called certificates of deposit, have a fixed maturity date and pay either a fixed or floating interest rate.

Explain the following three concepts: discount window, type of collateral (to borrow from Fed), and discount rate.

Risk-based capital guidelines establish a ________ weight for all assets where a weight depends on the credit risk associated with each asset.

In comparing savings banks and S&Ls, which of the below comparisons is FALSE?

Traditionally, the only assets in which S&Ls were allowed to invest include ________.

________ are institutions similar to, although much older than, S&Ls.

Prior to 1863, banks were regulated only at the ________ level.

Most global banking activities generate ________ rather than ________.

The maximum interest rate that is permitted on deposit accounts has been phased out by the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA).

The three sources of funds for banks are ________.

Contrast the differences and similarities between savings banks and S&Ls.

Introduction

Financial Institutions, Financial Intermediaries, and Asset Management Firms

The U.S. Federal Reserve and the Creation of Money

Monetary Policy in the United States

Insurance Companies

Investment Companies and Exchange Traded Funds

Pension Funds

Properties and Pricing of Financial Assets

The Level and Structure of Interest Rates

The Term Structure of Interest Rates

Risk/Return and Asset Pricing Models

Primary Markets and the Underwriting of Securities

Secondary Markets

Treasury and Agency Securities Markets

Municipal Securities Markets

Markets for Common Stock: The Basic Characteristics

Markets for Common Stock: Structure and Organization

Markets for Corporate Senior Instruments: I

Markets for Corporate Senior Instruments: II

The Markets for Bank Obligations

The Residential Mortgage Market

Mortgage-Backed Securities Market

Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities

Market for Asset-Backed Securities

Financial Futures Markets

Options Markets

Pricing of Futures and Options Contracts

The Applications of Futures and Options Contracts

OTC Interest Rate Derivatives: Forward Rate Agreements, Swaps, Caps, and Floors

Market for Credit Risk Transfer Vehicles: Credit Derivatives and Collateralized Debt Obligations

The Market for Foreign Exchange and Risk Control Instruments

Filters

Most global banking activities generate rather than .