Exam 23: Risk Management in Financial Institutions

Because larger loans create greater incentives for borrowers to engage in undesirable activities that make it less likely they will repay the loans, banks

Of the following methods that banks might use to reduce moral hazard problems, the one not legally permitted in the United States is the requirement that

Credit rationing occurs when lenders charge higher interest rates on the loans they make to riskier borrowers.

One problem with duration gap analysis is that it

What special assumptions do income and duration gap analyses make about interest rate changes and the yield curve?

How do the concepts of adverse selection and moral hazard explain the credit risk management principles that banks adopt?

Liabilities that are partially, but not fully, rate-sensitive include ________.

Banks attempt to screen good credit risks from bad to reduce the incidence of loan defaults. To do this, banks

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals by the change in the interest rate is called

A bank that wants to monitor the check payment practices of its commercial borrowers, so that moral hazard can be prevented, will require borrowers to

If a bank has a duration gap of 2 years, then a rise in interest rates from 6 percent to 9 percent will lead to

Use the following table to answer the questions : table23.1 Table 23.1 -Referring to Table 23.1, if interest rates rise by 5 percentage points, then bank profits (measured using gap analysis)will

The difference between rate-sensitive liabilities and rate-sensitive assets is known as the duration gap.

From the standpoint of ________, specialization in lending is surprising but makes perfect sense when one considers the ________ problem.

Compensating balances

Explain how banks benefit from long-term customer relationships.

When banks offer borrowers smaller loans than they have requested, banks are said to ________.

Banks face the problem of adverse selection in loan markets because bad credit risks are the ones most likely to seek bank loans.

Lines of credit and long-term relationships between banks and their customers

If a bank has more rate-sensitive liabilities than assets, then an increase in interest rates will reduce bank profits.