Financial Liquidity and Cost Management Quiz
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Questions and Answers

True or false: Commercial banks form their balance sheets in layers from most volatile to most stable.

False (B)

True or false: Wholesale funding is more stable than retail funding.

False (B)

True or false: Wholesale funding based banks are more exposed to liquidity and interest rate risks.

True (A)

True or false: Transaction deposits are always interest bearing.

<p>False (B)</p> Signup and view all the answers

True or false: Passbook savings deposits have a higher interest rate than transaction deposits.

<p>True (A)</p> Signup and view all the answers

True or false: Relationship pricing promotes greater loyalty among customers.

<p>True (A)</p> Signup and view all the answers

True or false: The Fed Reserve requires collateral for every loan made through its discount window.

<p>True (A)</p> Signup and view all the answers

True or false: Secondary credit is available at a lower rate than primary credit.

<p>False (B)</p> Signup and view all the answers

True or false: Operational risk is the most important risk after credit risk.

<p>True (A)</p> Signup and view all the answers

True or false: Most banks allocate a significant portion of their funds to investments in securities managed by investment officers.

<p>True (A)</p> Signup and view all the answers

True or false: Treasury bills have a high degree of safety, liquidity, and can be used for collateral borrowing.

<p>True (A)</p> Signup and view all the answers

True or false: Corporate bonds generally have higher pre-tax yields compared to government bonds.

<p>True (A)</p> Signup and view all the answers

True or false: Systemic risk is a risk that an event will trigger a loss of confidence in a substantial portion of the financial system that is serious enough to have adverse consequences for the real economy.

<p>True (A)</p> Signup and view all the answers

True or false: The asset quality of EU banks has been a major issue in recent years, with provisions on bad loans wiping out banks' core profitability.

<p>True (A)</p> Signup and view all the answers

True or false: Selling non-performing loans can lead to benefits such as release of risk-weighted assets, improvement of capital ratios, and potentially higher profits and return on equity.

<p>True (A)</p> Signup and view all the answers

True or false: Liquidity deficit occurs when a financial firm has more liabilities than assets at a given moment in time?

<p>True (A)</p> Signup and view all the answers

True or false: Asset Liquidity Management involves storing liquidity in assets, predominantly in cash and marketable securities, and converting selected assets into cash when liquidity is needed?

<p>True (A)</p> Signup and view all the answers

True or false: Borrowed Liquidity Management is a low-risk strategy because interest rates are stable and credit availability is always guaranteed?

<p>False (B)</p> Signup and view all the answers

True or false: Reclassification Methodology is a common method used to separate interest earning assets from interest bearing liabilities?

<p>True (A)</p> Signup and view all the answers

True or false: The IEA - IBL spread is a key component for a bank's income generation capacity?

<p>True (A)</p> Signup and view all the answers

True or false: The analysis of a bank's loan book is important in understanding the key element of interest earning assets?

<p>True (A)</p> Signup and view all the answers

True or false: Due to customers is the most important indicator of a bank's funding strategy?

<p>True (A)</p> Signup and view all the answers

True or false: Interbank funding is a more stable source of funding compared to deposits?

<p>False (B)</p> Signup and view all the answers

True or false: Securities issued by a bank are a higher cost source of funding compared to customer deposits?

<p>True (A)</p> Signup and view all the answers

True or false: The Loan to Deposit Ratio (LD Ratio) is calculated by dividing customer direct funding by customer deposits?

<p>False (B)</p> Signup and view all the answers

What are the three lending programs available from the Federal Reserve's discount window?

<p>Primary credit, Secondary credit, Seasonal credit</p> Signup and view all the answers

What is the purpose of a bank's capital?

<p>To protect liability holders from unexpected losses affecting the bank's assets</p> Signup and view all the answers

What is the Total Risk Based Capital Ratio?

<p>Regulatory Capital = Tier 1 + Tier 2</p> Signup and view all the answers

What are the different types of transaction deposits?

<p>The different types of transaction deposits are non-interest bearing (checking accounts) and interest bearing (negotiable order of withdrawal -NOW- accounts, money market deposits accounts -MMDA).</p> Signup and view all the answers

What are the different types of non-transaction savings deposits?

<p>The different types of non-transaction savings deposits are passbook savings deposits and time deposits (e.g. certificate of deposits).</p> Signup and view all the answers

What are the pricing strategies for deposits?

<p>The pricing strategies for deposits include cost-plus profit margin, marginal cost, conditional pricing, and relationship pricing.</p> Signup and view all the answers

What are some reasons why banks allocate funds to investments in securities?

<p>Some reasons include liquidity, risk management, diversification, tax efficiency, and stabilizing income.</p> Signup and view all the answers

What are some examples of money market instruments?

<p>Some examples include Treasury Bills (T-bills), Short-Term Government Bonds, and Certificates of Deposits (CDs).</p> Signup and view all the answers

What are some strategies for managing investment maturities?

<p>Some strategies include the Ladder or Spaced Maturity Policy, the Front-End Load Maturity Policy, the Back-End Load Maturity Policy, the Barbell Strategy, and the Rate Expectation Approach.</p> Signup and view all the answers

What is systemic risk?

<p>Systemic risk is a risk that an event will trigger a loss of confidence in a substantial portion of the financial system that is serious enough to have adverse consequences for the real economy.</p> Signup and view all the answers

What are the benefits of selling non-performing loans?

<p>The benefits of selling non-performing loans include: releasing risk-weighted assets, improving capital ratios, improving asset quality indicators/market perception, removing the risk of further credit deterioration/increase of coverage, potentially reducing loan loss provisions, and potentially increasing profits and return on equity.</p> Signup and view all the answers

What factors influence the price-to-book value ratio (PBV) of a stock?

<p>The price-to-book value ratio (PBV) of a stock is influenced by factors such as return on equity (ROE), long-term/stable growth rate, payout ratio, and the risk of the firm.</p> Signup and view all the answers

What are the three common methods for estimating financial institutions' liquidity needs?

<p>The three common methods for estimating financial institutions' liquidity needs are: 1) Sources and Uses of Funds Approach, 2) Structure of Funds Approach, and 3) Liquidity Indicator Approach.</p> Signup and view all the answers

What are the key principles for financial institutions' financial statement analysis?

<p>The key principles for financial institutions' financial statement analysis are: adoption of IFRS/IAS, understanding the bank's business model, analyzing main items based on their business model, and conducting benchmarking analysis.</p> Signup and view all the answers

Which financial statements need to be analyzed for a comprehensive understanding of a bank's financial performance?

<p>Consolidated accounts need to be analyzed for a comprehensive understanding of a bank's financial performance.</p> Signup and view all the answers

Why is retail funding more stable than wholesale funding?

<p>Retail funding is more stable than wholesale funding due to several factors. Firstly, depositors tend to be loyal to banks, especially for small amounts, resulting in low interest rate sensitivity. Additionally, retail deposits are insured, reducing sensitivity to changes in the bank's credit risk. Finally, retail deposits are pooled and managed according to the law of large numbers, further enhancing stability.</p> Signup and view all the answers

Why is wholesale funding more volatile than core deposits?

<p>Wholesale funding is more volatile than core deposits due to its characteristics. Wholesale funds commonly have short maturities, sometimes overnight, making them more susceptible to market interest rate fluctuations. Furthermore, wholesale funding is commonly unsecured, increasing the bank's exposure to liquidity and interest rate risks. Lastly, large banks often rely on wholesale funding at market rates, which results in less customer loyalty and greater sensitivity to market interest rates and borrower creditworthiness.</p> Signup and view all the answers

What are the benefits and risks associated with wholesale funding?

<p>Wholesale funding provides banks with flexibility but exposes them to risks. The benefits include the ability to access funds quickly and the potential for lower funding costs. However, wholesale funding also carries risks such as liquidity risk and interest rate risk. Banks relying heavily on wholesale funding are more vulnerable to sudden liquidity shortages and fluctuations in market interest rates.</p> Signup and view all the answers

What is the purpose of reclassification methodology in a bank's balance sheet?

<p>The purpose of reclassification methodology in a bank's balance sheet is to separate interest earning assets from interest bearing liabilities.</p> Signup and view all the answers

What is the key element of interest earning assets?

<p>The key element of interest earning assets is loans.</p> Signup and view all the answers

What is the key component of interest bearing liabilities?

<p>The key component of interest bearing liabilities is due to customers.</p> Signup and view all the answers

What is the formula for calculating Net Interest Income Weight?

<p>Net Interest Income Weight = \frac{Total Operating Income and Commissions Income}{Net Interest Income}</p> Signup and view all the answers

What is the formula for calculating Net Fees and Commissions Weight?

<p>Net Fees and Commissions Weight = \frac{Net Fees and Commissions}{Total Operating Income}</p> Signup and view all the answers

What is the formula for calculating Net Trading and Other Operating Income Weight?

<p>Net Trading and Other Operating Income Weight = \frac{Net Trading and Other Op Income}{Total Operating Income}</p> Signup and view all the answers

What is the formula for calculating Loan to Deposit Ratio?

<p>Loan to Deposit Ratio (LD Ratio) = \frac{Customer Direct Funding}{Direct Funding}</p> Signup and view all the answers

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