Podcast
Questions and Answers
Which funding source is considered the most stable for commercial banks?
Which funding source is considered the most stable for commercial banks?
Why are customer deposits considered more stable than wholesale funding?
Why are customer deposits considered more stable than wholesale funding?
What is the main risk associated with wholesale funding?
What is the main risk associated with wholesale funding?
Why do large banks buy funding at the margin?
Why do large banks buy funding at the margin?
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Which one of the following is NOT a reason why banks allocate their funds to investments in securities?
Which one of the following is NOT a reason why banks allocate their funds to investments in securities?
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Which one of the following is a characteristic of Money Market instruments?
Which one of the following is a characteristic of Money Market instruments?
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Which one of the following is a characteristic of Capital market instruments?
Which one of the following is a characteristic of Capital market instruments?
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What is the purpose of the Ladder or Spaced Maturity Policy in investment maturity strategies?
What is the purpose of the Ladder or Spaced Maturity Policy in investment maturity strategies?
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Which one of the following is NOT an example of a transaction deposit?
Which one of the following is NOT an example of a transaction deposit?
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Which one of the following is a characteristic of non-transaction savings deposits?
Which one of the following is a characteristic of non-transaction savings deposits?
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What is the purpose of conditional pricing for deposits?
What is the purpose of conditional pricing for deposits?
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What is the main strategy used by banks to find new money when deposit volume is inadequate?
What is the main strategy used by banks to find new money when deposit volume is inadequate?
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Which of the following is NOT a source of liquidity demand for a financial firm?
Which of the following is NOT a source of liquidity demand for a financial firm?
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Which liquidity management strategy involves storing liquidity in cash and marketable securities?
Which liquidity management strategy involves storing liquidity in cash and marketable securities?
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Which approach for estimating financial institutions' liquidity needs involves forecasting loans demand and deposits availability?
Which approach for estimating financial institutions' liquidity needs involves forecasting loans demand and deposits availability?
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Who would be interested in analyzing banks' financial statements?
Who would be interested in analyzing banks' financial statements?
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Which of the following lending programs is available from the Federal Reserve's discount window for institutions not qualifying for primary credit?
Which of the following lending programs is available from the Federal Reserve's discount window for institutions not qualifying for primary credit?
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Which of the following is NOT a reason why banks prefer to operate with lower levels of capital than socially optimal?
Which of the following is NOT a reason why banks prefer to operate with lower levels of capital than socially optimal?
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Which of the following is NOT a component of Tier 1 capital under the total risk-based capital ratio?
Which of the following is NOT a component of Tier 1 capital under the total risk-based capital ratio?
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Which of the following approaches allows banks to assign a rating to each counterparty resulting from an internal process of measuring the borrower's creditworthiness?
Which of the following approaches allows banks to assign a rating to each counterparty resulting from an internal process of measuring the borrower's creditworthiness?
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Which of the following is a benefit of selling non-performing loans from a bank's balance sheet?
Which of the following is a benefit of selling non-performing loans from a bank's balance sheet?
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What is the relationship between Return on Equity (ROE) and Price-to-Tangible Book Value (P/TBV) in the stock market?
What is the relationship between Return on Equity (ROE) and Price-to-Tangible Book Value (P/TBV) in the stock market?
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What is the main factor that has affected the profitability of EU banks in recent years?
What is the main factor that has affected the profitability of EU banks in recent years?
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What is systemic risk in the financial system?
What is systemic risk in the financial system?
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Which of the following is a key component of Interest Earning Assets (IEA) for a bank?
Which of the following is a key component of Interest Earning Assets (IEA) for a bank?
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What is the most important indicator of a bank's funding strategy in terms of Interest Bearing Liabilities (IBL)?
What is the most important indicator of a bank's funding strategy in terms of Interest Bearing Liabilities (IBL)?
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What is the key method of reclassification for separating assets that generate income from other assets and liabilities that have a cost?
What is the key method of reclassification for separating assets that generate income from other assets and liabilities that have a cost?
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What does the Loan to Deposit Ratio (LD Ratio) measure?
What does the Loan to Deposit Ratio (LD Ratio) measure?
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What does Positive Yield on Assets (A) represent?
What does Positive Yield on Assets (A) represent?
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Which of the following is NOT a component of Net Interest Income?
Which of the following is NOT a component of Net Interest Income?
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Study Notes
Funding Sources and Strategies
- Customer deposits are considered the most stable funding source for commercial banks due to their stickiness and low cost.
- Wholesale funding is considered less stable because it is more volatile and expensive.
Wholesale Funding Risks
- The main risk associated with wholesale funding is liquidity risk, which arises from the uncertainty of refinancing.
Funding Allocation
- Large banks buy funding at the margin to take advantage of cheaper funding opportunities and optimize their funding mix.
Investment Allocation
- Banks allocate their funds to investments in securities to diversify their portfolios and earn returns.
Money Market and Capital Market Instruments
- Money Market instruments are characterized by short-term maturity, high liquidity, and low risk.
- Capital Market instruments are characterized by long-term maturity, lower liquidity, and higher risk.
Investment Maturity Strategies
- The Ladder or Spaced Maturity Policy involves investing in a portfolio of securities with staggered maturities to manage interest rate risk and liquidity.
Deposit Types
- Transaction deposits are checking accounts used for daily transactions, whereas non-transaction savings deposits are used for storing value.
- Examples of transaction deposits include demand deposits, checking accounts, and Negotiable Order of Withdrawal (NOW) accounts.
Deposit Pricing
- Conditional pricing for deposits involves offering different interest rates to depositors based on their deposit volume and stability.
Liquidity Management
- The main strategy used by banks to find new money when deposit volume is inadequate is to attract new depositors or borrow from the market.
- Liquidity management involves storing liquidity in cash and marketable securities to meet unexpected withdrawals.
- The approach for estimating financial institutions' liquidity needs involves forecasting loans demand and deposits availability.
Financial Statement Analysis
- Bank regulators, investors, and creditors are interested in analyzing banks' financial statements to assess their financial health and risk.
Lending Programs
- The Federal Reserve's discount window offers lending programs, such as the secondary credit program, for institutions not qualifying for primary credit.
Capital Management
- Banks prefer to operate with lower levels of capital than socially optimal due to the high cost of capital.
- Tier 1 capital under the total risk-based capital ratio includes common equity, retained earnings, and disclosed reserves.
Credit Risk Management
- The internal ratings-based approach allows banks to assign a rating to each counterparty based on their internal credit assessment process.
Non-Performing Loans
- Selling non-performing loans from a bank's balance sheet can improve asset quality and reduce provisioning costs.
Capital Markets and Profitability
- The relationship between Return on Equity (ROE) and Price-to-Tangible Book Value (P/TBV) in the stock market is positive, indicating that higher ROE leads to higher P/TBV.
- The main factor that has affected the profitability of EU banks in recent years is the low-interest-rate environment.
Systemic Risk
- Systemic risk in the financial system refers to the risk of a collapse of the entire financial system.
Asset Classification and Funding
- Interest Earning Assets (IEA) for a bank include loans, securities, and other investments that generate income.
- The key indicator of a bank's funding strategy in terms of Interest Bearing Liabilities (IBL) is the Loan to Deposit Ratio (LD Ratio).
- The key method of reclassification for separating assets that generate income from other assets and liabilities that have a cost is the asset liability management (ALM) framework.
- The Loan to Deposit Ratio (LD Ratio) measures the bank's dependence on wholesale funding.
- Positive Yield on Assets (A) represents the net interest income earned by a bank.
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Description
Test your knowledge on the impact of liquidity demands and changes in liabilities and assets on financial firms. Explore topics such as deposits withdrawals, bond repayments, loan grants, securities acquisition, real estate acquisition, dividend payments, interest expenses, and operating expenses. Challenge yourself with this quiz and enhance your understanding of financial costs and non-financial costs in the corporate world.
