Exam 7: Risks of Financial Institutions

A Canadian bank has €40 million in assets and €50 million in CDs. All other assets and liabilities are in Canadian dollars. This bank is

Technology risk is the uncertainty that economies of scale or scope will be realized from the investment in new technologies.

During a liquidity crisis assets normally must be sold at a loss because of the rising interest rates caused by financial institutions attempting to raise funds.

Many of the various risks faced by an FI often are interrelated with each other.

Which of the following situations pose a refinancing risk for an FI?

Because the economies of Canada and other countries have become more integrated, the risks of financial intermediation have decreased.

Matching the maturities of assets and liabilities supports the asset transformation function of FIs.

Bank of the Atlantic has liabilities of $4 million with an average maturity of two years paying interest rates of 4.0 percent annually. It has assets of $5 million with an average maturity of 5 years earning interest rates of 6.0 percent annually. What is the bank's net interest income in dollars in year 3, if it refinances all of its liabilities at a rate of 8.0 percent?

Politically motivated limitations on payments of foreign currency may expose an FI to

With regard to market value risk, rising interest rates

An FI can hold assets denominated in a foreign country, but it cannot issue foreign liabilities.

"Matching the book" or trying to match the maturities of assets and liabilities is intended to protect the FI from

In the case where a borrower defaults on a loan, the FI may lose only a portion of the principal that was loaned.

The relationship of a limited or fixed upside return with a high probability and the potential large downside loss with a small probability is an example of an asset's credit risk to an FI.

As commercial banks move from their traditional banking activities of deposit taking and lending and shift more of their activities to trading, they are more subject to

The asset transformation function potentially exposes the FI to

The objective of technological expansion is to achieve economies of scale at the expense of diseconomies of scope.

Foreign exchange risk is that the value of assets and liabilities may change because of changes in the foreign exchange rate between two countries.

The BIS definition: "the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events," encompasses which of the following risks?

Which function of an FI involves buying primary securities and issuing secondary securities?