Exam 19: Types of Risks Incurred by Financial Institutions

Which of the following would normally be banking book assets rather than trading book assets?

A corporate borrower failing to repay a loan on time due to equipment breakdowns is an example of firm specific credit risk.

A thrift makes long-term fixed-rate mortgages funded with short-term deposits and then interest rates rise. Which of the following is true?

The £ is worth 1.2569 euros and the euro is worth $1.5568. Statistical analysis indicates that when the euro rises 1 percent against the dollar,the pound rises 0.5 percent against the euro and vice versa. A U.S. bank has assets of £40 million that mature in one year funded with liabilities of €55 million due in six months. The bank would be hurt by I. an increase in the value of the euro against the dollar. II. a decrease in the value of the euro against the dollar. III. an increase in euro interest rates relative to pound interest rates. IV. an increase in pound interest rates relative to euro interest rates.

The subprime crisis is a good example of the credit risk faced by financial institutions.

A U.S. bank has £700 million in loans it has made to corporate customers and it has £850 million in deposits. The net foreign exchange exposure from these accounts may be hedged by selling 150 million pounds forward.

Which one of the following intermediaries is likely to engage in more asset liability maturity matching?

A bank has book value of $5 million in liquid assets and $95 million in nonliquid assets. Large depositors unexpectedly withdraw $9.5 million in deposits. To cover the withdrawals the bank sells all of its liquid assets at book value. To raise the additional funds needed the bank sells the necessary amount of nonliquid assets at 80 cents per dollar of book value. As a result,the bank's equity will _____________.

What are the three major objectives of technological investments at FIs? What are the major risks involved with these investments?

What is sovereign risk? How is this different from credit risk on a domestic loan? How can sovereign risk be limited?

Risk arising from unhedged positions in securities,currencies,and derivatives is called market risk.

MONDEX spent $50 million to develop the Smart Card,but tests of prototypes in New York and Canadian cities revealed very little consumer interest. This is an example of

Maintaining a diversified loan portfolio helps a bank reduce systematic credit risk.

A bank has invested in U.S. Treasury investments that mature in two years. They will be held until maturity. The investments are funded with three-year maturity time deposits. The primary risk this bank faces is

A bank has $150 million in one-year loans earning a fixed rate equal to 4.75 percent. The assets are funded by $150 million in liabilities that have a cost of 4.25 percent and a maturity of three years. If all interest rates are projected to fall 100 basis points by next year,by how much will the bank's profits and loan NIM change in year two? Does this bank face refinancing risk or reinvestment risk? Explain.

Should regulators of FIs be concerned about the increased trading activity of FIs?

Having longer maturity assets than liabilities causes banks to bear which of the following risks? I. Interest rate risk II. Liquidity risk III. Credit risk

Rising interest rates decrease the value of fixed-income assets and increase the value of fixed-income liabilities.

Characterize each of the following according to the type of risk it primarily represents: I. Loan default II. Unexpected deposit withdrawals III. Losses on foreign currency holdings IV. Losses on standby letters of credit V. Reduction in earnings after an interest rate increase Indicate which of the risks could cause insolvency of the FI.

In October 2005,the Bankruptcy Reform Act was signed into law. This law primarily