Exam 7: Risks of Financial Institutions

Matching the foreign currency book of assets and liability maturity does not protect the FI from

Economies of scale refer to an FI's ability to

One cause of liquidity risk occurs when customers of an FI pay down their lines of credit.

The risk that a debt security's price will fall,subjecting the investor to a potential capital loss is

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?

Millon National Bank has 10 million British pounds (£)in one-year assets and £8 million in one-year liabilities.In addition,it has one-year liabilities of 4 million euros (€).Assets are earning 8 percent and both liabilities are being paid at a rate of 8 percent.All interest and principal will be paid at the end of the year.What is the net interest income in dollars if the spot prices at the end of the year are $1.35/£ and €1.35/$ and the liabilities instead cost 7 percent instead of 8 percent?

The risk that an FI may not have enough capital to offset a sudden decline in the value of its assets relative to its liabilities is referred to as

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

During a liquidity crisis,an FI may have to borrow additional funds at higher rates as the supply of funds becomes restricted.

This risk of default is associated with general economy-wide or macro conditions affecting all borrowers.

Employee fraud is a type of operational risk to a financial institution.

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.To what risk is the bank exposed?

An off-balance-sheet activity does not appear on the current balance sheet because it does not involve holding a current primary claim or the issuance of a current secondary claim.

Funding a portion of assets with equity capital means that hedging risk does not require perfect matching of the assets and liabilities.

Loss of reputation is a type of operational risk to a financial institution.

To be immunized against foreign currency and foreign interest rate risk,an FI should match both the size and maturities of its foreign assets and foreign liabilities.

Which of the following refers to an FI's ability to generate cost synergies by producing more than one output with the same inputs?

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

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

Bank regulators typically view tradable assets as those held for one month or less.