Exam 23: Risk Management in Financial Institutions

Explain how banks benefit from specialization in lending.

What is gap analysis and why is it important to a bank?

Duration analysis involves comparing the average duration of the bank's ________ to the average duration of its ________.

Use the following table to answer the questions : table23.2 Table 23.2 -Referring to Table 23.2, if interest rates rise by 5 percentage points, then bank profits (measured using gap analysis)will

Banks' attempts to solve adverse selection and moral hazard problems help explain loan management principles such as

If a bank has more rate-sensitive assets than rate-sensitive liabilities, then a(n)________ in interest rates will ________ bank profits.

When a lender refuses to make a loan, even though borrowers are willing to pay the stated interest rate or even a higher rate, it is said to engage in ________.

In one sense, ________ appears surprising since it means that the bank is not ________ its portfolio of loans and thus is exposing itself to more risk.

If interest rates rise by 5 percentage points, then bank profits (measured using gap analysis)will increase regardless of the income gap.

If a bank has ________ rate-sensitive assets than rate-sensitive liabilities, then a(n)________ in interest rates will increase bank profits.

If First National Bank has a gap equal to a negative $30 million, then a 5 percentage point increase in interest rates will cause profits to

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals by the change in the interest rate is called duration analysis.

What is the difference between credit risk and interest-rate risk?

Credit rationing occurs when a bank

How is credit risk related to the concepts of adverse selection and moral hazard?

Use the following table to answer the questions : table23.2 Table 23.2 -Refer to Table 23.2. Assuming that the average duration of the bank's assets is four years, while the average duration of its liabilities is three years, a rise in interest rates from 5 percent to 10 percent will cause the net worth of First National to ________ by ________ of the total original asset value.

If a rise in interest rates causes the market value of a bank's net worth to rise, then the bank must have a ________.

Banks face the problem of ________ in loan markets because bad credit risks are the ones most likely to seek bank loans.

What steps do banks take to reduce their exposure to credit risk?

If a bank has a duration gap of 2 years, then a fall in interest rates from 6 percent to 3 percent will lead to