Exam 23: Risk Management in Financial Institutions

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap times the change in the interest rate is called ________.

Which of the following are not generally rate-sensitive assets?

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

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

Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the

If a bank has a negative gap, then a decrease in interest rates will increase income.

Developing and maintaining long-term customer relationships help to reduce banks' costs of screening and monitoring borrowers.

If First State Bank has a gap equal to a positive $20 million, then a 5 percentage point drop in interest rates will cause profits to

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

Use the following table to answer the questions : table23.1 Table 23.1 -Refer to Table 23.1. Assuming that the average duration of its assets is five years, while the average duration of its liabilities is three years, a rise in interest rates from 5% to 10% will cause the net worth of First National to ________ by ________ of the total original asset value.

To use the concept of duration to analyze the effect of changes in interest rates on the market value of an asset, a bank manager would multiply

Credit rationing reduces adverse selection problems.

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

Use the following table to answer the questions : table23.1 Table 23.1 -Referring to Table 23.1, First National Bank has a gap of ________.

A bank manager concerned about interest income who expects interest rates to rise and who knows the bank currently has a positive gap should ________ rate-sensitive assets and ________ rate-sensitive liabilities.

One problem with basic gap analysis is that it

Duration gap analysis

Use the following table to answer the questions : table23.2 Table 23.2 -Referring to Table 23.2, First National Bank has a gap of ________.

A bank's commitment (for a specified future period of time)to provide a firm with loans up to a given amount at an interest rate that is tied to a market interest rate is called

The difference between rate-sensitive liabilities and rate-sensitive assets is known as the ________.