Exam 4: Risks of Financial Institutions

One of the most striking trends for many modern FIs has been the growth in their off-balance-sheet activities and thus their off-balance-sheet risk.Explain what is meant by off-balance-sheet activities and the risk associated with it using an example.

Which of the following is a suitable description of the term 'economies of scope'?

Economically speaking, contingent assets and liabilities are not contractual claims that directly impact the economic value of the equity holders' stake in an FI.

Non-performing loans are defined as loans that:

The potential exercise of unanticipated contingencies can result in:

A short-funded FI is exposed to increasing interest rates.

The collapse of the US bank IndyMac Bank was an example of:

The Reserve Bank of Australia believes that operational risk could lead to severe financial distress for FIs.Outline what is meant by operational risk and how it can impact on a financial institution.In particular, illustrate your answer with recent cases of bank operational risk, for example: retail bank system failures, trading loss fraud and Ponzi scheme fraud.

Economically speaking, contingent assets and liabilities are contractual claims that directly impact the economic value of the equity holders' stake in an FI.

Which of the following is an effective measure for claimholders if a foreign government prohibits repayment of debt obligations to an international lender?

If the difference between an FI's contingent liabilities and contingent assets is positive then there is an additional obligation, or claim, on the FI's net worth.

Based on the case of Indymac Bank, explain how liquidity risk and insolvency risk caused a bank failure despite deposit insurance.Outline the chain of events that led to this financial institution's illiquidity and eventual closure.

If an FI is long-funded it means that the:

An FI that finances a German euro loan with US dollar deposits is exposed to:

When analysing an FI's performance, it is not important to consider its off-balance-sheet activities as they have no current or future impact on the FI's financial standing.

An FI that holds more short-term assets relative to long-term liabilities is:

Unanticipated diseconomies of scale and scope are a result of:

Many of the various risks, such as interest rate risk, market risk, credit risk and off-balance-sheet risk, faced by an FI often are interrelated with each other.

An Australian FI that holds a net short asset position in $US is exposed to foreign exchange rate risk if the $US appreciates against the $A over the investment period.

Firm-specific credit risk can be reduced by diversification.