Finance 443

Fall Quarter 2001


Assignment #6


Question One:


Evaluate the following statement: The United States has about 12,000 banks, whereas Canada has only a few, so the U.S. banking industry must be more competitive.


"Banking has become a more dynamic industry because of more active liability management." 


                                                (true/false/uncertain)    Explain your answer.



Question Two:


The ceiling on the size of an account covered by federal deposit insurance is $100,000.  If you heard that your bank might be in trouble, what would you do if you had $10,000 in the bank?  If you had $200,000 in the bank?  Does deposit insurance fulfill its role in reducing failures if a bank has many large depositors?  Why or why not?


Unlike commercial banks, savings and loans, and mutual savings banks, credit unions do not have restrictions on locating branches in other states.  Why then, are credit unions typically smaller than the other depository institutions?  Does this work in their favour or against them?  Explain.



Question Three:

The bank you own has the following balance sheet:


                                                Assets                                   Liabilities

                                                res             $75m              deposits         $500m

                                                loans           $525m            capital            $100m


If the bank suffers a deposit outflow of $50m with a required reserve ratio on deposits of 10%, what actions must you take to make sure that your bank meets its reserve requirement?



Question Four:

Suppose that you manage a small S+L that has a net worth of -$50 million.  You fear that within two years, regulators will discover that your firm is insolvent and will shut you down.  You have two possible investment strategies:

(a)     continue to operate as you have been, offering market interest rates on CDs to finance mortgage loans or,

(b)     offer higher than market interest rates on CDs and use the increased funds to speculate in junk bonds and real estate. 

Your analysis tells you that strategy (a0 has a 10% chance of losing $10 million and a 90% chance of gaining $20 million, with an expected return of $17 million.  Strategy (b) has an 80% chance of losing $50 million and a 20% chance of gaining $75 million, with an expected return of -$25 million.  What strategy would you follow?  Why?  What are the consequences of your choice?  What should regulators do in this situation?



Question Five:


Why has international banking grown so rapidly during the past two decades?


Describe Edge Act Corporations and International Business Facilities.  What can they do that regular U.S. banks cannot?


If the bank at which you keep your chequing account is owned by Saudi Arabians, should you worry that your deposits are less safe than if the bank were owned by Americans?



Question Six:


What initially caused the S+L crisis of the 1980's?  What subsequent events caused S+L's to lose even more money?

Why didn't regulators close all the insolvent S+L's in the early 80's?


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