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FSU FIN 4324 - Mid-Term Exam Study Guide

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Commercial Bank Administration (FIN4324)Mid-Term Exam Study Guide 1. FDIC, Deposit Insurance and Deposit Insurance Pricing (6 questions) a. Federal Deposit Insurance Corporation (FDIC) - is a United States government corporation operating as an independent agency created by the Banking Act of 1933 (Glass-Steagall Act). i. The FDIC was created after the Great Depression, due to many banks experiencing Bank Runs. The FDIC was created to provide federal insurance for bank deposits. Banks pay premiums based on their deposits. Almost all banks in the U.S. hold this insurance today. ii. The original amount of money insured by the FDIC was $2,500; the minimum amount insured by the FDIC increased several times throughout its 80 year history, with the most notable changes being a minimum insured amount of $100,000 in 1980, and most recently a temporary increase to $250,000 in 2008 (made permanent by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010). iii. The FDIC acts as receiver and liquidator when chartering authority makes closure decision.1. Administers risk-based deposit insurance premiums are based upon capital adequacy and CAMELS ratings.2. Depending on the bank’s composite CAMELS risk rating it is placed in one of three risk categories:a. Risk Category A: CAMELS Rating = 1 or 2b. Risk Category B: CAMELS Rating = 3c. Risk Category C: CAMELS Rating = 4 or 53. The CAMELS ratings or Camels rating is a United States supervisory rating of the bank's overall condition used to classify the nation’s fewer than 8,000 banks. This rating is based on financial statements of the bank and on-site examination by regulators like the Federal Reserve, the Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation. Thescale is from 1 to 5 with 1 being strongest and 5 being weakest. These ratings are not released to the public but only to the top management of the banking company to prevent a bank run on a bank which has a bad CAMELS rating. a. (C)- Capital adequacyb. (A)- Asset qualityc. (M)- Management capabilityd. (E)- Earningse. (L)- Liquidityf. (S)- Sensitivity to market risk 4. The Deposit Insurance Subsidy can be thought of as the reduction in interest expense the bank can generate on the insured deposits it provides. a. Investors will accept a lower deposit rate because of the deposit insurance they receive 2. Various Definitions of banking, Glass-Steagal and Gramm-Leach-Bliley Acts (12 questions)a. Commercial Bank - Commercial banks are the only financial intermediaries that (1) accept demand deposits (liabilities) and (2) make commercial loans (assets); they represent the largest group of depository institutions measured by asset size i. Under the Glass-Steagall Act of 1933, these two characteristics defined the legal definition of a commercial bank and distinguished it from investment banking ii. Investment banking consists primarily of securities underwriting and related activities such as making primary and secondary markets in securities and facilitating corporate mergers and acquisitions.iii. Banks are also distinguishable from other depository intermediaries because they (1) offer the widest variety of types of deposit liabilities, (2) make use of several types of non-deposit liabilities, and (3) offer the broadest array of loans. iv. A major difference between banks and other firms is their high leverage or debt-to-assets ratio.b. Banks by size and typei. Retail Banks : consumer oriented banking activities such as residential and consumer loans and small time and savings deposits 1. ex: Bank of America, Wells Fargo, SunTrust ii. Wholesale Banks : commercial oriented banking activities such as commercial loans funded by purchased funds1. ex: Citigroup/CitiBank, US Bancorp, PNC Financial iii. Investment Banks : banking activities designed to help customers raise funds, consisting of advising, underwriting, marketing, and distributing financial securities 1. ex: JPMorgan, Goldman Sachs, Morgan Stanley, Jeffries Inc.c. Transaction accounts - The sum of noninterest-bearing demand deposits and interest-bearing checking accounts.d. NOW account - An interest-bearing checking account.e. Negotiable CDs - Fixed-maturity interest-bearing deposits with face values of $100,000 or more that can be resold in the secondary market. f. Retail CDs - Time deposits with a face value below $100,000.g. Wholesale CDs - Time deposits with a face value of $100,000 or more. h. Federal funds market - An interbank market for short-term borrowing and lending of bank reserves. i. Interest rate spread - The difference between lending and deposit rates. j. Dual banking system - The coexistence of both nationally and state-chartered banks, as in the United States. k. Commercial banking - Banking activity of deposit taking and lending.l. Investment banking - Banking activity of underwriting, issuing, and distributing securities. m. Unit bank - A bank with a single office. n. Glass-Steagal Acti. aka Bank Act of 1933ii. Prohibits payment of interest on demand deposits iii. Establishes the FDIC iv. Seperates banking from investment bankingv. Establishes interest rate ceilings on savings and time deposits vi. Allows Federal Reserve to set stock margin requirements o. The Gramm-Leach-Bliley Financial Modernization Act (11/12/1999)i. Repeals the anit-competitive aspects of the Glass-Steagall Act of 1933ii. Permits mergers and affiliations between banks/thrifts and brokers, investment and insurance companiesiii. Permits banks/thrifts, insurors and investment/brokers to sell each others’ products iv. Prohibits non-financial companies from buying banks, thrifts, insurors or brokersv. Allows wider access to borrowing from Federal Home Loan banks for small banks and thrifts vi. Strengthens consumer privacy and CRA protection 3. Chartering, Branch Banking, Bank Holding Companies and Changing Structure of Banking Markets (13 questions) a. Charters- Dual Banking Systemi. State Charters1. First form of bank charter in the US dating back to early 1700s2. Granted by State Agencya. Office of Financial Regulation – Division of Financial Institutions-Licensing and Chartering 3. The state system is characterized bya. State charteringb. Bank powers established under state lawsc. Operation under state standards d. Subject to state supervision 4. Application to appropriate state agency5. No Federal requirement that they join FED or have FDIC


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