The Mid Term Exam will be given on Tuesday March 1st Please bring a pencil and a non programmable calculator The exam will cover all material in the following PowerPoint slides Part 1 Introduction A Why Study Commercial Banking Part 2 Bank Financial Statements 2 A Commercial Bank Financial Statements Balance Sheet 2 A 1 Definition of Deposit Broker 2 A 2 Reserve Computation and Reserve Maintenance Periods 2 A 3 Illustration of the Computation of Required Reserves Assigned reading from the textbook include Chapter 1 Introduction pp 10 17 Chapter 11 Commercial Banks Industry Overview pp 36 59 Chapter 12 Commercial Bank Financial Statements and Analysis pp 62 79 Exam Composition The exam has two parts Part 1 is made of 45 multiple choice and True False questions similar in nature to the questions appearing on the quizzes Each objective question is worth 2 points Part 2 of the exam is a computation analysis question similar in nature to Mini Case 1 dealing with the computation of required reserves The breakdown of the objective questions is as follows 2 questions purpose of the Glass Steagall Act Stock market crash of 1929 led to concern that bank involvement in capital market activites was leading to losses to banks and contributing to large number of bank failures so congress wanted to restrict use of bank credit for speculative purposes Imposed interest rate ceiling on bank deposits Commercial Bank Legal Definition Accept demand deposits make commercial Loans 1 question FDIC The FDIC insures deposits in member banks up to US 250 000 per individual per institution 3 questions Definitions of Retail Wholesale and Investment banking Question Banks with business models that are focused on consumer oriented banking activities such as consumer loans and small time deposits are often referred to as Answer Retail Banks Wholesale banks commercial oriented banking activities such as commercial loans funded by purchased funds Investment banking consists primarily of securities underwriting and related activities such as making primary and secondary markets facilitating corporate M A Viewed by Glass Steagall as too risky for banks a potential source of conflict of interest 1 question shadow banks Include money market funds hedge funds private equity funds securities broker dealers and insurance companies Question Financial companies that offer banking services but either do not accept demand deposits or make commercial loans and therefore are not regulated as banks are known as Answer Shadow Banks 1 question source of bank profitability Positive Rate Spread Banks are in position to earn a higher expected return on their assets than they pay on their liabilities Question For a bank to be profitable i e have a positive ROA the spread between the average rate earned on its assets and the average rate paid for its liabilities must be large enough to cover Answer Sum of both A B A The operating and administrative costs per dollar of assets b The expected losses per dollar of assets 1 question definition of a SIFI Systematically Important Financial Institution Any firm as designated by the Financial Stability Oversight Council and regulated by the U S Federal Reserve whose collapse would pose a serious risk to the economy Systematically important financial institutions became the target of legislation and regulatory reform by the Obama Administration due to issues concerning their consolidated supervision and regulation following the financial crisis of 2008 Intended to prevent firms from becoming too big to fail 1 question banks advantage s in financing below investment grade borrowers Banks are better credit risk managers than the average bond investor they are better at screening and monitoring risk Question Research evidence indicates that while corporate bond spreads and the bank rate spreads increase as a borrower s credit rating declines the corporate bond spread does NOT increase as quickly and the bank rate spread Answer False 1 question bank certification effect Question The positive stock price reaction to the announcement of a new or renewed loan agreement between a company and a bank Answer All of the Above A Is known as the bank certification effect b Is attributed to the fact that banks are believed to have access to more and better information than do investors c Is attributed to the fact that banks are believed to have more expertise in screening and monitoring credit risk than do investors 3 questions Sources of funding for US publically traded manufacturing firms 69 New loans 29 sales of new bonds 2 sales of new shares of equity Question The average publicly traded US manufacturing firm obtains approximately of its funding from internal sources such as current profits and retained earnings Answer 70 Question The majority of the external funding utilized by the average publicly traded US manufacturing firm is obtained from Answer New Bank Loans 1 question the most important source of bank profits and risk Loans generate most profit Profit Interest Rev on Assets Interest cost of Funds Operating Costs Expected Losses Profit Ra X A Rl X L OC EL 1 question usefulness of financial statement information Contains useful info Profitability Liquidity and Solvency Most banks are not publicly traded and therefore have no observable stock or bond prices Heavily utilized by Regulators in evaluating the safety and soundness of bank Heavily relied upon by industry analysts to evaluate bank performance Heavily relied upon by Ownership and Management to evaluate bank performance 1 question income statement Shows the various sources of expenses incurred by the bank to generate revenues and is a reflection of the outcome of previous decisions that management has already made Question The financial statement that provides evidence of the quality and effectiveness of the previous funding and investment decisions made by bank managers is Answer b The income statement or Report of Income 1 question balance sheet Shows the amount of funds generated by each type of liability and equity the bank has used to finance its lending and investing activities Question The financial statement that captures at a point in time the decisions the bank has already made to acquire and invest its funds is the Answer Balance Sheet or Report of Condition 1 question core deposits Most stable source and lowest cost of funding Question All but which one of the following deposit liabilities would be included among a bank s