List and describe the different channels that banks use to deliver banking services. For each, describe the characteristics of the customers who will likely be active users of services in that channel.
Change is always good for some participants and bad for others. Which types of financial institutions appear best situated to gain from potential changes in the regulatory structure within the financial services arena? Which institutions seem most likely to lose?
What are the basic arguments for increasing capital requirements at large commercial banks? In what ways will depositors, stockholders, and society in general benefit? How might each group be disadvantaged? As commercial banks enter new lines of business such as brokerage, how much additional capital should be required? Should these new lines of business be insured by the FDIC? Why or why not? Give examples from today’s financial marketplace.
Assume that you manage the interest rate risk position for your bank. Your bank currently has a positive cumulative GAP for all time intervals through one year. You expect that interest rates will fall sharply during the year and want to reduce your bank’s risk position. The current yield curve is inverted with long-term rates below short-term rates.
a. To reduce risk, would you recommend issuing a three-month time deposit and investing the proceeds in one-year T-bills? Will you profit if rates fall during the year?
b. To reduce risk, would you recommend issuing a three-month time deposit and making a two-year commercial loan priced at prime plus 1 percent? Why?
Your bank has 50 percent of its loans priced off the current prime rate at prime plus 1 percent, on average. The majority of the bank’s liabilities are interest-bearing core deposits (NOWs, MMDAs, and small-time deposits).
a. Assume that the prime rate immediately rises from 6 percent to 6.5 percent. Will management likely increase deposit rates by 0.50 percent immediately? Explain why or why not. What will be the impact on the bank’s spread?
b. Assume that the prime rate immediately falls from 6 percent to 5.5 percent. Will management likely decrease deposit rates by 0.50 percent immediately? Explain why or why not. What will be the impact on the bank’s spread?
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