FIN 480 UKY EXAM 2 STUDY GUIDE
McFadden Act - Answers - prevented BRANCH BANKS across state lines
Glass Steagall Act - Answers - law that established the federal deposit insurance
corporation to protect individuals bank accounts and prevented securities and insurance
by commercial banks
Riegle-Neal Act - Answers - Repealed McFadden Act and allowed interstate branching
Gramm-Leach-Bliley Act - Answers - Repealed glass steagle act's prohibition of
mergers between commercial bank and insurance companies or securities firms
Dodd Frank Act - Answers - Aims to prevent financial crises and government bailouts of
intermediaries partly through govt oversight of SIFIs
States outlawed bank branching - Answers - The US has many banks because
Service fees and what it pays for its liabilities and the return it receives on its assets -
Answers - A banks profit comes from
Profits - Answers - Revenue - Costs
Reserves (%of cash held, vault cash), cash in collections , balances banks hold at other
banks - Answers - Three types of cash assets a bank holds
Securities - Answers - Sometimes referred to as Secondary reserves, second largest
component of bank assets
Loans - Answers - Primary assets of modern banks, accounting for well over one-half of
assets
Business loans (commercial and industrial loans), real estate loans, consumer loans,
interbank loans, other types - Answers - 5 categories of Loans
Deposits and borrowings - Answers - Bank liabilities
Borrowing from the Federal Reserve (which is rare) or other banks. Accounts for
somewhat less than 15% of bank liabilities - Answers - Banks can borrow by
repurchase agreements (repos) - Answers - A short term collateralized loan in which a
security is exchanged for cash. Typically reversed the next day.
Capital - Answers - The cushion banks have against a sudden drop in the value of their
assets or unexpected withdrawal of liabilities.
, Loan loss reserves - Answers - An amount the bank sets aside to cover potential losses
from defaulted loans
ROE and ROA - Answers - Measures of bank profitability
ROE - Answers - Banks net profit after taxes divided by the banks capital (equity)
ROA (return on assets): - Answers - Banks profit left after taxes divided by the bank's
total assets. A measure of of how efficiently a particular bank uses its assets
Net Interest Income - Answers - Final measure of bank profitability. Banks pay interest
on liabilities and receive interest on their assets
Net Interest margin - Answers - Interest income generated by assets minus interest
expense from liabilities relative to amount of assets
Net interest income = 5-2 = 3
Net interest margin = (5-2)/100 = 3% - Answers - Ex: $100 of loans (assets) payed $5
and paid $2 on deposits
Lines of credit (similar to limits on credit cards), letters of credit - Answers - 2 off-
balance-sheet acitivities
Service fees and what it pays for liabilities vs what it receives for assets - Answers - A
banks profit comes from
Shows what banks do with the funds they raise - Answers - Asset side of the balance
sheet
Cash, securities, loans, all other assets - Answers - 4 categories of assets
Reserves, cash items in collections, balances at other banks - Answers - Cash assets
moral hazard problem - Answers - when people don't have to bear the negative
consequences of their actions - deposit insurance
A bank receives higher interest rates on its assets relative to what it pays for liabilities -
Answers - Net interest income is based on the idea that
Liquidity Risk - Answers - Risk of sudden demand for liquid funds, face this on both
sides of their balance sheets
Sell a portion of its securities portfolio (treasury bonds), sell loans to another bank,
refuse to renew a customer loan - Answers - To negate liquidity risk on the asset side of
a banks balance sheet they can
McFadden Act - Answers - prevented BRANCH BANKS across state lines
Glass Steagall Act - Answers - law that established the federal deposit insurance
corporation to protect individuals bank accounts and prevented securities and insurance
by commercial banks
Riegle-Neal Act - Answers - Repealed McFadden Act and allowed interstate branching
Gramm-Leach-Bliley Act - Answers - Repealed glass steagle act's prohibition of
mergers between commercial bank and insurance companies or securities firms
Dodd Frank Act - Answers - Aims to prevent financial crises and government bailouts of
intermediaries partly through govt oversight of SIFIs
States outlawed bank branching - Answers - The US has many banks because
Service fees and what it pays for its liabilities and the return it receives on its assets -
Answers - A banks profit comes from
Profits - Answers - Revenue - Costs
Reserves (%of cash held, vault cash), cash in collections , balances banks hold at other
banks - Answers - Three types of cash assets a bank holds
Securities - Answers - Sometimes referred to as Secondary reserves, second largest
component of bank assets
Loans - Answers - Primary assets of modern banks, accounting for well over one-half of
assets
Business loans (commercial and industrial loans), real estate loans, consumer loans,
interbank loans, other types - Answers - 5 categories of Loans
Deposits and borrowings - Answers - Bank liabilities
Borrowing from the Federal Reserve (which is rare) or other banks. Accounts for
somewhat less than 15% of bank liabilities - Answers - Banks can borrow by
repurchase agreements (repos) - Answers - A short term collateralized loan in which a
security is exchanged for cash. Typically reversed the next day.
Capital - Answers - The cushion banks have against a sudden drop in the value of their
assets or unexpected withdrawal of liabilities.
, Loan loss reserves - Answers - An amount the bank sets aside to cover potential losses
from defaulted loans
ROE and ROA - Answers - Measures of bank profitability
ROE - Answers - Banks net profit after taxes divided by the banks capital (equity)
ROA (return on assets): - Answers - Banks profit left after taxes divided by the bank's
total assets. A measure of of how efficiently a particular bank uses its assets
Net Interest Income - Answers - Final measure of bank profitability. Banks pay interest
on liabilities and receive interest on their assets
Net Interest margin - Answers - Interest income generated by assets minus interest
expense from liabilities relative to amount of assets
Net interest income = 5-2 = 3
Net interest margin = (5-2)/100 = 3% - Answers - Ex: $100 of loans (assets) payed $5
and paid $2 on deposits
Lines of credit (similar to limits on credit cards), letters of credit - Answers - 2 off-
balance-sheet acitivities
Service fees and what it pays for liabilities vs what it receives for assets - Answers - A
banks profit comes from
Shows what banks do with the funds they raise - Answers - Asset side of the balance
sheet
Cash, securities, loans, all other assets - Answers - 4 categories of assets
Reserves, cash items in collections, balances at other banks - Answers - Cash assets
moral hazard problem - Answers - when people don't have to bear the negative
consequences of their actions - deposit insurance
A bank receives higher interest rates on its assets relative to what it pays for liabilities -
Answers - Net interest income is based on the idea that
Liquidity Risk - Answers - Risk of sudden demand for liquid funds, face this on both
sides of their balance sheets
Sell a portion of its securities portfolio (treasury bonds), sell loans to another bank,
refuse to renew a customer loan - Answers - To negate liquidity risk on the asset side of
a banks balance sheet they can
