COMMERCIAL BANK MANAGEMENT
FINAL EXAM PREP QUESTIONS AND
ANSWERS
Out of non-interest expense, which is the largest component? - Answer-Personnel
expense
Operating Risk Ratio - Answer-- (Non-interest Expense -Non-interest Income)/Net
Interest Margin
- Lower is better because proportionally more income comes from fees.
Productivity Ratios - Answer-- Asset per employee = Average Assets/Number of Full-
time Employees
- Average personnel expense = Personnel Expense/Number of Full-time Employees
Line-of-Business Profitability Analysis - Answer-- Risk-Adjusted Return on Capital
(RAROC): Risk-adjusted income / Capital
- Return on Risk Adjusted Capital (RORAC): Income /Allocated-risk Capital
Volker Rule - Answer-Prohibits proprietary trading using FDIC funds and limits hedge
fund and private equity fund investing
Proprietary trading - Answer-- occurs when an investment bank commits its own
funds to take a risk position in a security, commodity or asset.
- Hopes to profit later by reversing the trade
What is an ILC? - Answer-- Industrial Loan Companies
- Originated in the early 1900s to make loans to borrowers who could not get loans
at commercial banks
- Over time, ILCs were granted the right to issue deposits insured by the FDIC.
- Historically, most ILCs operated to assist their parent organization in some facet of
the firm's core business.
Why does Mutual of Omaha have a Mutual of Omaha Banks? - Answer-- MO Bank's
strategic objective is to "acquire community banks in fast-growing cities with a high
density of Mutual of Omaha insurance customers.
- MO Bank benefits from the strong capital based and low-risk profile of its parent
- The principal benefit from operating as part of MO is the diversification and access
to capital
- Second phase of MO Bank's strategy is the creation of a virtual online bank where
customers can transact business online from anywhere in the U.S
Asset utilization (AU) - Answer-a measure of the institution's ability to generate total
revenue.
Noninterest Income (OI) - Answer-Fees, fiduciary activities, service charges, trading
revenues and other noninterest income
, Net Interest Margin (NIM) - Answer-- a summary measure of the net interest return
on income-producing assets
- Net Interest Income/Average Earning Assets
Spread (SPRD) - Answer-- a measure of the rate spread or funding differential on
balance sheet items that earn or pay interest.
- Interest Income/Average Earning Assets – Interest Expense/Average Interest-
Bearing Liabilities
Burden ratio - Answer-- measure the amount of non-interest expense covered by
fees, service charges, securities gains and other income as a fraction of total assets.
- (Non-Interest Expense - Non-Interest Income)/Average Earning Assets
Efficiency ratio - Answer-- measures a bank's ability to control non-interest expense
relative to total revenue net of interest expense.
- Non-Interest Expense/(Net Interest Income + Non-Interest Income)
Define core deposits - Answer-- consist of demand deposits, NOW and ATS
account, MMDAs, other savings and time deposits less than FDIC limits.
- stable deposits that are not typically withdrawn over short periods of time.
- Most valuable and stable source of institutions' funding.
Define the commercial banking industry as reported by IBIS - Answer-The
Commercial Banking industry comprises banks that provide financial services to
retail and business clients in the form of commercial, industrial and consumer loans.
Banks accept deposits from customers, which are used as sources of funding for
loans. Banks in this industry are regulated by the Office of the Comptroller of the
Currency
Top 3 largest banks - Answer-1. Jp morgan Chase & Co- 7.3%
2. Wells Fargo & Company- 6.6%
3. Bank Of America Corporation- 5.1%
What are the characteristics of the banking industry for the next 5 years? - Answer-
Over the five years to 2027, IBISWorld expects operators in the Commercial Banking
industry to experience steadily improving operating conditions.
What are the tools the Fed uses to change the money supply? - Answer-- Fed can
adjust the level of reserves thereby influencing short-term interest rates and the
growth of the money supply.
- Changes in discount rate affect cost of reserve borrowing
- Changes in the reserve requirements adjusts the amount of funds an institution can
lend out
How is net income for a bank derived? - Answer-Net interest income - burden -
provision for loan loss + securities gains or losses - taxes.
What transaction is the highest cost for a bank? - Answer-Live teller transactions
FINAL EXAM PREP QUESTIONS AND
ANSWERS
Out of non-interest expense, which is the largest component? - Answer-Personnel
expense
Operating Risk Ratio - Answer-- (Non-interest Expense -Non-interest Income)/Net
Interest Margin
- Lower is better because proportionally more income comes from fees.
Productivity Ratios - Answer-- Asset per employee = Average Assets/Number of Full-
time Employees
- Average personnel expense = Personnel Expense/Number of Full-time Employees
Line-of-Business Profitability Analysis - Answer-- Risk-Adjusted Return on Capital
(RAROC): Risk-adjusted income / Capital
- Return on Risk Adjusted Capital (RORAC): Income /Allocated-risk Capital
Volker Rule - Answer-Prohibits proprietary trading using FDIC funds and limits hedge
fund and private equity fund investing
Proprietary trading - Answer-- occurs when an investment bank commits its own
funds to take a risk position in a security, commodity or asset.
- Hopes to profit later by reversing the trade
What is an ILC? - Answer-- Industrial Loan Companies
- Originated in the early 1900s to make loans to borrowers who could not get loans
at commercial banks
- Over time, ILCs were granted the right to issue deposits insured by the FDIC.
- Historically, most ILCs operated to assist their parent organization in some facet of
the firm's core business.
Why does Mutual of Omaha have a Mutual of Omaha Banks? - Answer-- MO Bank's
strategic objective is to "acquire community banks in fast-growing cities with a high
density of Mutual of Omaha insurance customers.
- MO Bank benefits from the strong capital based and low-risk profile of its parent
- The principal benefit from operating as part of MO is the diversification and access
to capital
- Second phase of MO Bank's strategy is the creation of a virtual online bank where
customers can transact business online from anywhere in the U.S
Asset utilization (AU) - Answer-a measure of the institution's ability to generate total
revenue.
Noninterest Income (OI) - Answer-Fees, fiduciary activities, service charges, trading
revenues and other noninterest income
, Net Interest Margin (NIM) - Answer-- a summary measure of the net interest return
on income-producing assets
- Net Interest Income/Average Earning Assets
Spread (SPRD) - Answer-- a measure of the rate spread or funding differential on
balance sheet items that earn or pay interest.
- Interest Income/Average Earning Assets – Interest Expense/Average Interest-
Bearing Liabilities
Burden ratio - Answer-- measure the amount of non-interest expense covered by
fees, service charges, securities gains and other income as a fraction of total assets.
- (Non-Interest Expense - Non-Interest Income)/Average Earning Assets
Efficiency ratio - Answer-- measures a bank's ability to control non-interest expense
relative to total revenue net of interest expense.
- Non-Interest Expense/(Net Interest Income + Non-Interest Income)
Define core deposits - Answer-- consist of demand deposits, NOW and ATS
account, MMDAs, other savings and time deposits less than FDIC limits.
- stable deposits that are not typically withdrawn over short periods of time.
- Most valuable and stable source of institutions' funding.
Define the commercial banking industry as reported by IBIS - Answer-The
Commercial Banking industry comprises banks that provide financial services to
retail and business clients in the form of commercial, industrial and consumer loans.
Banks accept deposits from customers, which are used as sources of funding for
loans. Banks in this industry are regulated by the Office of the Comptroller of the
Currency
Top 3 largest banks - Answer-1. Jp morgan Chase & Co- 7.3%
2. Wells Fargo & Company- 6.6%
3. Bank Of America Corporation- 5.1%
What are the characteristics of the banking industry for the next 5 years? - Answer-
Over the five years to 2027, IBISWorld expects operators in the Commercial Banking
industry to experience steadily improving operating conditions.
What are the tools the Fed uses to change the money supply? - Answer-- Fed can
adjust the level of reserves thereby influencing short-term interest rates and the
growth of the money supply.
- Changes in discount rate affect cost of reserve borrowing
- Changes in the reserve requirements adjusts the amount of funds an institution can
lend out
How is net income for a bank derived? - Answer-Net interest income - burden -
provision for loan loss + securities gains or losses - taxes.
What transaction is the highest cost for a bank? - Answer-Live teller transactions
