Question & Answer

1.    What is the difference between a benefit corporation and a B Corporation?

1.    : Is it reasonable to expect that managers can measure their social and environmental performance on the same level as they measure financial performance with a triple bottom line? Discuss.

Some bank managers argue that U.S. banks’ access to capital is restricted because the capital requirements imposed by U.S. regulators are too high. Write a short essay that offers logical insights into why high capital requirements may restrict a bank’s access to capital. Also, describe why high capital requirements for all banks in the United States might actually allow the banks to have easier access to capital. Which of the arguments do you believe? 

Dakota Bank has a branch overseas with the following balance sheet characteristics: 50 percent of the liabilities are rate-sensitive and denominated in Swiss francs; the remaining 50 percent of liabilities are rate-insensitive and are denominated in dollars. With regard to assets, 50 percent are rate-sensitive and are denominated in dollars; the remaining 50 percent of assets are rate-insensitive and are denominated in Swiss francs. (LO3, LO7)

A. Is the performance of this branch susceptible to interest rate movements? Explain.

B. Assume that Dakota Bank plans to replace its short-term deposits denominated in U.S. dollars with short-term deposits denominated in Swiss francs because Swiss interest rates are currently lower than U.S. interest rates. The asset composition would not change. This strategy is intended to widen the spread between the rate earned on assets and the rate paid on liabilities. Offer your insights into how this strategy could backfire.

C. One consultant has suggested to Dakota Bank that it could avoid exchange rate risk by making loans in whatever currencies it receives as deposits. In this way, it will not have to exchange one currency for another. Offer your insights into whether this strategy has any disadvantages.

Oregon Bank has branches overseas that concentrate on short-term deposits in dollars and floating-rate loans in British pounds. Because it maintains rate-sensitive assets and liabilities of equal amounts, the bank believes it has essentially eliminated its interest rate risk. Do you agree? Explain. (LO3)

Explain how banks become exposed to exchange rate risk. (LO7)

Does the use of floating-rate loans eliminate interest rate risk? Explain. (LO3)

If a bank has more rate-sensitive liabilities than rate-sensitive assets, what will happen to its net interest margin during a period of rising interest rates? During a period of declining interest rates? (LO3)

Why might a bank retain some excess earnings rather than distribute those funds as dividends? (LO1)

Do all commercial borrowers receive the same interest rate on loans? (LO5)

What are the two ways in which a bank should diversify its loans? Why? Is international diversification of loans a viable strategy for dealing with credit risk? Defend your answer. (LO4)

As economic conditions change, how do banks adjust their asset portfolio? (LO4)

Can a bank simultaneously maximize return and minimize credit risk? If not, what can it do instead? (LO4) 

Why do loans that can be prepaid on a moment’s notice complicate the bank’s assessment of interest rate risk? (LO3)

How do banks use duration analysis? (LO3)

What is a bank’s gap, and what does it attempt to determine? Interpret a negative gap. What are some limitations of measuring a bank’s gap? (LO3)

According to this chapter, have banks been able to insulate themselves against interest rate movements? Explain. (LO3)

Assume that a bank expects to attract most of its funds through short-term CDs and would prefer to use most of its funds to provide long-term loans. How could it follow this strategy and still reduce interest rate risk? (LO3)

What is the formula for the net interest margin? Explain why it is closely monitored by banks. (LO3)

If a bank is very uncertain about future interest rates, how might it insulate its future performance from future interest rate movements? (LO3)

List some rate-sensitive assets and some rate-insensitive assets of banks. (LO3)

If a bank expects interest rates to decrease over time, how might it alter the rate sensitivity of its assets and liabilities? (LO3)

How do banks resolve illiquidity problems? (LO2) 

Given the liquidity advantage of holding Treasury bills, why do banks hold only a relatively small portion of their assets as T-bills? (LO2)

What is accomplished when a bank integrates its liability management with its asset management? (LO1)