Financial Institute

Selected End-of-Chapter Questions and Problems - Chapter Two 4. What are the major uses of funds for commercial banks in the United States? What are the primary risks to a bank caused by each use of funds? Which of the risks is most critical to the continuing operation of the bank?

Loans and investment securities continue to be the primary assets of the banking industry. Commercial loans are relatively more important for the larger banks, while consumer, small business loans, and residential mortgages are more important for small banks. Each of these types of loans creates credit, and to varying extents, liquidity risks for the banks. The security portfolio normally is a source of liquidity and interest rate risk, especially with the increased use of various types of mortgage-backed securities and structured notes. In certain environments, each of these risks can create operational and performance problems for a bank. 5. What are the major sources of funds for commercial banks in the United States? How is the landscape for these funds changing and why?

The primary sources of funds are deposits and borrowed funds. Small banks rely more heavily on transaction, savings, and retail time deposits, while large banks tend to utilize large, negotiable time deposits and nondeposit liabilities such as federal funds and repurchase agreements. The supply of nontransaction deposits is shrinking, because of the increased use by small savers of higher-yielding money market mutual funds, 7. How does the liability maturity structure of a bank’s balance sheet compare with the maturity structure of the asset portfolio? What risks are created or intensified by these differences?

Deposit and nondeposit liabilities tend to have shorter maturities than assets such as loans. The maturity mismatch creates varying degrees of interest rate risk and liquidity risk. 12. What are the main features of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994? What major...