Show as many calculations as possible Time: about two hours. I1] True or False?
ID: 2817782 • Letter: S
Question
Show as many calculations as possible Time: about two hours. I1] True or False? (25 points) (1) in Basel I regulations on credit risk, the riskier the loan, the higher the proportion of equity that is needed to fund it. (2) Interbank loans are generally seen as a cheap and but unstable source of funding for commercial banks. (3) An inverted yield curve, in which long-term interest rates are lower than short-term interest rates is a good situation for commercial banks because their cost of funds is based on short-term rates, while the interest they charge on loans is based on long-term interest rates. (4) The Basel Committee on Bank due to unexpected changes in the difference between long-term and short-term interest rates. Is that statement true or false? Supervision defines an operational loss as the loss in market value (5) Net interest margin is defined as interest income minus the cost of funding (6) During a yield curve bear flattener' move, interest rate risk decreases. (7) Deutsche Bank lends 500 million to Petrobras, the Brazilian oil company. The loan is funded in Germany. Therefore, Deutsche Bank runs cross-border country risk.Explanation / Answer
1. True. With high risk loans, ie., when the chances of non repayment are high regarding such loans Basel II regulations insist use of higher proportion of tier 1 capital.
Tier 1 capital, according to Basel normal is nothing but common shareholder equity, disclosed reserves and non cumulative perpetual preferred stock.
Equity being fully paid, helps in absorbing the losses permanently. Therefore , definitely, in respect of loans with high credit risk, higher proportions of equity is being adviced. It must also be remembered that the debt capital carries a financial risk with itself which can make banks more vulnerable.
2. Inter bank loans:
Interbank loans are nothing but the loans given by one bank to another who is in need of funds to meet the regulatory requirements. Banks with surplus funds use this as a way to park it's excess funds and the needs banks accept the loans. Through this the lender bank gets an interest called overnight rate. It is TRUE that interbank loans are cheaper sources of fund , however they are unstable. It can be useful only when there is complementary needs between the parties.
5.Net interest margin is the difference between the interest income it earns on loans advanced and the amount of interest it pays to its lenders with respect to assets.
6.in bear flattener move, short term interest rates rise master than long term interest rates. It is an indicator of bearish economy. The short term interest and long term interest rates converge and therefore interest rate risk declines.
Net interest margin= (investment returns - interest expenses) / average earning assets