Week 7

1. Consider a bank that has rate-sensitive assets of $200 and rate-sensitive liabilities of $100. These assets and liabilities are everything this bank has on its balance sheet.

a. Describe the bank's balance sheet using a t-account. Compute this bank's net worth ratio and its debt-to-equity ratio.

b. Suppose the interest rate in the market rise from 8% to 10%. According to Gap analysis, how much will the bank's profit change due to the rise in the interest rate?

2. Consider a bank that has fixed-rate assets of $150 and fixed-rate liabilities of $100. These assets and liabilities are everything this bank has on its balance sheet. Assume the average duration of the fixed-rate assets is 5 years and the average duration of the fixed-rate liabilities is 2 years.

a. Describe the bank's balance sheet using a t-account. Compute this bank's net worth ratio and its debt-to-equity ratio.
b. Suppose the interest rate in the market rise from 10% to 20%. According to Duration analysis, what will be the resulting net worth due to the rise in the interest rate?

3. The McFadden Act wan passed by Congress in 1927. What did this Act do?

4. What were the two alleged reasons for the failure of many financial institutions in the Great depression?

5. List three main components of Glass-Steagall Act of 1933. Out of three components, which one did increase moral hazard? Which one contributed to disintermediation?

6. What did the Interstate Banking and Branching Efficiency Act of 1994 (IBBEA) allow? What was the objective?

7. What is the purchase and payoff method? What is the payoff method?

8. List what Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) did.

9. List what Garn-St. Germain Depository Depository Institutions Act of 1982 did. What was the objective?

10. Financial Institutions Reform, Recovery, and Enforcement Act of 1989 attempted to resolve the S&L crisis. List three components of this act. By this act, the Federal Home Loan Bank, which had regulated the S&Ls, was replaced by new government agency. What was the new government agency?

11. The Gramm-Leach-Bliley Act (GLBA) became effective in 2000. What did it do?

12. Between 1980 and 1994, 1,617 banks failed. There were two alleged reasons for this. What were they?

13. Consider a bank and two firms. One firm is risky firm while another is safe. When the risky firm is granted a loan, it will accept the interest rate up to 20%. When the safe firm is granted a loan, it will accept the interest rate up to 10%. If the bank knows the type of firms in granting a loan, it will charge the interest rate at least 18% to the risky firm and at least 4% to the safe firm. Assume the bank does not know the type of firms, but it knows the following table. Moreover, assume each firm knows its type. Find the possible range of the market interest rate and discuss who is in the market and who is driven out of the market.