THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 377

CHAPTER 13 Banking and the Management of Financial Institutions If the First bank decides to convert $5 million of its fixed-rate assets into rate-sensitive assets, what will happen to its interest-rate risk? Explain using gap analysis What happens to the market value of the bank s assets if the interest rate increases by percentage points? What happens to the market value of the bank s liabilities if the interest rate falls by percentage points? What will happen to the bank s net worth if interest rates rise by 10 percentage points? Will the bank stay in business? Why or why not? 10 WestBank just started operations with $6 million in capital On the first day of operations, it received 345 $100 million in chequable deposits and issued $25 million non-mortgage loans and another $25 million in mortgages a If the desired reserve ratio is 8%, what does the bank s balance sheet look like? b On the second day of operations, the bank decides to invest $45 million in 30-day T-bills, traded at $4986.70 per $5000 face value How many T-bills does the bank purchase? How does the bank s balance sheet look after the purchase of these T-bills? c On the third day of operations, deposits fall by $5 million What does the balance sheet look like? Are there any problems? If yes, how can the bank address the problems? WEB EXERCISES It is relatively easy to find up-to-date information on banks because of their extensive reporting requirements Go to www.osfi-bsif.gc.ca This site is sponsored by the Office of the Superintendent of Financial Institutions Canada (OSFI) You will find balance sheet data on domestic banks as well as on foreign bank subsidiaries a Have bank loans been increasing or decreasing over the last few years? b Has bank capital been increasing? How does it compare to the figure reported in Table 13-1 (p 315)? Table 13-1 reports the balance sheet of all commercial banks based on aggregate data found in the OSFI s website Compare this table to the balance sheet information reported (under Financial Highlights) by CIBC at www.cibc.com /ca/inside-cibc/fin-higlights html Does CIBC have more or less of its portfolio in loans than the average Canadian bank? This chapter discussed the need financial institutions have to control credit risk by lending to creditworthy borrowers If you allow your credit to deteriorate, you may find yourself unable to borrow when you need to Go to www.quicken.com/cms/viewers/article/ banking/39654 and assess your own creditworthiness What can you to improve your appeal to lenders? The CDIC is extremely concerned with risk management in banks High-risk banks are more likely to fail and cost the CDIC money The CDIC regularly examines banks and rates them using a system called CAMELS Go to www.fdic.gov/regulations/ safety/manual/index.html What does the acronym CAMELS stand for? Go to Part II 7.1 and review the discussion of Market Risk Summarize the interest-rate risk-measurement methods Be sure to visit the MyEconLab website at www.myeconlab.com.This online homework and tutorial system puts you in control of your own learning with study and practice tools directly correlated to this chapter content On the MyEconLab website you will find the following appendices and mini-cases for this chapter: Appendix 13.1: Measuring Bank Performance Appendix 13.2: Nonbanking Financial Institutions and Duration Analysis Mini-Case 13.1: Bank Performance Analysis Mini-Case 13.2: Calculating and Comparing Gap, Duration, and Risk Management Alternatives