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FIN4324 Commercial Bank Management
Assignment 1
Chapter 1 Problems and Projects #1 on page 22
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1. You recently graduated from college with a business degree
and accepted a position at a major corporation earning more
than you could have ever dreamed. You want to (1) open a
checking account for transaction purposes, (2) open a savings
account for emergencies, (3) invest in an equity mutual fund
for that far-off future called retirement, (4) see if you can find
more affordable auto insurance, and (5) borrow funds to buy a
condo, helped along by your uncle who said he was so proud of
your grades that he wanted to give you $20,000 towards a
down payment. (Is life good or what?) Make five lists of the
financial service firms that could pro- vide you each of these
services.
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(1) Firms providing checking account services include credit unions, fringe banks,
banks, and savings and loan associations. Securities brokers also offer checking
accounts services. Many brokers have recently become a bigger player in
offering online checking accounts that often offer a higher interest rate than
many banks are willing to pay.
(2) When opening a savings account, the options available for doing so are
commercial banks, credit unions, savings associations, and online brokerages.
(3) When opening a retirement fund, there is a significant competition available,
offering distinct benefit and contribution schemes. The options for retrieving
these funds are inclusive of private pension funds, mutual funds, banks, trust
departments, and insurance firms. These options offer a variety of investment
options for retirement including equity mutual funds.
(4) If I were searching for auto insurance, I would have the options of using a
traditional insurer such as Prudential Insurance, State Farm, financial holding
companies, or approach some of the newer discount insurers including Geico and
Progressive. As an alternative, I could use a service such as Esurance to search
for the best rate.
(5) Upon trying to borrow funds for purchasing a condo, one could approach a
traditional bank, financial companies such as GMAC, or savings associations that
specialize in granting home mortgage loans. A site such as LendingTree, reverseauction sites, would also be helpful.
Chapter 2 Problems and Projects #1 and 2 on page 60
1. For each of the actions described, explain which government
agency or agencies a financial manager must deal with and
what laws are involved: a. Chartering a new bank. b.
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Establishing new bank branch offices. c. Forming a bank
holding company (BHC) or financial holding company. (FHC). d.
Completing a bank merger. e. Making holding company
acquisitions of nonbank businesses.
A. The state banking commission, located in the specific state where the bank
will be headquartered must be contacted. The Comptroller of the Currency may
also be addressed an application for a national charter. The National Banking Act
controls national controlled by rules set in local state banking laws.
B. Applications for creating new branch locations must also be made of the
bank's chartering agency either Comptroller of the Currency for national banks in
the United States, or the state banking commission for state-chartered banks.
C. Applications for holding company formation go through the Federal Reserve
Board or, for some basic transactions, to the Federal Reserve Bank in the
community. Certain states require local banking commissions to be contacted if a
holding company acquires a firm within the state.
D. When national banks merge, their application must be approved by the
Comptroller of the Currency as well as the state banking commission, if the bank
has a state charter of incorporation. This merger also must be analyzed by other
federal agencies which have supervisory responsibility for a bank, for instance
the FDIC or Federal Reserve, as well as by the DOJ, or U.S. Department of Justice.
The Bank Merger Act requires the approval of a bank's principal federal
supervisory agency for a prospective merger, even if the firm is chartered by the
state.
E. Acquisitions of nonbank businesses have to be be approved by the FRB, or
Federal Reserve Board. For some more routine transactions, the local Federal
Reserve Bank in the district can make the decision.
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2. See if you can develop a good case for and against the
regulation of financial institutions in the following areas: a. b.
c. d. e.
A. Restrictions on the number of new financial-service
institutions allowed to enter the industry each year.
B. Restrictions on which depository institutions are eligible for
government-sponsored deposit insurance.
C. Restrictions on the ability of financial firms to underwrite
debt and equity securities issued by their business
customers.
D. Restrictions on the geographic expansion of banks and
other financial firms, such as limits on branching and
holding company acquisitions across state and international
borders.
E. Regulations on the failure process, defining when banks and
other financial firms are to be allowed to fail and how their
assets are to be liquidated.
A. Restricting entry into the banking industry limits competition and, to some
extent, protects some banks from failure, reducing the risk of depositor loss.
Contrarily, limiting new firms props up some financial-service companies that
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should be allowed to deteriorate if the system is to be as efficient as it can
be.
B. The heavy restrictions on which banks can get deposit insurance
minimizes competition but reassures some banks to take on more risk
because most depositors are protected by the insurance. Restricting which
firms are suitable for deposit insurance may limit the losses to the federal
agency providing that insurance but may further limit that federal agency’s
ability to monitor and control the money supply and the economy
consequentially.
C. Regulations on underwriting securities decline a bank's revenue potential
and will probably result in losing some of the larger corporate customers to
foreign banks who face more compassionate regulations. Underwriting
securities is naturally risky and limiting this may limit the risk of the bank. It
may likewise prevent the conflicts of interest that derive when a bank makes
loans and underwrites securities at the same time.
D. Inhibiting a bank's capability to expand worldwide exposes it to greater
exposure of economic fluctuations within its local market area and makes it
more susceptible to failure. On the other hand, allowing an institution to
expand geographically may consolidate power in the hands of a few monster
institutions that create a higher likelihood that service costs will increase for
all customers.
E. Defending banks from failure surely involves protecting some incompetent
and poorly run firms that waste resources and fail to tend to customers
effectively and efficiently. It also tends to make the typical customer less
vigilant about the quality and risk of a firm’s services and operations since
deposits are insured, and bank failure seems to most customers to be a
vaguely remote possibility. It makes consumers more confident in the system
and makes a firm run less likely.
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Chapter 3 Problems and Projects #2 on page 94
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Of the business activities listed here, which activities can be
conducted through U.S.-regulated holding companies today? a.
Data processing companies b. Office furniture sales c. Auto and
truck leasing companies d. General life insurance and
property-casualty insurance sales e. Savings and loan
associations f. Mortgage companies g. General insurance
underwriting activities h. Professional advertising services i.
Underwriting of new common stock issues by nonfinancial
corporations j. Real estate development companies k.
Merchant banks l. Hedge funds
Banks can perform most of the activities listed above. It may be easier to
talk about the activities the cannot do. They cannot sell office furniture and
they cannot perform professional advertising services. They can do
everything else listed.
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Chapter 4 Problems and Projects #3 on page 125
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3. Forever Savings Bank estimates that building a new branch
office in the newly developed Washington township will yield
an annual expected return of 12 percent with an estimated
standard deviation of 10 percent. The bank’s marketing
department estimates that cash flows from the proposed
Washington branch will be mildly positively correlated (with a
correlation coefficient of +0.15) with the bank’s other sources
of cash flow. The expected annual return from the bank’s
existing facilities and other assets is 10 percent with a
standard deviation of 5 percent. The branch will represent just
20 percent of Lifetime’s total assets. Will the proposed branch
increase Forever’s overall rate of return? Its overall risk?
The estimated total rate of return would be 10.4%
This is calculated by using the equation: E(R)=.20(12%)
+.80(10%)=10.4%
The overall risk associated with this is calculated below:
(.20)^2 (.10)^2 + (.80)^2 (.05)^2 + 2(.20)(.80)(.15)(.10)
(.05)=.00224 or 4.73%
The banks expected return will increase, although slightly increasing
the risk. With this stated, the bank should go ahead with the project.
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