UNIVERSITY OF PORTSMOUTH
Portsmouth Business School
BANKING AND FINANCIAL STRUCTURE
(U01096C)
Level 2, Semester 2
May/June 2010
Answer TWO questions
Time Allowed: 1½ Hours
Calculators that are capable of holding text are not permitted in
examinations (for the purpose of identification calculators capable of
holding text will have an alpha-numeric keypad, i.e. a-z letters)
Specialist dictionaries such as Legal, Business, Technical or
Accounting Dictionaries etc. are not allowed in the exam. International
students for whom English is a second language are allowed to take into
the exam one bilingual paper based dictionary containing no
annotations.
Unit Co-ordinator: Yaseen Ghulam
Department: Economics
Answer TWO questions
QUESTION 1
(a)
According to finance theory, why do banks exist in modern society?
[15% of question marks]
(b)
What different kinds of services do banks offer the public and why are banks
increasingly reaching out to become one-stop financial service conglomerates?
Is this a good idea in your opinion?
[15% of question marks]
(c)
What recent changes have occurred in banking, and how have these changes
affected bank managers and shareholders respectively?
[30% of question marks]
(d)
In the context of banking, what do economists mean by problems of adverse
selection and moral hazard? Give a brief definition for each concept and
provide an example of its application in banking.
[40% of question marks]
QUESTION 2
(a)
Credit risk management techniques are probably among the best-developed
tools that can be used by banks to mitigate exposure to risk. Critically evaluate
the approaches to the management of credit risk employed in the modern
banking industry.
[50% of question marks]
Continued/......
U01096C
1
Continued/......
(b)
In explaining risk management in banking, Rose (2002) presents the
interesting case. Read the case carefully and answer the questions that follow.
Casio Merchants and Trust Bank, N.A. has a portfolio of loans and securities
expected to generate cash inflows for the bank as follows:-
Expected cash receipts
£1,385,421
746,872
341,555
62,482
9,871
Period in which receipts are
expected
Current year
2 years from today
3 years from today
4 years from today
5 years from today
Deposits and money market borrowings are expected to require the following cash
outflows:-
Expected cash payments
£1,427,886
831,454
123,897
1,005
-----
Period in which
payments will be made
Current year
2 years from today
3 years from today
4 years from today
5 years from today
Assume that the discount rate applicable to the above cash flows is 8 percent.
(i)
What is the duration of the bank's portfolio of earning assets and of its
deposits and money market borrowings?
[10% of question marks]
(ii)
Assuming all other factors are held constant what will happen to the bank's
total returns, if interest rates rise? If interest rates fall?
[15% of question marks]
(iii)
Given the size of the duration gap you have calculated, what type of
hedging should the bank engage in?
[15% of question marks]
(iv)
If interest rates drop from 8 percent to 7 percent, what happens to Casio's
net worth in this case and by how much in pounds does it change by?
[10% of question marks]
U01096C
2
QUESTION 3
Banking sectors need to be closely monitored through stringent prudential and
regulation. Discuss the advantages and disadvantages of prudential control and
regulation. How has the USA regulatory environment evolved to meet the needs
of the modern banking sector?
[100% of question marks]
QUESTION 4
(a)
It is established fact that customers are better off when banking sectors
are contestable. Outline what is meant by the concept of a contestable
banking market and discuss the extent to which contestability has been
determined by academic studies conducted in the last 30 years.
[50% of question marks]
(b)
Critically evaluate the estimation and use of the total factor
productivity (TFP) approach in banking. By utilising this technique
what do the empirical results show about the performance of banks in
European and US banking industries?
[50% of question marks]
U01096C
3