What are some of the conclusion from empirical studies on economies of scales/economies of scopes and x-efficiencies on the banking sector? What is a bank run? What are some of the causes of bank run?...

Question 1
a. What are the advantages of using futures contracts as risk hedging tool?
Answer:
The following are the main reasons due to which futures are used as risk hedging tool-
1. Low margin requirements
2. High Liquidity
3. Cost of trading futures are very less as compared to forwards
. What is one major way an FI can discipline a country that threatens not to repay its
loans?
Answer:
FI can threaten that it will stop future supply of funds to the country. This is most efficient tool
which can increase the probabilities of getting back the money.
c. Discuss some reasons why in the recent decades Australian financial institutions have
gradually less dependent upon retail deposits as their major source of funding.
Answer:
1. Shift in household financial assets to superannuation funds.
2. Entry of foreign bank that has captured large part of retail deposits.
3. Increase in cost of retail deposits due to high competition.
d. Besides raising funds from overseas market, what other activities of the banks that
may lead to them exposed to foreign cu
ency risk? Identify two.
Answer:
1. Lending in foreign cu
ency
2. Offshore wholesale funding
Question 2
a. Provide two motivations why financial institutions are prepared to expose to
offbalance-sheet risk. How are the off-balance-sheet risk activities of financial
institutions being monitored by the regulators?
Answer:
Off balance sheet are contingent claim contract which on occu
ence of contingent events will
esult in creation of on balance sheet asset.
Motivations
1. Additional income from issuance of off balance sheet item.
2. Funding required only when contingent event occurs.
Banking regulation require banks to maintain adequate control and records of comparable to
ecords on direct loans so that bank’s total liability may be determined all the times.
. Why is the market value of equity a better (than book value) measure of a financial
institution’s ability to abso
losses?
Answer: The market value of equity is more relevant then book value because in the event of a
ankruptcy, the liquidation values determine the FI’s ability to pay various claimants.
c. How does loan portfolio risk differ from individual loan risks?
Answer:
Portfolio risk refers to the risk of portfolio of loans as opposed to the risk of a single loan.
Probability risk of portfolio of loan leads to elimination of risks of individual loan because of
diversification.
Question 3
a. What are the main differences in the assets, liabilities and income of a commercial
ank and a life insurance company? Why such differences exist?
Answer:
Life insurance policies have long term liabilities because of life insurance product that they sell.
Due to this, life insurance company asset side of balance sheet includes long term govt. and
corporate bonds and declining amount of mortgage products. Whereas, asset side of balance
sheet of commercial bank has short and medium term loans given to companies/ individual and
treasury securities.
Liability side of life insurance companies mainly includes insurance claim liability (as per actuary
valuation) and liability side of commercial bank includes deposits, funding obtained from
corporate/ reserve bank.
This difference exists due to the nature of service provided. Insurance company issues policies
on which claim are payable in future for which they need to keep adequate funds to meet
equirement. Whereas, commercial banks purpose is to obtain funds at lower cost and provide it
to needy at higher cost. So, their liability includes funds obtained from individual/ companies/
eserve bank and asset side includes loan issued to companies/ individual.
. Bank 1 can issue five-year CDs at an annual rate of...