FINS1612 Study Guide - Quiz Guide: Tier 1 Capital, Basel Iii, Basel Ii

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15 May 2018
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Week 3 hw (and w4)
2 Introduction Chapter 1: 2, 3, 6, 7, 8, 9, 10
Chapter 2
1. ‘Deregulation has changed banking practices in Australia.’ Discuss this statement w
reference to banks’ asset and liability management.
move from asset management (loans) to liability management (deposits)
asset- give out loans based on amount of funds they have (constrained by deposit
base)
liability mgmt.- allow more loans based on forecasts of how many loans (future loan
demand) they will give out go to raise funds
risk
3. a customer has approached your commercial bank seeking to invest funds for a period of of
months. The customer is particularly worried about risk following the GFC and the market
volatility that continues to characterise world financial markets. Explain the features of call
deposits, term deposits and CDs to the customer and provide advice on risk-reward tradeoffs
that might be associated with each product.
Call deposits- savings account (low risk, low return- small amount of interest)
Term deposit- locked in for specific term (low risk, bit higher return quod of interest)
Negotiable certificate of deposit- papers, ST, discount securities- issued in its own
name (less interest than term deposit)
4. Discuss the four main uses of funds by commercial banks and identify the role that the
purchase of government securities plays in commercial banks’ management of their asset
portfolios.
Personal loaning (credit card) + mortgage
Commercial loans (overdraft, rollover)
Government loans (Treasury notes)
Other bank assets
o Government securities used to increase liquidity (easily convert to cash) and
risk management, used as collateral for future borrowing- to support own
borrowing
o Improve quality of overall BS + manage maturity structure of BS + manage
interest rate sensitivity of overall balance sheet (low risk offset higher risk
loans to customers)
6. ABC Ltd plans to purchase injection moulding equipment to manufacture its new range of
plastics products. The company approaches its bank to obtain a term loan. Identify and
discuss important issues that the company and the bank will need to negotiate in relation ot
the term loan.
Interest rates- fixed and variable (reference rate and margin- BBSW)- repayment time
structure
Period: matching princ
Security
7. The OBS business of banks has expanded significantly and, in notional dollar terms, now
represents over seven times the value of BS assets.
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a) define what is meant by the OBS business of banks- contingent liability- if some specific
event happens- Direct credit substitutes (guarantor- fee), trade and performance related (same
as DCS but non-financial ie goods), commitments (to advance funds or underwrite
debt/equity issue) and market related instruments (any derivatives: interest rate swaps, call
options to manage fx and market risk exposures)
Not recorded on BS- uncertainty/unfulfilled
b) identify the four main categories of BOS business and use an example to explain each
category
9. Bank regulators impose minimum capital adequacy standards on commercial banks.
a) briefly explain the main functions of capital
Equity and quasi equity capital is a source of LT funds for institutions- enables
ongoing growth in business, source of profits, necessary to use capital to write off
abnormal business losses
b) what is the minimum capital requirement under the Basel II capital accord
8% of total risk weighted assets (risk based capital), 50% of which must be Tier 1
capital (vs. B3 6% T1) banks can ask for higher
c) Identify and define the different types of acceptable capital under the Basel II and Basel III
capital accords. Remember that Basel II continues to function, with Basel III acting to
strengthen its main pillars.
Tier 1 capital: core capital (equity, RP)- permanent, unrestricted, freely available
Tier 2 supplementary upper: hybrids, convertible notes, essentially permanent)
Tier 2 lower: quality debt (approved by regulator) (not permanent)
10. Pillar 1 of Basel II capital accord includes an operational risk component.
a) define operational risk.
b) Using the standardised approach, explain how a commercial bank is required to measure
the operational risk component of its minimum capital adequacy requirement.
11. Provide an overview and rationale for the two new liquidity standards introduced by
Basel III.
- LCR: liquidity coverage ratio: buffer withstand financial stress (HQLA- high quality liquid
asset)- ratio between financial institution’s HQLA and net cash outflows over 1 month
- NSFR: net stable funding ratio: foster LT stability by requiring financial institution to fund
activities w stable sources of funding
- face capital shortages and liquidity problems
LCR = HQLA/ net outflow
= 10m/2*3
Chapter 4
3. a) briefly explain the concept of corporate governance within the context of a corporation.
b) what is the relationship between corporate governance and the so-called agency problem?
- maximisation of shareholder value- w LT stability and survival of corporation
- moral hazard
4. Most developed or developing countries seek to establish modern and efficient stock
exchanges.
a) Identify and discuss the five principal functions of a modern and efficient stock exchange.
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Document Summary

2 introduction chapter 1: 2, 3, 6, 7, 8, 9, 10. The customer is particularly worried about risk following the gfc and the market volatility that continues to characterise world financial markets. The company approaches its bank to obtain a term loan. Identify and discuss important issues that the company and the bank will need to negotiate in relation ot the term loan. Lcr: liquidity coverage ratio: buffer withstand financial stress (hqla- high quality liquid asset)- ratio between financial institution"s hqla and net cash outflows over 1 month. Nsfr: net stable funding ratio: foster lt stability by requiring financial institution to fund activities w stable sources of funding. Maximisation of shareholder value- w lt stability and survival of corporation. Moral hazard: most developed or developing countries seek to establish modern and efficient stock exchanges, identify and discuss the five principal functions of a modern and efficient stock exchange. Efficient access to large amounts of equity funding essential for corporation.

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