1. What is the purpose of peer group ratio comparison? Write a short paragraph on the each of the following ratios: "Core deposits to total assets," "Loans to deposits," and "Loan commitments to total assets." What is each ratio's relationship to liquidity risk? Which is more likely to need to rely more on borrowed funds and why? (7 points)
2. Bank A has a loans/deposits ratio of 10%. Bank B has a loans/deposits ratio of 90%. Which of the following statements are true? (1 point)
a. Bank A is better because it has lower liquidity risk.
b. Bank A is lending out a lot of its funding.
c. If Bank A is near its borrowing limit, it could lead to future liquidity problems.
d. A loans/deposits ratio shouldn't be too low because then the bank isn't making money, however a high ratio means there could be liquidity risk in the future.
e. None of the above.
3. Which of the following regarding loan commitments is false? (1 point)
a. Loan commitments are an off balance sheet activity, however it gets recorded on balance sheet when a business draws down on it.
b. A large amount of loan commitments causes high liquidity risk for banks because during economic downturns businesses all require more cash.
c. When a business draws down on a loan commitment, this is reflected on the liabilities side of the balance sheet of banks. On the asset side, cash decreases.
d. During the recent financial crisis, banks that had a lot of loan commitments had high liquidity risk because they didn't have enough cash.
e. All of the above are true.
4. Which of the following is true regarding the recent financial crisis? (1 point)
a. FIs' new policy of "originate to distribute" caused banks to increase their lending standards for issuing new loans.
b. FIs increasingly relied on repos to fund their loans and when the housing market bubble burst, they were unable to use repackaged loans as collateral in the repo market.
c. The recent financial crisis was not a bank run because deposits are Federally insured by the FDIC.
d. The "originate to distribute" model moved loans off of banks' balance sheets and banks were no longer able to issue new loans.
e. All of the above are not true.