Problem
I. Why is the creation (chartering) of new banks closely regulated? What about nonbank financial firms?
II. What do you see as the principal benefits and costs of government regulation on the number of financial-service charters issued?
III. Why do you think the organizers of a new financial firm are usually expected to put together a detailed business plan, including marketing, management, and financial components?
IV. What are the key factors the organizers of a new financial firm should consider before deciding to seek a charter?
V. How well do most new banks perform for the public and for their owners?
VI. Why is the establishment of new branch offices usually favored over the chartering of new financial firms as a vehicle for delivering financial services?
VII. A group of businesspeople from Scott Island are considering filing an application with the state banking commission to charter a new bank. Due to a lack of current banking facilities within a 10-mile radius of the community, the organizing group estimates that the initial banking facility would cost about $3.3 million to build along with another $500,000 in other organizing expenses and would last for about 25 years. Total revenues are projected to be $400,000 the first year, while total operating expenses are projected to reach $160,000 in year 1. Revenues are expected to increase 4 percent annually after the first year, while expenses will grow an estimated 2 percent annually after year 1. If the organizers require a minimum of a 10 percent annual rate of return on their investment of capital in the proposed new bank, are they likely to proceed with their charter application given the above estimates?
VIII. Norfolk Savings Bank is considering the establishment of a new branch office at the corner of 49th Street and Hampton Boulevard. The savings association's economics department projects annual operating revenues of $1.6 million from fee income generated by service sales and annual branch operating expenses of $800,000. The cost of procuring the property is $1.75 million and branch construction will total an estimated $2.75 million; the facility is expected to last 20 years. If the savings bank has a minimum acceptable rate of return on its invested capital of 15 percent, will Norfolk Savings likely proceed with this branch office project?
IX. 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?
X. First National Bank of Conway is considering installing two ATMs in its Southside branch. The new machines are expected to cost $37,000 apiece. Installation costs will amount to about $15,000 per machine. Each machine has a projected useful life of 10 years. Due to rapid growth in the Southside district, these two machines are expected to handle 50,000 cash transactions per year. On average, each cash transaction is expected to save 30 cents in teller expenses. If First National has a 10 percent cost of capital, should the bank proceed with this investment project?
XI. The following statistics and estimates were compiled by Big Moon Bank regarding a proposed new branch office and the bank itself:
Branch office expected return = 15%
Standard deviation of branch return = 8%
Existing bank's expected return = 10%
Standard deviation of existing bank's return = 5%
Branch asset value as a percentage of total bank assets = 16%
Correlation of net cash flows for branch and bank as a whole = +0.48
What will happen to Big Moon's total expected return and overall risk if the proposed new branch project is adopted?
XII. Life Is Good Financial Services has provided Good Things to Eat Groceries a proposal for in-store branches in two of its four Davidson locations. Good Things to Eat counter proposed opening one in-store branch in one of the two proposed locations as a test case. The locations would be identified as the Lily Branch or the Daisy Branch. Given the following statistics and forecasts compiled by Life Is Good regarding the two alternatives, which branch should be used as a test case? Base your recommendation on returns and risk.
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Expected Return
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Standard Deviation
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Correlation Coefficient Other Services
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Percentage Total Assets
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In-store branch at Lily location
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15.00%
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6.50%
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0.5
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5.00%
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In-store branch at Daisy location
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15.50%
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7.50%
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0.3
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5.00
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Existing facilities
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12.00
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5.00
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95.00
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