Q15. If a bank is falling short of meeting its capital requirements by $1 million, what three things can it do to rectify the situation?
1. Explain the tradeoff between ROE and ROA when deciding upon the optimal capital structure of a bank.
2. A bank determines that its VaR (Value-at-Risk) is $100 million, for 1-day holding period, at a 99% confidence level. Assuming that the bank manages its assets and liabilities such that VaR is nearly constant over the long run, about how many days would you expect the bank to lose more than $100 million of value during a three year period? For simplicity, assume there are 300 trading days in a year.
3. Why might a bank use interest rate swaps? If a bank swaps a fixed rate for a floating rate (i.e. selling fixed and buying float), then how might that affect its CAMELS rating?
4. Who defines the framework for capital requirements that is generally adopted by bank regulators in the world’s major economies, including the US.
Chapter 17 Problems
P6. A bank estimates that demand deposits are, on average, $100 million with a standard deviation of $5 million. The bank wants to maintain a minimum of 8% of deposits in reserves at all times. What is the highest expected level of deposits during the month? What reserves to they need to maintain? Use a 99% confidence level.