FINC 4330 Exam 1 Study Guide Questions And Answers
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Course
FINC 4330
Institution
FINC 4330
How is the US banking system different from the European system? - ANS - In Europe, each individual country has a small number banks. 6 to 8. Some of those may be partially owned by the governments of those countries
- In the US, we have approximately 4,800 banks. This number has been dec...
FINC 4330 Exam 1 Study Guide
Questions And Answers
How is the US banking system different from the European system? - ANS - In Europe,
each individual country has a small number banks. 6 to 8. Some of those may be partially
owned by the governments of those countries
- In the US, we have approximately 4,800 banks. This number has been declining over the
years due to consolidations between banks. The number of individual branches is increasing but
the number of banks as a unit is decreasing.
Briefly explain the basic idea of how banks earn a profit. What is their largest risk that can cut
into profits? - ANS - Bank's primary income is from loans, which most loans are to local
businesses.
- The bank's profitability depends on the quality of their loan portfolio so banks want to make
high quality loans.
- The largest risk that can cut into profits is loan charge-off. Not only are they not getting the
interest income, but they lost the entire principal amount. That can be really be harmful to a
bank's operations because that is a loss.
What is meant by saying that loan growth is cyclical? - ANS It means that during good
economic times, businesses want to borrow money to expand their operations, for
improvements, or just for expansion in general. That is considered a good time for banks
because there is potential for growth or expansion.
However, banks need to be careful with their evaluations because at some point, the economy
might turn around for the worse.
What are some of the important items that a loan officer needs to understand about a potential
or current client's business? - ANS - How the business is managed
- What the business' products are and why is it that customers buy those products from them
- How the products/services are made or provided
- What the local & national economic prognosis is & how it will affect the business
Why is it important for a banker to have good understanding of the local and national economy?
- ANS It is important for the banker to understand the current economic state on the local
and national levels because they need to understand if the interest rates might go up or down
and where the productivity might go so the banker can make good lending decisions.
They also need to understand monetary and fiscal policies.
, What are some of the personal characteristics that make up a good business banker? - ANS
- Ability to communicate
- Ability to listen & observe
- Have empathy
- Positive attitude
- Ethical
- Analytical ability & math aptitude
- Risk taker
- Common sense
- Motivation to sell
Do you think a banker should be risk taker? - ANS It depends on certain factors. One factor
can be the current state of the economy in general. Another factor is the current financial health
and what the financial statements look from the business. There are times to be a risk taker and
there are times to be conservative
Why do the OCC and FDIC examine banks? - ANS FDIC: They want to make sure a bank
is safe because they are the entity that is insuring the depositors. FDIC Insurance is mandatory
for all banks.
OCC: They have the primary responsibility for supervising all national banks.
- Bank examinations
- Reviews new charter and bank requests
- Take supervisory actions against non-compliers
List and briefly explain 4 significant banking regulations - ANS 1. Federal Reserve Act of
1913: Established the Federal Reserve Banking System w/ powers split between the Board of
Governors and the District Banks
2. Federal Deposit Insurance Act of 1934: Established deposit insurance
3. Truth in Lending (Reg. Z): Disclosure in standard format; makes it easier to compare loans;
finance charge, APR, total amount repaid, etc. (Provided disclosure for non-business loans)
4. Equal Credit Opportunity Act of 1974: Reg B requires written notification if credit is denied,
including the reason. Why is that? Regulators can compare to those accepted for discrepancies.
Prohibits discriminating based on age, race, color, religion, sex, national origin, marital status, or
where income is originated.
What is a financial intermediary, and how does a bank function as one? - ANS An
intermediary just basically brings two parties together.
Banks are financial intermediaries, which are also called a match maker.
Goal of banks is to "buy" money at one price and hopefully "sell" or invest it at a higher price.
Banks develop operating strategies to maximize profit & minimize risk.
Banks serve 3 entities: depositors, borrowers, and owners
How Intermediation Works - ANS - Customer A has money to invest.
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