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BFW1001 - Tutorial 3 - Questions

The document outlines a tutorial for the BFW1001 Foundations of Finance course, focusing on financial institutions and regulations. It includes questions on monetary policy tools, the impact of negative interest rates, the implications of bank capital, and a case study on the collapse of Silicon Valley Bank. Students are required to analyze these topics and discuss their relevance to current financial issues.

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37 views3 pages

BFW1001 - Tutorial 3 - Questions

The document outlines a tutorial for the BFW1001 Foundations of Finance course, focusing on financial institutions and regulations. It includes questions on monetary policy tools, the impact of negative interest rates, the implications of bank capital, and a case study on the collapse of Silicon Valley Bank. Students are required to analyze these topics and discuss their relevance to current financial issues.

Uploaded by

jcho0194
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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BFW1001 Foundations of Finance

Semester 2 2024

Tutorial 3: Financial Institutions and Regulations

1. Out of all the four conventional monetary policy tools available (i.e., open market
operations, discount lending, reserve requirements, and interest on reserves), which
one seems to be the most effective for central banks? Explain.

2. In an attempt to revive their economies after the 2008 global financial crisis, some
central banks have introduced negative interest rates on bank deposits with the
central bank. The first one to introduce negative interest rates in 2014 was the
European Central Bank. Other countries such as Japan, Switzerland, and Sweden soon
followed the suit. What do you expect to happen to these economies if banks decide
to loan their excess reserves but no good investment opportunities exist?

3. “Higher bank capital is always a good thing.”


a) Do you agree with this statement? Why or why not?
- Maintaining certain level of bank capital is mandatory – to comply with
regulatory requirements
- High bank capital provides the bank with a bigger cushion/safety margin –
greater stability
b) What can banks do to decrease (increase) capital in order to increase (decrease)
ROE?

4. Consider a bank, Bank XYZ, with the following balance sheet items:

Assets Liabilities
Required reserves RM17 million Checkable deposits RM205 million
Excess reserves RM 3 million Bank capital RM 10 million
Municipal bonds RM65 million
Residential mortgages RM70 million
Commercial loans RM60 million

(a) What is Bank XYZ’s total risk-weighted assets (RWA) based on Basel I?
(b) Does the bank’s total capital comply with the minimum total capital requirements
set by Basel I?

5. Discussion on current issues:


Silicon Valley Bank (SVB) failed after a bank run on March 2023, becoming the third-
largest bank failure in US history and the largest since the Global Financial Crisis in
2007-2008.

You are required to do some online reading about the recent Silicon Valley Bank (SVB)
collapse and discuss the following questions:
i. What is Silicon Valley Bank (SVB)?

ii. How is SVB different from other banks?


iii. Why did SVB collapse in March 2023? Explain.

iv. How did the collapse impact the depositors, investors, and banking industry?

v. What are the lessons learned from the SVB’s collapse? Relate to what was covered in
Lecture 2.

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