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1. How do lenders' and borrowers' requirements differ?

How can
financial intermediaries bridge the gap between them?

Well, lenders and borrowers have different requirements. Lenders want the
minimalisation of risk so they give short-term payements fearing the future
of market and the risk of assets dropping in value.
Borrowers want long-term funds given at particullary specific date and time
on lowest possible cost. In summary, majority of lenders want to lend their
assets for highest possible return costs and short-time period, and on the
other hand, borrowers want long-term funds with lower price possible.

Financial intermediaries are there to bridge the gap giving lenders on

deposits safety and liquidity on borrowed funds and giving borrowers at any
time loans and minimasing the cost of transactions without assymetrical

2. Briefly explain the Federal Reserve System in the USA?

FED is central bank of USA founded in 1913.

Structure of FED includes:

board of governors

federal reserve bank

federal open market committee

board of directors

member banks

Main duties are:

conducting the nations monetary policy

supervising and regulating banking institutions and protecting

the credit rights of consumers

maintaining the stability of the financial system

providing certain financial services to the US government, the
public, financial institutions and foreign official institutions.

Three monetary policy of FED are: open market operations the

discount rate, and reserve requirements.

Functions are:

Establish the discount rate at which member banks may borrow from
the Federal Reserve Bank

Determine which bank receive loans

Elect one member to the Federal

Advisory Council

Five of the 12 bank presidents vote in the Federal Open Market


3. What are the core functions of the Federal Reserve Bank? How do they
differ from

those of the Bank of England and of the European Central Bank?

Clear checks

Issue new currency and remove

damaged currency

Evaluate bank mergers and expansions

Lender to member banks

Liaison between local community and the Federal Reserve System

Perform bank examinations

Collect and examine data on local business conditions

FED explicily targets short-term interest rates as its major tool of monetary
policy, whereas the Bank of England and the ECB place a greater emphasis
on inflation-targeting.

8. Explain the main concerns of:

a) asset-liability Management

AssetLiability Management (ALM) view of the liquidity situation for

preventive causes and liquidity monitoring

Liquidity and interest rate risk management, measure and control of risks,
hedging, recommendation-balance sheet actions

b) capital management

Capital management the bank must keep an adequate level of capital to

comply with regulatory requirements in order to maintain the appropriate
level of solvency

9. List all types of banking risks and explain their main importance
and features
Credit risk

Credit Risk is also defined, as the potential that a borrower or counter

party will fail to meets its obligations in accordance in agreed terms. Risk
of a loan not being repaid in part or in full.

There are various default events:

delay in payment obligations;


Other payment delays

The major credit risk components are:

likelihood of default
recoveries under default.

Country risk

Sovereign risk, which is the risk of default of sovereign issues, such as

central banks or government sponsored banks.
A deterioration of the economic conditions. This might lead to a
deterioration of the credit standing.

A deterioration of the value of the local foreign currency in terms of the

banks base currency.


Is generated in balance sheet by mismatch between the size and maturity

of assets and liabilities

Risk that bank is holding insufficient liquid assets on its balance sheet

Extreme lack of liquidity results in bankruptcy


The interest rate risk is the risk of a decline in earnings due to the
movements of interest rates.

Long-term interest-bearing assets are more sensitive to interest rate



Market risk is the risk of losses in on-and off balance sheet position arising
from movements in market prices

Earnings for the market portfolio are Profit and Loss (P&L) arising from

The P&L between two dates is the variation of the market value. Any
decline in value results in a market loss.


The currency risk is that of incurring losses due to changes in the exchange

Foreign exchange risk is a classical field of international finance. For the

banking portfolio, foreign exchange risk relates to ALM.

Multi-currency ALM uses similar techniques for each local currency.

Classical hedging instruments accommodate both interest rate and
exchange rate risk.


Solvency risk is the risk of being unable to absorb losses, generated by all
types of risks,with the available capital.
Solvency is a joint outcome of available capital and of all risks. The basic
principle of capital adequacy, promoted by regulators, is to define what
level of capital allows a bank to sustain the potential losses arising from all
current risks and complying with an acceptable solvency level.


Risk of loss resulting from inadequate or failed internal processes, people

and systems or from external events.
This is the risk associated with the possible failure of a bank systems,
controls or other management failure including human errors

Operational risks appear at different levels: People, Processes,

Technical and Information technology.


Model risk is self-explanatory.

Gaps between predicted values of variables, such as the VaR, and actual
values observed from experience.

Models are subject to misspecifications, because they ignore some

parameters for practical reasons.

4. Explain the main characteristics of the different types of banks

and list their primery features.

Commercial banks are major finnacial intermediaries in economy. They are main
providers of credits to households and corporative sector nd operate the payment
mechanism. They deal with both retail and corporative customers, have well
diversified deposit nd lending books and generally offer full range of finncial services.
Savings banks are similar in many ways to commercial banks although their main
difference is in ownership features- savings banks have mutual ownership, being
owned by their members or shareholders who may be depositors or borrowers.
Cooperative banks- very similar to savings, had originally had musual ownership and
offered retail and small business banking services.
Building societies institution offering personal banking services prelvalent to UK.
They have musual ownership and offer retail deposit-taking and mortgage lending
Credit unions another type of mutual ownership institutions. These are non
profitable institutions owned by their members. Member deposits are used to pffer
loans to other members
Finance houses they provide finance to individuals and companies by making
consumer, comercial and othe types of loans. Main type of business is retail lending
and leasing activity.

5. Please list main reasons in favor of the regulation of financial

intermediaries and financial markets?
Regulation is needed to ensure customers confidence in the financial sector. Main reasons for
financial sector regulation are:

- to ensure systematic stability

- to provise smaller retail customers with protection

- to protect consumers against monopolistic exploatation

systematic stability is one of the main reasons for regulation, as the social cost of the failure
of banking sector is greater than the private cost.the second concern is the customers
protection. Consumer protection is particulary sensitiveissue of costumersface the loss of their
lifetime savings. Finally, regulation serves the purpose of protecting consumers against
monopoly power in product pricing.

6. Please list the main differences between a bank balance sheet

and bank inome

The relationship between the balance sheet and income statement relates to the fact
that the balance sheet reports stock value (eg. Number of outstanding loans) whereas
the income statement represents cash flow value for particular year (eg. Interest rate
received from outstanding loans).
Balance sheet is a financial statementof the wealth of a business or other organization
on a given date. It is usually made for the end of financial year.

Income statement - the profitability of the bank Also known as a profit & loss account. The
income statement reflects the revenue sources in banking as well as the cost. The cost, derived
from the liabilities side of a balance sheet, relates to the payments banks need to undertake.
The revenue, generated by assets, include interest-earning on loans and investments, fees and