Final Revision

Banking
Question One:
1) Money centre banks Are Industry Leaders (Banks located in major cities operating globally)
,spanning the whole regions, nations and continents offering the widest possible menu of
financial services.
2) Community banks Are much smaller and service local communities and towns, offering
narrower but more personalized menu of financial services to the public.
3) Commercial Banks Sell deposits and make loans to businesses, individuals and institutions
4) Mortgage banks Provide mortgage loans on new homes but do not sell deposits (debt instrument
secured by the collateral of specified real estate property)
5) Investment Banks Underwrite issues of new securities on behalf of their corporate customers, and
give financial advices.
6) Saving Banks Attract saving deposits and make loans to individuals and families
7) Insured Banks Maintain deposits backed by federal deposit insurance
8) Virtual Banks Offer their services only over the internet
9) What is a leading competitor to banks that Sell saving deposits and granting home mortgage
loans and other forms of household credits to individuals and families Saving Associations
10) What is a leading competitor to banks, that Sell shares to the public representing an interest
in a professionally managed pool of stocks, bonds and other securities Mutual Funds
11) What is a leading competitor to banks, Provides professional advice to corporations and
governments, help clients raise funds, seek possible business acquisitions, and trade
securities Investment Banks
12) What is a leading competitor to banks Protect against risks to persons or property and
manage the pension plans of businesses and the retirement funds of individuals Life and
property insurance companies
13) A study of history shows that one of the first services offered by banks was Currency
exchange
14) Banks that offer all of their services from one office is called Unit Banks
15) Branching Organizations offer the full range of services from several locations, including a
head office and one or more full service-branch offices.
16) What is an alternative or a supplement to Traditional Bank Branch offices Websites and
Electronic Branching.

Question Two:

1) Suppose that a bank holds cash in its vault of $2.4 million, short-term government
securities of $15.4 million, privately issued money market instruments of
$5.5 million, deposits at the Federal Reserve banks of $25.1 million, cash items in the
process of collection of $0.9 million, and deposits placed with other banks of $20.4
million. How much in primary reserves does this bank hold? In secondary reserves?

Answer:
Primary Reserve= 2.4 + 25.1+ 0.9 + 20.4= 48.8 m
Secondary Reserve= 15.4+ 5.5= 20.9m

2) Suppose a bank has an allowance for loan losses of $2.25 million at the beginning

of the year, charges current income for a $350,000 provision for loan losses, charges
off worthless loans of $250,000, and recovers $60,000 on loans previously charged
off. What will be the balance in the allowance for loan losses at year-end?

Answer:

ALL (Beginning) 2,250,000

+ PLL 350,000
- Worthless loans (bad loans) (250000)
+ Recoveries 60,000

Ending balance 2,410,000

 3) Given the following:

Total Interest Income $ 210
Provision for Loan Loss $5
Total Interest Expenses $ 200
Income Taxes $5
Total Noninterest Income $ 20
Surplus $6
Total Noninterest Expenses $ 35
Total Earning assets $ 980
Total Assets $ 1000
a) Calculate the Net Interest Income? (interest income-interest expense)= (210-
200) = 10
b) Calculate the Net Non-interest income? (non-interest income-non-interest
expense) = (20-35)= -15
c) Calculate the NIM? (Net interest income/ Total Assets)= (10/1000)*100= 1%
d) Calculate the net non-interest margin? (Net noninterest income/ Total Assets)=
(-15/1000)*100= -1.5%
e) Calculate the pretax net operating income? (Net interest income+ Net non-interest
income – PLL) = 10+(-15)- 5= -10
f) Calculate the net operating margin? (Net interest income +Net non-interest-
income -PLL)/Total Assets = (10+(-15)-5)/1000= -1%

Another rule for net operating margin:’

(Total operating revenue- Total operating expense) / Total Assets

=(interest income+ non-interest income)-(interest expense+ non-interest expense +PLL) / Total

Assets
 2)

• Gross Loans $ 375 T.A

• Trading Account Securities $8 T.A

• Allowance for Loan Losses $5 T.A

• Other Real Estate Owned $4 T.A

• Investment Securities $ 40 T.A

• Goodwill and other Intangibles $3 T.A

• Common Stock $5 Capital

• Total Liabilities $ 375

• Surplus $ 19 Capital

• Preferred Stock $3 Capital

• Total Equity Capital $ 39

• Non deposit Borrowings $ 20 T.L

• Cash and Due from Banks $9 T.A

• Bank Premises and Equipment, Net $ 29 T.A

• Miscellaneous Assets $ 38 T.A

• Bank Premises and Equipment, Gross $ 34 T.A

• Fed fund sold $ 60 T.A

• Fed fund purchased $ 78 T.L

What are the items that should fall under Total assets, Total liabilities and how to calculate
undivided profits?

Total Assets = 561, Total Liabilities (Deposits+ Non-deposit Borrowings+ Fed fund purchased),
Total Equity Capital: 39

C.S 5

P.S 3

SURPLUS 19

UNDIVIDED PROFITS ( Retained earnings): Total equity capital-(all items in T.E)

= 39-(5+3+19) = 12

4) Suppose a bank reports that its net income for the current year is $55 million, its 
assets total $2,144 million, and its liabilities amount to $925 million. What is its
return on equity capital? 
Answer:
ROE= (Net income/ T.E)= (55/( 2,144-925))*100 = 4.5%

5) Suppose a banker tells you that his bank in the year just completed had total interest
expenses on all borrowings of $14 million and noninterest expense of $10 million,
while interest income from earning assets totaled $16 million and noninterest
revenues totaled $2 million . Suppose further that assets amounted to $480 million, of
which earning assets represented 85 percent of that total while total interest-bearing
liabilities amounted to 75 percent of total assets . See if you can determine this bank's
earnings spread for the most recent year?
Answer:
Earning Spread= interest income - interest expense
Total Earning assets Total interest bearing liabilities

=( (16/ (480*85%)) - (14/ (480*75%))*100=

How to calculate PLL and net loans?
PLL= Net interest income+ Net non-interest income – Pretax operating income
Net loans= Gross loans – ALL- Unearned income

N.B: -Total Earning assets (All assets that I earn income from: Investment securities, short-term
investment, long-term investments, Net loans, Fed fund sold)
 - Total interest bearing liabilities: All liabilities that you pay on it interest ex: All deposits except
demand deposit (Saving deposits, time deposits,), non-deposit borrowing, Fed fund purchased)