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FIN 323
Assignment 1
(Please no PDF files)
Due: January 20 at 11:59pm
1.
Data are collected from the Federal Deposit Insurance Corporation website (https://www.fdic.gov/analysis/quarterlybanking-profile/) on Quarterly Income and Expense of FDIC-Insured Commercial Banks and Savings Institutions:
1984Q1
Net interest income
Total noninterest income
…
2022Q1
138,030
76,657
2022Q2
151,126
76,887
2022Q3
168,620
76,792
2022Q4
180,311
62,986
2023Q1
175,740
85,984
2023Q2
174,331
78,184
2023Q3
175,228
74,104
214,687
228,013
245,413
243,297
261,725
252,515
249,332
72%
64%
66%
69%
74%
67%
69%
70%
28%
36%
34%
31%
26%
33%
31%
30%
20,876
8,303
…
…
…
Total operating income (defined as
the sum of net interest income and
total noninterest income
29,179
…
…
Net interest income as a percentage
of total operating income
Noninterest income as a
percentage of total operating
income
Noninterest income includes income from fiduciary activities; service charges on deposit accounts; trading account gains and
fees; investment banking, advisory, brokerage and underwriting fees and commissions; venture capital revenue; and insurance
commission fees and income. Net interest income is the difference between gross interest income from loans and securities
and gross interest expense from funding sources such as deposits and other borrowed funds.
Page 29 of Week 1 notes provides a figure on the behavior of net interest income and noninterest income over the period 1984
to 2021, quarterly data. The above table updates that information. What do you observe in the above table and in the figure on
page 29 of Week 1?
2. On page 11 of week1 PowerPoint slides, there is an illustration of two types of ways that borrowers (spending units) can
finance their activities. If the top portion is only available to lenders/savers, what risk would they face by holding directly the
securities (bond or stocks) of borrowers/spenders?
3. On page 11 of week1 PowerPoint slides, what role does the financial institution play as a conduits between borrowers/spenders
and lenders/savers?
4. Use the following figure to answer this question. The vertical axis in this figure is the percent of total external financing
businesses obtained from each source. What are the implications? That is, where do businesses obtain most of their external
financing? Why?
Source: Mishkin/Eakins, Financial markets and institutions
NOTE: An example of a nonbank is a finance company. A finance company is an institution that provides funds to both households
and businesses by raising non-deposit sources of funds.
5. What is meant by the term depository institution? How does a depository institution differ from an industrial corporation like
General Motor?
6. Why should a bank attempt to manage its exposure to risk? Finance theory generally judges policies whether they increase
firm or shareholder value. If we apply this yardstick to corporate risk management activities, we must be able to identify how
these activities create value for the bank. Financial risk can be defined as the exposure of a bank’s earnings, cash flow, or
market value to external factors such as anticipated changes in interest rates. There are various types of ways to mitigate risk.
You can hedge to complete eliminate an exposure, eliminating both upside and downside. You can purchase insurance that
will protect against the financial effects of unfavorable events, but leaves the door open to allow the exposed party with the
potential to benefit from favorable events. And third, one can mitigate certain types of risk through diversification. By
holding a large collection of imperfectly-correlated assets, all exposure except those common to the pool can be “averagedout.”
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