1. Too-big to fail: [Read the article by Senator Kaufman "Three years later, Dodd-Frank is a
failure: Column", USA Today]
A. Kaufman argues that Dodd -Frank is failure because it does not effectively eliminate
"Too-big to fail" Do you agree?
B. What institutions are too big to fail? Why are such institutions allowed to exist and
operate in the world?
C. What should regulators do about these institutions when they have excessive losses?
D. Looking forward, what meaningful regulations would you enact to break-up their
operation, and prevent causing world- wide contagion?
2. Identify and explain the Monetary Equation? What are its economic implications? What
causes Inflation? What is the relationship of Inflation to Money Supply? Based on the
theory, critically examine Quantitative Easing 1,2 and in United States and explain the
rationale for and its potential impact on the economy?
3. Your Bank has stated that pays 3% Interest, annually compounded, for year certificate
of deposit. You have decided to invest $10,000 for 7 years. If the average rate of Inflation
during the years is 2.5% per year during the years, and you anticipate being in the 20%
tax bracket for the first years, and 40% for the next years, what is your Real, After Tax
return? Should you make the Deposit?
4. Stress testing of banks and capital injection has been adopted in the United States, and is
being currently implemented by the European Banks.
A. What is Stress Testing and how is implemented?
B. What are the advantages and limitations of Stress Testing?
C. Explain in your own words how reliable are these tests for ensuring banking stability
and preventing contagion?
D. What additional steps would you recommend to regulators to ensure stability and
prevent bank failures?
State Bank's balance sheet is listed below Market yields and durations (in years) are in
parenthesis, and amounts are in millions. Calculate
Fed Funds (5.05% 0.02)
MMDAs (4.5% 0.50y
T-bills (5.25%, 0.22)
(no minimum balance requirement)
T-bonds (7.50%, 7.55)
CDs (4.3% 0.48)
Consumer loans (6% 2.50)
C&lloans 5.8% 6.58)
Fed Fund (5% 0.02)
Fixed-rate morigages 7.85 19.50)
1200 Commercial paper (5.05% 0.45)
repriced @ quarter(6.3% 0.25)
Fixed-rate 7.25% 6.65)
$3,945 Total Liabilies and equity
What is State's Bank's duration gap?
b. Use these duration values to calculate the expected changed in the value of the
assets and liabilities of State Bank for the predicted increase of 2.5 percent in
What is the change in equity value forecasted from the duration values for the
predicted increase in interest rates of 2.5 percent?
6. Discuss the impact of High speed, and Algorithmic trading on financial markets? Identify
any discuss two specific strategies and explain how it works. Given the potential for
FLASH CRASH should we ban Algorithmic High speed trading in Securities? Yes or No.
If you answer yes, what are the implications of your answer for markets, traders and
participants? If you answer No. how do we deal with future Flash Crashes?
This material may consist of step-by-step explanations on how to solve a problem or examples of proper writing, including the use of citations, references, bibliographies, and formatting. This material is made available for the sole purpose of studying and learning - misuse is strictly forbidden.
A. I agree that Dodd-Frank has been failure since there are some loopholes which have not been addressed in the system and this continues to expose the system to vulnerabilities. As pointed by Kaunfman, the regulatory agencies were influenced by political lobbying and therefore they did not completely address all the loopholes in the system. The example cited by Kaunfman shows that the Dodd-Frank has taken only partial steps to strengthen the system and has also provided routes for manipulations. The lack of proper derivative trading standards led to the sub-prime crisis and these standards have not been adequately addressed.
B. The institutions which command a significant market share of the industry in which they operate are considered as too big to fail. As an example, Freddie Mac and Fannie Mae are mortgage providers and these cannot fail since these are used to implement the housing objectives of the Government. Similarly, a large bank like JP Morgan Chase cannot fail since it has a large market share. There are no institutions which can buy such large institutions and as such, they are supported by the Government....