Questions and Problem Set 5
School of Business
FIN350 Global Financial Markets & Institutions
Questions & Problems Set 5
1. Explain why commercial banks are regulated and describe the major pieces of legislation enacted to prevent bank failures.
Financial institutions are regulated because they provide products and services that the economy needs to function efficiently. Also they function in an environment where there is a great deal of asymmetric information, so they help in the screening process. Another reason why banks are regulated is to limit predatory lending practices, for example charging excessively high interest rates or imposing unreasonable conditions and penalties. A final reason why financial …show more content…
A loan commitment is a formal promise by a bank to lend money according to the terms outlined in the commitment. The purpose of a loan commitment is to provide some assurance to the borrower that the funds will be available if and when they are needed, and to provide the lender with a basic format for structuring the customer’s loan request properly. Examples of loan commitments are lines of credit, term loans, and revolving credit. Contingent liabilities are those off-balance-sheet activities that may ultimately become obligations of the bank; examples of this are letters of credit and unrealized losses on derivative securities. A line of credit is a contractual agreement issued by a bank that involves three parties; the bank, the banks customer, and the beneficiary. Examples of letters of credit are commercial letter of credit and standby letter of credit.
6. What are the major business activities of investment banks?
Investment banks conduct a number of activities; they help assist firms to bring new securities into the market, with initial public offerings and seasoned offering. The investment bank helps to originate, underwrite, and distribute these securities. Mergers and acquisitions are also an activity of investment banks; they help bring the two together and provide advice and valuation estimates for the given firms. Another activity done by investment banks is trading