EBK FINANCIAL MANAGEMENT: THEORY & PRAC
15th Edition
ISBN: 9781305886902
Author: EHRHARDT
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 19, Problem 4Q
Summary Introduction
To discuss: The way the investment in REITs and municipal bonds reduces the willingness of bank to act as a lessor.
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Commercial banks moved heavily into equipment leasing during the early1970s, acting as lessors. One major reason for this invasion of the leasingindustry was to gain the benefits of accelerated depreciation and the investment tax credit on leased equipment. During this same period, commercialbanks were investing heavily in municipal securities, and they were alsomaking loans to real estate investment trusts (REITs). In the mid-1970s, theseREITs got into such serious difficulty that many banks suffered large losseson their REIT loans. Explain how its investments in municipal bonds andREITs could reduce a bank’s willingness to act as a lessor.
A commercial bank in Barbados faces serious liquidity problems; however, they have an asset that has the required value to meet their debt obligations. However, due to poor economic conditions, they may not get a buyer in time to purchase such an asset at their preferred price, so they may end up losing money for selling that asset lower than their preferred price, or if they choose not to sell the asset, they will not be able to meet their financial obligation. Which of the following strategy is best suited to manage the bank’s liquidity risk?
Select one:
a.
Interest rate swaps
b.
Stress Tests
c.
Diversifying
d.
Hedging
Investment banks' activities in recent years have gone well beyond their "traditional" role of underwriting stocks and bonds. Investment banks (remember, most of them are now bank holding companies and thus are able to borrow funds from the Federal Reserve and get taxpayer-funded bailouts) are involved in a wide variety of "complimentary financial activities." What are the possible implications for financial markets as investment bans continue to expand their activities? Is this an efficient way for investment banks to diversify their activities? Or is it an attempt by investment banks to corner markets that could result in the next global financial crisis?
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EBK FINANCIAL MANAGEMENT: THEORY & PRAC
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