3-1ANSWERS TO QUESTIONS FOR CHAPTER 3(Questions are in bold print followed by answers.)1. Explain the ways in which a depository institution can accommodate withdrawal and loan demand.A depository institution can accommodate loan and withdrawal demands first by having sufficient cash on hand. In addition it can attract more deposits, borrow from the Fed or other banks, and liquidate some of its other assets.2. Why do you think a debt instrument whose interest rate is changed periodically based on some market interest rate would be more suitable for a depository institution than a long- term debt instrument with a fixed interest rate?This question refers to asset-liability management by a depository institution. An adjustable rate can eliminate or minimize the mismatch of maturity risk. As interest rates rise, the institution would have to pay more for deposits, but would also receive higher payments from its loan.3. What is meant by: a. individual banking b. institutional banking c.global bankinga.Individual banking is retail or consumer banking. Such a bank emphasizes individual deposits, consumer loans and personal financial trust services. b. An institutional bank caters more to commercial, industrial and government customers. It issues deposits to them and tries to meet their loan needs. c.A global bank encompasses many financial services for both domestic and foreign customers. It is much involved in foreign exchange trading as well as the financial of international trade and investment.4. a. What is the Basel Committee for Bank Supervision? b. What do the two frameworks, Basel I and Basel II, published by the Basel Committee for Bank Supervision, address regarding banking?a.It is the organization that plays the primary role in establishing risk and management guidelines for banks throughout the world. b. The frameworks set forth minimum capital requirements and standards. 3-25. Explain each of the following: a. reserve ratio b. required reservesa.The reserve ratio is the percentage of deposits a bank must keep in a non-interest-bearing account at the Fed. b. Required reserves are the actual dollar amounts based on a given reserve ratio.6. Explain each of the following types of deposit accounts: a. demand deposit b. certificate of deposit c.money market demand accounta.Demand deposits (checking accounts) do not pay interest and can be withdrawn at any time (upon demand). b. Certificates of Deposit (CDs) are time deposits which pay a fixed or variable rate of interest over a specified term to maturity. They cannot be withdrawn prior to maturity without a substantial penalty. negotiable CDs (large business deposits) can be traded so that the original owner still obtains liquidity when needed. c.Money Market Demand Accounts (MMDAs) are basically demand or checking accounts that pay interest. Minimum amounts must be maintained in these accounts so that at least a 7-day interest can be paid. Since many persons find it not possible to maintain this minimum (usually around $2500) there are still plenty of takers for the non-interest-bearing demand deposits.7. How did the Glass-Steagall Act impact the operations of a bank?The Glass-Steagall Act prohibited banks from carrying out certain activities in the securities markets, which are principal investment banking activities. It also prohibited banks from engaging in insurance activities. 3-38. The following is the book value of the assets of a bank:AssetBook Value (in millions) U.S. Treasury securities$ 50 Municipal general obligation bonds50Residential mortgages400 Commercial loans200 Total book value$700a. Calculate the credit risk-weighted assets using the following information:AssetRisk Weight U.S. Treasury securities0% Municipal general obligation bonds20Residential mortgages50 Commercial loans100b. What is the minimum core capital requirement? c.What is the minimum total capital requirement?a.The risk weighted assets would be $410BVWeightProduct US T Sec.$500%0 MB5020%10 RM40050%200 CL200100%200 Total700410b. The minimum core capital is $28 million (.04X700) i.e., 4% of book value. c.Minimum total capital (core plus supplementary capital) is 32.8 million, .08X410, which is 8% of the risk-weighted assets.9. In later chapters, we will discuss a measure called duration. Duration is a measure of the sensitivity of an asset or a liability to a change in interest rates. Why would bank management want to know the duration of its assets and liabilities?a.Duration is a measure of the approximate change in the value of an asset for a 1% change in interest rates. b. If an asset has a duration of 5, then the portfolios value will change by approximately 5% if interest rate changes by 100 basis points.10.3-4a. Explain how bank regulators have incorporated interest risk into capital requirements. b. Explain how S&L regulators have incorporated interest rate risk into capital requirements.a.The FDIC Improvement Act of 1991, required