Chapter 10 - Banking and the Management of Financial Institutions

5) Asset transformation can be described as A) borrowing short and lending long. B) borrowing and lending only for the short term. C) borrowing long and lending short. D) borrowing and lending for the long term.

A) borrowing short and lending long.

15) Examples of off-balance-sheet activities include A) loan sales. B) selling negotiable CDs. C) borrowing from other banks. D) extending loans to depositors.

A) loan sales.

12) Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the A) moral hazard problem. B) adverse credit risk problem. C) adverse selection problem. D) lemon problem.

A) moral hazard problem.

8) A $5 million deposit outflow from a bank has the immediate effect of A) reducing deposits and reserves by $5 million. B) reducing deposits and capital by $5 million. C) reducing deposits and securities by $5 million. D) reducing deposits and loans by $5 million.

A) reducing deposits and reserves by $5 million.

1) Which of the following are reported as liabilities on a bank's balance sheet? A) Deposits with other banks B) Checkable deposits C) Reserves D) Loans

B) Checkable deposits

11) If borrowers with the most risky investment projects seek bank loans in higher proportion to those borrowers with the safest investment projects, banks are said to face the problem of A) moral hazard. B) adverse selection. C) adverse credit risk. D) lemon lenders.

B) adverse selection.

2) Bank capital is equal to ________ minus ________. A) total liabilities; total borrowings B) total assets; total liabilities C) total liabilities; total assets D) total assets; total reserves

B) total assets; total liabilities

3) Bank reserves include A) deposits at other banks and deposits at the Fed. B) vault cash and deposits at the Fed. C) vault cash and short-term Treasury securities. D) deposits at the Fed and short-term treasury securities.

B) vault cash and deposits at the Fed.

The Bank has: Assets Rate-sensitive $40 M Fixed-rate $60 M Liabilities Rate-sensitive $50 M Fixed-rate $50 M 14) If interest rates rise by 5 percentage points, say from 10 to 15%, bank profits (measured using gap analysis) will A) decline by $1.5 million. B) decline by $2.5 million. C) decline by $0.5 million. D) increase by $2.0 million.

C) decline by $0.5 million. The Bank hence has more rate-sensitive Liabilities (than Assets), for which they will PAY interest. They will hence gain from a decrease in i, and lose from an increase in i. *Basic Gap Analysis*: ∆Bank profit=(Rate sensitive assets-Rate sensitive liabilities)*∆i -> (40-50)*0.05 = -$0,5 M

6) With a 10% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could *lend* is A) $10. B) $110. C) $100. D) $90.

D) $90.

9) If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can A) reduce deposits by $3 million. B) increase loans by $3 million. C) repay its discount loans from the Fed. D) sell $3 million of securities.

D) sell $3 million of securities.

17) When banks calculate the losses the institution would incur if an unusual combination of bad events happened, the bank is using the ________ approach. A) value-at-risk B) maximum value C) stress-test D) trading-loss

C) stress-test

7) Which of the following are primary concerns of the bank manager? A) Extending loans to borrowers who will pay low interest rates, but who are poor credit risks B) Acquiring funds at a relatively high cost, so that profitable lending opportunities can be realized C) Maintaining high levels of capital and thus maximizing the returns to the owners. D) Maintaining sufficient reserves to minimize the cost to the bank of deposit outflows

D) Maintaining sufficient reserves to minimize the cost to the bank of deposit outflows

4) Which of the following are reported as assets on a bank's balance sheet? A) Borrowings B) Bank capital C) Savings deposits D) Reserves

D) Reserves

16) The principal-agent problem that exists for bank trading activities can be reduced through A) creation of internal controls that combine trading activities with bookkeeping. B) elimination of internal controls. C) elimination of regulation of banking. D) creation of internal controls that separate trading activities from bookkeeping.

D) creation of internal controls that separate trading activities from bookkeeping.

The Bank has: Assets Rate-sensitive $20 M Fixed-rate $80 M Liabilities Rate-sensitive $50 M Fixed-rate $50 M 13) If interest rates rise by 5 percentage points, say, from 10 to 15%, bank profits (measured using gap analysis) will A) decline by $2.5 million. B) decline by $0.5 million. C) increase by $1.5 million. D) decline by $1.5 million.

D) decline by $1.5 million. The Bank hence has more rate-sensitive Liabilities (than Assets), for which they will PAY interest. They will hence gain from a decrease in i, and lose from an increase in i. *Basic Gap Analysis*: ∆Bank profit=(Rate sensitive assets-Rate sensitive liabilities)*∆i -> (20-50)*0.05 = -$1,5 M

10) A bank is insolvent when A) its assets increase in value. B) its assets exceed its liabilities. C) its capital exceeds its liabilities. D) its liabilities exceed its assets.

D) its liabilities exceed its assets.