ECO 414 CH 9

Duration analysis involves comparing the average duration of the bank's ________ to the average duration of its ________. A) assets; liabilities B) assets; deposit liabilities C) securities portfolio; non-deposit liabilities D) loan portfolio; deposit liabilities

A) assets; liabilities

Credit risk management tools include A) collateral. B) interest rate swaps. C) duration analysis. D) deductibles.

A) collateral.

A bank that wants to monitor the check payment practices of its commercial borrowers, so that moral hazard can be reduced, will require borrowers to A) keep compensating balances in a checking account at the bank. B) place a bank officer on their board of directors. C) purchase the bank's CDs. D) place a corporate officer on the bank's board of directors.

A) keep compensating balances in a checking account at the bank.

Bank's make their profits primarily by issuing A) loans. B) NOW accounts. C) negotiable CDs. D) equity.

A) loans.

Long-term customer relationships ________ the cost of information collection and make it easier to ________ credit risks. A) reduce; screen B) increase; increase C) reduce; increase D) increase; screen

A) reduce; screen

Which of the following statements most accurately describes the task of bank asset management? A) Banks seek to prevent bank failure at all cost; since a failed bank earns no profit, liquidity needs supersede the desire for profits. B) Banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity. C) Banks seek to have the highest liquidity possible subject to earning a positive rate of return on their operations. D) Banks seek to acquire funds in the least costly way.

B) Banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity.

Which of the following are reported as assets on a bank's balance sheet? A) savings deposits B) reserves C) bank capital D) borrowings

B) reserves

Banks face the problem of ________ in loan markets because bad credit risks are the ones most likely to seek bank loans. A) moral suasion B) intentional fraud C) adverse selection D) moral hazard

C) adverse selection

Through correspondent banking, large banks provide services to small banks, including A) loan guarantees. B) issuing stock. C) foreign exchange transactions. D) debt reduction.

C) foreign exchange transactions.

A $100 deposit into my checking account at My Bank increases my checkable deposits by $100, and the bank's ________ by $100. A) securities B) capital C) reserves D) loans

C) reserves

Net profit after taxes per dollar of assets is a basic measure of bank profitability called A) return on investment. B) return on capital. C) return on assets. D) return on equity.

C) return on assets.

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals times the change in the interest rate is called A) the segmented maturity approach to interest-exposure analysis. B) basic gap analysis. C) the maturity bucket approach to gap analysis. D) the segmented maturity approach to gap analysis.

C) the maturity bucket approach to gap analysis.

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

D) reducing deposits and reserves by $5 million.

Provisions in loan contracts that prohibit borrowers from engaging in specified risky activities are called A) proscription bonds. B) liens. C) due-on-sale clauses. D) restrictive covenants.

D) restrictive covenants.

Banks hold capital because A) higher capital increases the returns to the owners. B) higher capital increases the return on equity. C) it increases the likelihood of bankruptcy. D) they are required to by regulatory authorities.

D) they are required to by regulatory authorities.

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

B) borrowing short and lending long.

A bank with insufficient reserves can increase its reserves by A) buying short-term Treasury securities. B) calling in loans. C) lending federal funds. D) buying municipal bonds.

B) calling in loans.

The goals of bank asset management include A) lending at high interest rates regardless of risk. B) purchasing securities with high returns and low risk. C) minimizing liquidity. D) maximizing risk.

B) purchasing securities with high returns and low risk.

Secondary reserves include A) state and local government securities. B) short-term U.S. government securities. C) deposits at other large banks. D) deposits at Federal Reserve Banks.

B) short-term U.S. government securities.

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

B) vault cash and deposits at the Fed

Bankers' concerns regarding the optimal mix of excess reserves, secondary reserves, borrowings from the Fed, and borrowings from other banks to deal with deposit outflows is an example of A) liability management. B) managing credit risk. C) liquidity management. D) managing interest rate risk.

C) liquidity management.

Bank capital has both benefits and costs for the bank owners. Higher bank capital ________ the likelihood of bankruptcy, but higher bank capital ________ the return on equity for a given return on assets. A) increases; reduces B) increases; increases C) reduces; reduces D) reduces; increases

C) reduces; reduces

Collateral requirements lessen the consequences of ________ because the collateral reduces the lender's losses in the case of a loan default and it reduces ________ because the borrower has more to lose from a default. A) diversification; moral hazard B) moral hazard; adverse selection C) adverse selection; diversification D) adverse selection; moral hazard

D) adverse selection; moral hazard

All else the same, if a bank's liabilities are more sensitive to interest rate fluctuations than are its assets, then ________ in interest rates will ________ bank profits. A) a decline; not affect B) an increase; increase C) a decline; reduce D) an increase; reduce

D) an increase; reduce

If a bank needs to acquire funds quickly to meet an unexpected deposit outflow, the bank could A) increase loans. B) buy corporate bonds. C) buy U.S. Treasury bills. D) borrow from another bank in the federal funds market.

D) borrow from another bank in the federal funds market.

Because of an expected rise in interest rates in the future, a banker will likely A) buy long-term rather than short-term bonds. B) make long-term rather than short-term loans. C) make either short or long-term loans; expectations of future interest rates are irrelevant. D) buy short-term rather than long-term bonds.

D) buy short-term rather than long-term bonds.

Conditions that likely contributed to a credit crunch during the global financial crisis include A) increases in reserve requirements. B) regulated hikes in bank capital requirements. C) falling interest rates that raised interest rate risk, causing banks to choose to hold more capital. D) capital shortfalls caused in part by falling real estate prices.

D) capital shortfalls caused in part by falling real estate prices.

Bank loans from the Federal Reserve are called ________ and represent a ________ of funds. A) fed funds; source B) discount loans; use C) fed funds; use D) discount loans; source

D) discount loans; source

The difference of rate-sensitive liabilities and rate-sensitive assets is known as the A) rate-risk index. B) duration. C) interest-sensitivity index. D) gap.

D) gap.

Holding large amounts of bank capital helps prevent bank failures because A) it makes loans easier to sell. B) it makes it easier to call in loans. C) it means that the bank has a higher income. D) it can be used to absorb the losses resulting from bad loans.

D) it can be used to absorb the losses resulting from bad loans.