10.3

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

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

A bank failure occurs whenever A) a bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements. B) a bank suffers a large deposit outflow. C) a bank has to call in a large volume of loans. D) a bank is not allowed to borrow from the Fed

a bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements

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

borrow from another bank in the federal funds market

Of the following, which would be the first choice for a bank facing a reserve deficiency? A) Call in loans B) Borrow from the Fed C) Sell securities D) Borrow from other banks

borrow from other banks

Banks that actively manage liabilities will most likely meet a reserve shortfall by A) calling in loans. B) borrowing federal funds. C) selling municipal bonds. D) seeking new deposits.

borrowing federal funds

In general, banks would prefer to acquire funds quickly by ________ rather than ________. A) reducing loans; selling securities B) reducing loans; borrowing from the Fed C) borrowing from the Fed; reducing loans D) "calling in" loans; selling securities

borrowing from the Fed; reducing loans

A bank will want to hold more excess reserves (everything else equal) when A) it expects to have deposit inflows in the near future. B) brokerage commissions on selling bonds increase. C) the cost of selling loans falls. D) the discount rate decreases

brokerage commissions on selling bonds increase

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

calling in loans

If a bank has excess reserves greater than the amount of a deposit outflow, the outflow will result in equal reductions in A) deposits and reserves. B) deposits and loans. C) capital and reserves. D) capital and loans

deposits and reserves

The amount of assets per dollar of equity capital is called the A) asset ratio. B) equity ratio. C) equity multiplier. D) asset multiplier

equity multiplier

Banks that suffered significant losses in the 1980s made the mistake of A) holding too many liquid assets. B) minimizing default risk. C) failing to diversify their loan portfolio. D) holding only safe securities.

failing to diversify their loan portfolio

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

higher capital increases the returns to the owners

Modern liability management has resulted in A) increased sales of certificates of deposits to raise funds. B) increase importance of deposits as a source of funds. C) reduced borrowing by banks in the overnight loan market. D) failure by banks to coordinate management of assets and liabilities

increased sales of certificates of deposits to raise funds.

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

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

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

its liabilities exceed its assets.

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) liquidity management. C) managing interest rate risk. D) managing credit risk.

liquidity management

Which of the following would a bank not hold as insurance against the highest cost of deposit outflow-bank failure? A) Excess reserves B) Secondary reserves C) Bank capital D) Mortgages

mortgages

Banks hold excess and secondary reserves to A) reduce the interest-rate risk problem. B) provide for deposit outflows. C) satisfy margin requirements. D) achieve higher earnings than they can with loans.

provide for deposit outflows

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

purchasing securities with high returns and low risk

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) reduces; reduces B) increases; increases C) reduces; increases D) increases; reduces

reduces; reduces

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 loans by $5 million. C) reducing deposits and securities by $5 million. D) reducing deposits and capital by $5 million.

reducing deposits and reserves by $5 million.

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

return on assets

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

return on equity

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) sell $3 million of securities. D) repay its discount loans from the Fed

sell $3 million of securities

Which of the following would not be a way to increase the return on equity? A) Buy back bank stock B) Pay higher dividends C) Acquire new funds by selling negotiable CDs and increase assets with them D) Sell more bank stock

sell more bank stock

For a given return on assets, the lower is bank capital, A) the lower is the return for the owners of the bank. B) the higher is the return for the owners of the bank. C) the lower is the credit risk for the owners of the bank. D) the lower the possibility of bank failure.

the higher is the return for the owners of the bank

In the absence of regulation, banks would probably hold A) too much capital, reducing the efficiency of the payments system. B) too much capital, reducing the profitability of banks. C) too little capital. D) too much capital, making it more difficult to obtain loans

too little capital

________ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow. A) Selling securities B) Selling loans C) Calling in loans D) Selling negotiable CDs

calling in loans

Conditions that likely contributed to a credit crunch during the global financial crisis include: A) capital shortfalls caused in part by falling real estate prices. 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) increases in reserve requirements

capital shortfalls caused in part by falling real estate prices

Which of the following has not resulted from more active liability management on the part of banks? A) Increased bank holdings of cash items B) Aggressive targeting of goals for asset growth by banks C) Increased use of negotiable CDs to raise funds D) An increased proportion of bank assets held in loans

Increased bank holdings of cash items

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

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

As the costs associated with deposit outflows ________, the banks willingness to hold excess reserves will ________. A) decrease; increase B) increase; decrease C) increase; increase D) decrease; not be affected

increase; increase

If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to A) buy back bank stock. B) pay higher dividends. C) shrink the size of the bank. D) sell securities the bank owns and put the funds into the reserve account

shrink the size of the bank