Ch 9 HW
Required reserves Excess reserves T-bills Loans Checkable deposits Bank capital (Required reserves=checkable deposits ×required reserve ratio Excess reserves = total reserves−required reserves)
$20 Million $29 Million $320 Million $47 Million $259 Million $157 Million
Suppose $25,000 is deposited at a bank. The required reserve ratio is 20 percent, and the bank chooses not to hold any excess reserves but makes loans instead. What are the bank's total reserves?
$25,000*.20=$5,000
Suppose that a bank's balance sheet consists of the following: On the liability side it has $93 of deposits and $7 of capital, while on the asset side it has $10 of reserves and $90 of loans. This bank can then sustain $__________of bad loans before it becomes solvent.
$7
X-Bank reported an ROE of 16% and an ROA of 1.38%. What is the equity multiplier?
.16*.0138=11.60
Using the T-accounts of the First National Bank and the Second National Bank, describe what happens when Jane Brown writes a check for $55 on her account at the First National Bank to pay her friend Joe Green, who in turn deposits the check in his account at the Second National Bank. T-account for the First National Bank:
1st National Bank Assets (Reserves)-55 Liabilities (Checkable deposits) -55 2nd National Bank Assets (Reserves)+55 Liabilities (Checkable deposits) +55
In recent years the interest paid on checkable and nontransaction deposits has accounted for around ________ of total bank operating expenses, while the costs involved in servicing accounts have been approximately ________ of operating expenses.
25 percent; 50 percent
NewBank started its first day of operations with $157 million in capital. A total of $259 million in checkable deposits is received. The bank makes a $21 million commercial loan and another $26 million in mortgage loans. Required reserves are 7.8%. NewBank decides to invest $320 million in 30-day T-bills. The T-bills are currently trading at $4,983 (including commissions) for a $5,040 face value instrument. How many T-bills do they purchase? (Note:Information is based on NewBank's first month of operations.) NewBank will purchase ________ T-bills.
320 million / $4,983=64,218
Which of the following statements are true?
A bank's balance sheet shows that total assets equal total liabilities plus equity capital.
Why has noninterest income been growing as a source of bank operating income?
Banks can increase profits by engaging in noninterest income, or off-balance-sheet activities.
Which of the following are transaction deposits?
Checkable deposits
Rank the following bank assets from most liquid (1) to least liquid (4).
Commercial loans (3) Securities (2) Reserves (1) Physical capital (4)
A bank almost always insists that the firms it lends to keep compensating balances at the bank. Why?
Compensating balances can act as collateral Compensating balances help establish long-term customer relationships, which make it easier for the bank to collect information about prospective borrowers, thus reducing the adverse selection problem Compensating balances help the bank monitor the activities of a borrowing firm, which reduces the moral hazard problem
Which of the following are reported as liabilities on a bank's balance sheet?
Discount loans
If a bank doubles the amount of its capital and ROA stays constant, what will happen to ROE?
Given the ROA, if bank capital doubles, then ROE will fall by half
If the bank you own has no excess reserves and a sound customer comes in asking for a loan, should you automatically turn the customer down, explaining that you don't have any excess reserves to lend out? Why or why not? What options are available for you to provide the funds your customer needs?
No. There are several ways that reserves can be acquired. For example, the bank can borrow at the discount window or in the federal funds market, or it can acquire funds by issuing negotiable CDs
Which of the following are reported as assets on a bank's balance sheet?
Reserves
How well capitalized is this bank?
This is a well-capitalized bank because its equity/asset ratio exceeds the minimum required level.
The largest percentage of banks' holdings of securities consist of
Treasury and government agency securities
The bank you own has the following balance sheet Reserves $75 million Loans $525 million Deposits $500 million Bank Cap $100 million If the bank suffers a deposit outflow of $50 million with a required reserve ratio on deposits of 10%, what actions can you take to keep your bank from failing?
You can borrow reserves in the federal funds market. You can go to the discount window. You can call in or sell off loans
The process of asset transformation is frequently described by saying that banks are in the business of
borrowing short and lending long
Bank ________ is/are listed on the liability side of the bank's balance sheet
capital
Which of the following is the greatest source of funds to commercial banks in the past
checkable deposits
The volume of checkable deposits relative to total bank liabilities has
declined over time.
When you deposit your $5000 paycheck in your bank, which was written on an account at a different bank, the immediate impact on your bank's balance sheet is that your bank's cash items in the process of collection rise by $5000 and your bank's
deposits rise by $5000
Banks also obtain funds by borrowing from the Federal Reserve System. These borrowings are known as
discount loans
Bank loans from the Federal Reserve are called ________ and represent a ________ of funds.
discount loans; source
Which of the following is NOT true regarding how banks manage their assets? Banks seek assets that
have no default risk
Because of their ________ liquidity, ________ U.S. government securities are called secondary reserves.
high; short−term
Risk that is related to the uncertainty about future interest-rate movements is called:
interest-rate risk
A bank with excess reserves can economize on these reserves by:
lending reserves in the federal funds market
Bank's make their profits primarily by issuing ________.
loans
In order to reduce the ________ problem in loan markets, banks often insist on collateral from potential borrowers.
moral hazard
Banks often specialize in providing loans to firms in a particular industry because this activity
reduces the cost of acquiring and analyzing information about the borrower
The portion of checkable deposits that banks are required to hold is called:
required reserves.
Because ________ are less liquid for the depositor than ________, they earn higher interest rates.
savings accounts; checkable deposits
Which of the following is not a method by which banks reduce their credit risk?
use gap analysis to help balance a bank's rate-sensitive assets and liabilities
