chapter 9 final exam
With a 10% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is
$90.
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
Which of the following statements are TRUE?
A bank's balance sheet shows that total assets equal total liabilities plus equity capital.
A deposit outflow results in equal reductions in**
Assets and Liabilities
Which of the following statements is FALSE?
Bank capital is recorded as an asset on the bank balance sheet.
Which of the following statements most accurately describes the task of bank asset management?
Banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity.
Which of the following statements are TRUE? *
Checkable deposits are payable on demand.
Which of the following statements is FALSE?
Checkable deposits are the primary source of bank funds.
Which of the following would NOT be a way to increase the return on equity?
Sell more bank stock.
The largest percentage of banks' holdings of securities consist of
Treasury and government agency securities.
A bank failure occurs whenever**
a bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements.
Banks face the problem of ________ in loan markets because bad credit risks are the ones most likely to seek bank loans.
adverse selection
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
adverse selection
In order to reduce the ________ problem in loan markets, bankers collect information from prospective borrowers to screen out the bad credit risks from the good ones.
adverse selection
If a bank's liabilities are more sensitive to interest rate movements than are its assets, then
an increase in interest rates will reduce bank profits
If a bank has $50 million in rate-sensitive assets and $20 million in rate-sensitive liabilities then
an increase in interest rates will reduce bank profits.
If a bank needs to acquire funds quickly to meet an unexpected deposit outflow, the bank could
borrow from another bank in the federal funds market.
Banks that actively manage liabilities will most likely meet a reserve shortfall by
borrowing federal funds
In general, banks would prefer to acquire funds quickly by ________ rather than ________.
borrowing from the Fed; reducing loans
Asset transformation can be described as**
borrowing short and lending long
A bank will want to hold more excess reserves (everything else equal) when
brokerage commissions on selling bonds increase.
Of the following, which would be the last choice for a bank facing a reserve deficiency?
call in loans
________ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow.
calling in loans
A bank with insufficient reserves can increase its reserves by
calling in loans.
Bank ________ is/are listed on the liability side of the bank's balance sheet.
capital
Conditions that likely contributed to a credit crunch during the global financial crisis include
capital shortfalls caused in part by falling real estate prices.
Holding all else constant, when a bank receives the funds for a deposited check
cash items in the process of collection fall by the amount of the check.
Which of the following are NOT reported as assets on a bank's balance sheet?
checkable deposits
Which of the following are reported as liabilities on a bank's balance sheet?
checkable deposits
Which of the following are transaction deposits?
checkable deposits
All of the following are nontransaction deposits EXCEPT
checkable deposits.
Credit risk management tools include**
collateral
Property promised to the lender as compensation if the borrower defaults is called
collateral
When a lender refuses to make a loan, although borrowers are willing to pay the stated interest rate or even a higher rate, the bank is said to engage in
credit rationing
If a bank has excess reserves greater than the amount of a deposit outflow, the outflow will result in equal reductions in
deposits and reserves.
Which of the following are reported as liabilities on a bank's balance sheet?
discount loans
Bank loans from the Federal Reserve are called ________ and represent a ________ of funds.
discount loans; source
From the standpoint of ________, specialization in lending is surprising but makes perfect sense when one considers the ________ problem.
diversification; adverse selection
The amount of assets per dollar of equity capital is called the
equity multiplier
Banks that suffered significant losses in the 1980s made the mistake of
failing to diversify their loan portfolio.
Through correspondent banking, large banks provide services to small banks, including
foreign exchange transactions
Because of their ________ liquidity, ________ U.S. government securities are called secondary reserves.
high; short-term
As the costs associated with deposit outflows ________, the banks willingness to hold excess reserves will ________.
increase; increase
When a new depositor opens a checking account at the First National Bank, the bank's assets ________ and its liabilities ________.
increase; increase
Which of the following has NOT resulted from more active liability management on the part of banks?
increased bank holdings of cash items
Modern liability management has resulted in**
increased sales of negotiable CDs to raise funds
Risk that is related to the uncertainty about interest rate movements is called
interest-rate risk
Holding large amounts of bank capital helps prevent bank failures because
it can be used to absorb the losses resulting from bad loans.
When you deposit a $50 bill in the Security Pacific National Bank
its assets increase by $50.
A bank is insolvent when**
its liabilities exceed its assets
When you deposit $50 in currency at Old National Bank
its liabilities increase by $50
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
keep compensating balances in a checking account at the bank.
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
liquidity management
A bank's commitment to provide a firm with loans up to pre-specified limit at an interest rate that is tied to a market interest rate is called
loan commitment.
Bank's make their profits primarily by issuing**
loans
The most important category of assets on a bank's balance sheet is
loans
Unanticipated moral hazard contingencies can be reduced by
long-term customer relationships.
When Jane Brown writes a $100 check to her nephew and he cashes the check, Ms. Brown's bank ________ assets of $100 and ________ liabilities of $100.
loses; loses
Which of the following are primary concerns of the bank manager?
maintaining sufficient reserves to minimize the cost to the bank of deposit outflows
To reduce moral hazard problems, banks include restrictive covenants in loan contracts. In order for these restrictive covenants to be effective, banks must also
monitor and enforce them
Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the
moral hazard problem
Because checking accounts are ________ liquid for the depositor than savings accounts, they earn ________ interest rates.
more;lower
Which of the following would a bank NOT hold as insurance against the highest cost of deposit outflow-bank failure?
mortgages
Large-denomination CDs are ________, so that like a bond they can be resold in a ________ market before they mature.
negotiable; secondary
Banks hold excess and secondary reserves to**
provide for unexpected deposit outflows.
The goals of bank asset management include**
purchasing securities with high returns and low risk
When banks offer borrowers smaller loans than they have requested, banks are said to
ration credit
Long-term customer relationships ________ the cost of information collection and make it easier to ________ credit risks.
reduce;screen
A $5 million deposit outflow from a bank has the immediate effect of
reducing deposits and reserves by $5 million
The amount of checkable deposits that banks are required by regulation to hold are the
required reserves.
Of the following methods that banks might use to reduce moral hazard problems, the one not legally permitted in the United States is the
requirement that firms place on their board of directors an officer from the bank.
A $100 deposit into my checking account at My Bank increases my checkable deposits by $100, and the bank's ________ by $100.
reserves
Which of the following are reported as assets on a bank's balance sheet?
reserves
Which of the following bank assets is the most liquid?
reserves
Provisions in loan contracts that prohibit borrowers from engaging in specified risky activities are called
restrictive covenants.
Net profit after taxes per dollar of assets is a basic measure of bank profitability called
return on assets
Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called
return on equity.
Banks acquire the funds that they use to purchase income-earning assets from such sources as
savings accounts.
Because ________ are less liquid for the depositor than ________, they earn higher interest rates.
savings accounts; checkable deposits
If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can
sell $3 million of securities
Secondary reserves include**
short-term U.S. government securities
In general, banks make profits by selling ________ liabilities and buying ________ assets.
short-term; longer-term
If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to
shrink the size of the bank.
The share of checkable deposits in total bank liabilities has
shrunk over time
In one sense ________ appears surprising since it means that the bank is not ________ its portfolio of loans and thus is exposing itself to more risk.
specialization in lending; diversifying
When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to make any loans but to hold excess reserves instead, then, in the bank's final balance sheet
the assets at the bank increase by $1 million
Which of the following are bank assets?**
the building owned by the bank
For a given return on assets, the lower is bank capital
the higher is the return for the owners of the bank.
When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then
the liabilities of Citibank increase by $10.
When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then
the liabilities of the First National Bank decrease by $10.
When $1 million 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, then, in the bank's final balance sheet
the liabilities of the bank increase by $1,000,000.
When you deposit $50 in your account at First National Bank and a $100 check you have written on this account is cashed at Chemical Bank, then
the reserves at First National fall by $50
Banks hold capital because**
they are required to by regulatory authorities
Secondary reserves are so called because
they can be converted into cash with low transactions costs.
Banks' asset portfolios include state and local government securities because
they help to attract business from these government entities.
Because ________ are less liquid for the depositor than ________, they earn higher interest rates.
time deposits; savings accounts
In the absence of regulation, banks would probably hold
too little capital.
Bank capital is equal to ________ minus ________.
total assets - total liabilities
Which of the following is NOT a source of borrowings for a bank?
transaction deposits
Bank reserves include**
vault cash and deposits at the Fed