Exam 3

Am instrument developed to help investors and institutions hedge interest rate risk is

A financial derivative

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

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 is NOT true of moral hazard?

It describes a lender's problem of distinguishing the good-risk applicants from the bad-risk applicants.

Which of the following statements about a checking deposit is true?

It is an asset for households but a liability for a bank

Financial intermediaries' low transaction costs allow them to provide___ services that make it easier for customers to conduct transactions

Liquidity

Which of the following is a checkable deposit?

NOW account

The chattering process is similar to ___ potential borrowers and the restriction of risk assets by regulators is similar to ___ in private financial markets

Screening, restrictive covenants

Because of the abuses by state banks and the clear need for a central bank to help the federal government raise funds during the War of 1812, Congress created the

Second Bank of the United States in 1816.

A bank failure occurs whenever

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

If a bank has $50 million in rate-sensitive assets and $20 million in rate-sensitive liabilities then

a decrease in interest rates will reduce bank profits

The name economists give the process by which stockholders gather information by frequent monitoring of the firm's activities is

costly state verification

The fact that banks operate on a "sequential service constraint" means that

depositors arriving first have the best chance of withdrawing their funds.

Tools to help solve adverse selection problem in financial markets include all of the following EXCEPT

diversification

The reduction in transactions costs per dollar of investment as the size of transactions increases is

economies of scale

Non-financial businesses in Germany, Japan, and Canada raise most of their funds

from bank loans

When a new depositor opens a checking account at the First National Bank, the bank's assets ________ and its liabilities ________.

increase; increase

Risk that is related to the uncertainty about interest rate movements is called

interest rate risk

The U.S banking system is considered to be a dual system because

it is regulated by both state and federal governments.

Banks earn profits by selling ________ with attractive combinations of liquidity, risk, and return, and using the proceeds to buy ________ with a different set of characteristics.

liabilities/assets

The federal reserve act of 1913 required that

national banks join the Federal Reserve System.

The principal agent problem would not occur if ___ of a firm had complete information about actions of the ___

owners; managers

One purpose of regulation of financial markets is to

promote the provision of information to shareholders, depositors and the public.

If the FDIC decides that a bank is too big to fail, it will use the ________ method, effectively ensuring that ________ depositors will suffer losses.

purchase and assumption; no

The best measure economists have of how successful a country is in providing a high standard of living to its residents is

real GDP per capita

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.

reduces; reduces

The practice of keeping high-risk assets on a bank's books while removing low-risk assets with the same capital requirement is known as

regulatory arbitrage

Which of the following would not be a way to increase the return on equity?

sell more bank stock

Which of the following are bank assets?

the building owned by 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

Banks hold capital because

they are required to by regulatory authorities

A major controversy involving the banking industry in its early years was

whether the federal government or the states should charter banks.