Money and Banking Exam Three

Which of the following are reported as liabilities on a bank's balance sheet? A. consumer loans B. checkable deposits C. reserves D. deposits with other banks

B

Which of the following statements most accurately describes the task of bank asset management? 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. Banks seek to prevent bank failure at all cost; since a failed bank earns no profit, liquidity needs supersede the desire for profits. Banks seek to have the highest liquidity possible subject to earning a positive rate of return on their operations.

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

Under the Gramm-Leach-Bliley Act the oversight of the securities activities of bank holding companies belongs to the SEC. the U.S. Treasury. the Comptroller of the Currency. the Federal Reserve.

SEC

The belief that bank failures were regularly caused by fraud or the lack of sufficient bank capital explains, in part, the passage of the National Bank Charter Amendments of 1918. the Garn-St. Germain Act of 1982. the National Bank Act of 1863. Federal Reserve Act of 1913.

the national bank act of 1863

Mutual savings banks are primarily regulated by the states in which they are located. the FDIC. the Federal Reserve. the National Credit Union Administration.

the states in which they are located

Bank capital is equal to ________ minus ________. total liabilities; total assets total assets; total liabilities total assets; total reserves total liabilities; total borrowings

total assets; total liabilites

The too-big-to-fail policy treats large depositors of small banks inequitably when compared to depositors of large banks. allows small banks to take on more risk than large banks. puts large banks at a competitive disadvantage in attracting large deposits. reduces moral hazard problems.

treats large depositors of small banks inequitably when compared to depositors of large banks.

When bad drivers line up to purchase collision insurance, automobile insurers are subject to the moral hazard problem. assigned risk problem. adverse selection problem. ill queue problem.

adverse selection problem

The government safety net creates ________ problem because risk-loving entrepreneurs might find banking an attractive industry. a moral hazard an adverse selection a revenue a lemons

an adverse selection

Prior to 2008, bank managers looked on reserve requirements as a tax on loans. as a subsidy on loans. as a subsidy on deposits. as a tax on deposits.

as a tax on deposits

Financial innovations that grew out of the bank branching restrictions were bank holding companies and securitization. bank holding companies and automated teller machines. automated teller machines and sweep accounts. automated teller machines and bank credit cards.

bank holding companies and automated teller machines

Since 1980 bank profits have grown rapidly due to deregulation. banks have decreased risk taking to offset the decline in profits. banks have offset the decline in profits from off-balance-sheet activities with increased income from traditional activities. banks have offset the decline in profits from traditional activities with increased income from off-balance-sheet activities.

banks have offset the decline in profits from traditional activities with increased income from off-balance-sheet activities.

The result of the too-big-to-fail policy is that ________ banks will take on ________ risks, making bank failures more likely. small; fewer big; fewer big; greater small; greater

big;greater

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. buy corporate bonds. buy U.S. Treasury bills. increase loans.

borrow from another bank in the federal funds market

Regulations that reduced competition between banks included the dual system of granting bank charters. branching restrictions. interest-rate ceilings. bank reserve requirements.

branching restrictions

In a ________ banking system, commercial banks engage in securities underwriting, but legal subsidiaries conduct the different activities. Also, banking and insurance are not typically undertaken together in this system. universal British-style universal compartmentalized short-fence

british-style universal

Banks are required to file ________ usually quarterly that list information on the bank's assets and liabilities, income and dividends, and so forth. call reports regulatory sheets balance reports examiner updates

call reports

Holding all else constant, when a bank receives the funds for a deposited check bank liabilities decrease by the amount of the check. bank reserves increase by the amount of required reserves. bank assets increase by the amount of the check. cash items in the process of collection fall by the amount of the check.

cash items in the process of collection fall by the amount of the check

Because of asymmetric information, the failure of one bank can lead to runs on other banks. This is the moral hazard problem. adverse selection problem. too-big-to-fail effect. contagion effect.

contagion effect

if interest rates rise by 5 percentage pts, say from 10 to 15%, bank profits (measured by the gap analysis will)

decline by .5 million

Mutual savings banks are owned by shareholders. partners. depositors. foreign investors.

depositors

Allowing bank branching across state lines gives banks greater ability to coordinate bank operations. This makes it easier for them to receive the benefits of economies of scale. the dual banking system. interest-rate irregularities. disintermediation.

economies of scale

The McFadden Act of 1927 separated the commercial banks and investment banks. effectively prohibited banks from branching across state lines. required that banks maintain bank capital equal to at least 6 percent of their assets. effectively required that banks maintain a correspondent relationship with large money center banks.

effectively prohibited banks from branching across state lines

The National Bank Act of 1863, and subsequent amendments to it created insurance on deposit accounts. established the Office of the Comptroller of the Currency. broadened the regulatory powers of the Federal Reserve. created a banking system of state-chartered banks.

established the Office of the Comptroller of Currency

Unlike banks, ________ have been allowed to branch statewide since 1980. federally-chartered S&Ls technically insolvent S&Ls state-chartered S&Ls financially troubled S&Ls

federally-chartered S&Ls

Bank consolidation will likely result in a shift in assets from larger banks to smaller banks. less competition. the elimination of community banks. increased competition.

increased competition

Risk that is related to the uncertainty about interest rate movements is called interest-rate risk. the problem of moral hazard. security risk. default risk.

interest rate risk

When you deposit a $50 bill in the Security Pacific National Bank its reserves decrease by $50. its assets increase by $50. its liabilities decrease by $50. its cash items in the process of collection increase by $50.

the assets increase by $50

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 reserves increase by $160,000. the assets at the bank increase by $800,000. the liabilities of the bank increase by $1,000,000. the liabilities of the bank increase by $800,000.

the liabilities of the bank increase by $1M

The legislation that effectively prohibited banks from branching across state lines and forced all national banks to conform to the branching regulations in the state in which they reside is the National Bank Act. Garn-St.Germain Act. McFadden Act. Glass-Steagall Act.

McFadden Act

Regulators attempt to reduce the riskiness of banks' asset portfolios by establishing a minimum interest rate floor that banks can earn on certain assets. requiring collateral for all loans. encouraging banks to hold risky assets such as common stocks. limiting the amount of loans in particular categories or to individual borrowers.

limiting the amount of loans in particular categories or to individual borrowers.

Banks will be examined at least once a year and given a CAMELS rating by examiners. The L stands for leverage. liabilities. loans. liquidity.

liquidity

The most important category of assets on a bank's balance sheet is securities. cash items in the process of collection. loans. other assets.

loans

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

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

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

make long-term rather than short-term loans

Because checking accounts are ________ liquid for the depositor than savings accounts, they earn ________ interest rates. more; higher less; lower more; lower less; higher

more lower

Federal deposit insurance covers deposits up to $250,000, but as part of a doctrine called "too-big-to-fail" the FDIC sometimes ends up covering all deposits to avoid disrupting the financial system. When the FDIC does this, it uses the "payoff" method. "inequity" method. "purchase and assumption" method. "Basel" method.

purchase and assumption model no

If the FDIC decides that a bank is too big to fail, it will use the ________ method, effectively ensuring that ________ depositors will suffer losses. payoff; large purchase and assumption; large payoff; no purchase and assumption; no

purchase and assumption; no

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. a dual banking system. competition in laxity. depositor supervision.

regulatory arbitrage

The Basel Accord, an international agreement, requires banks to hold capital based on risk-weighted assets. the total value of assets. deposits. liabilities.

risk-weighted assets

The chartering process is similar to ________ potential borrowers and the restriction of risk assets by regulators is similar to ________ in private financial markets. identifying; credit rationing screening; restrictive covenants identifying; branching restrictions screening; branching restrictions

screening; restrictive covenants

One way for banks to reduce the principal-agent problems associated with trading activities is to make sure that the person conducting the trades is also the person responsible for recording the transactions. encourage traders to take on more risk if the potential rewards are higher. set limits on the total amount of a traders' transactions. reduce the regulations on the traders so that they have more flexibility in conducting trades.

sets limits on the total amount of traders' transactions

In general, banks make profits by selling ________ liabilities and buying ________ assets. short-term; longer-term illiquid; liquid risky; risk-free long-term; shorter-term

short-term; longer term

Like the dual banking system for commercial banks, thrifts can have either ________ or ________ charters. local; federal municipal; federal state; federal state; local

state; federal

Although the FDIC was created to prevent bank failures, its existence encourages banks to open too many branches. hold too much capital. take too much risk. buy too much stock.

take too much risk