Problem Sets
If a bank has $100,000 of deposits, a required reserve ratio of 20 percent, and $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is
$ 25,000
Assuming that the average duration of its assets is five years, while the average duration of its liabilities in three years, then 5 percentage point increase in interest rates will cause the net worth of First National to decline by _______ of the total original asset value
10 percent
both ____and_____ were financial innovations that occured because of interest rate volatility.
Adjustable-rate mortages; financial derivatives
Rising intrest-rate risk
Increased the demand for financial innovation
Bruce the Bank Manager can reduce interest rate risk by ________ the duration of the bank's assets to increase their rate sensitivity or, alternatively, ________ the duration of the bank's liabilities.
Lengthening; shortening
Duration analysis involves comparing the average duration of the bank's ________ to the average duration of its ________.
assets ; liabilities
In a bank panic, the source of contagion is the
asymmetric information problem
assets transformation can be described as
borrowing short and lending long
A bank with insufficient reserves can increase its reserves by
calling in loans
Which of the following are reported as liabilities on a bank's balance sheet?
checkable deposits
When financial institutions go on a lending spree and expand their lending at a rapid pace they are participating in a
credit boom
If interest rates rise by 5 percentage points, say from 10 to 15%, bank profits (measured using gap analysis) will
decline by $0.5 million
Bank loans from the Federal Reserve are called ________ and represent a ________ of funds.
discount loans ; source
competition between banks
encourages greater risk taking
The amount of assets per dollar of equity capital is called the
equity multiplier
When you deposit $50 in currency at Old National Bank
its liabilities increased by $50
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
liability management
If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to
reduce the bank's assets by making fewer loans
Adjustable Rate Mortgage
reduce the interest rate risk for financial institutions
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
If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to
sell securities the bank owns and put the funds into the reserve account
Although the FDIC was created to prevent bank failures, its existence encourages banks to
take too many risk
Bank reserves include
vault cash and deposits at the Fed
A major controversy involving the banking industry in its early years was
wether the federal government or the states should charter banks