Assignment 10

Of the following, which would be the last choice for a bank facing a reserve deficiency? A. Call in loans. B. Borrow from the Fed. C. Sell securities. D. Borrow from other banks.

A. Call in loans.

Banks face the problem of ________ in loan markets because bad credit risks are the ones most likely to seek bank loans. A. adverse selection B. moral suasion C. intentional fraud D. moral hazard

A. adverse selection

In general, banks would prefer to acquire funds quickly by ________ rather than ________. A. borrowing from the Fed; reducing loans B. "calling in" loans; selling securities C. reducing loans; selling securities D. reducing loans; borrowing from the Fed

A. borrowing from the Fed; reducing loans

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

A. buy short-term rather than long-term bonds.

The principal-agent problem that exists for bank trading activities can be reduced through A. creation of internal controls that separate trading activities from bookkeeping. B. elimination of regulation of banking. C. elimination of internal controls. D. creation of internal controls that combine trading activities with bookkeeping.

A. creation of internal controls that separate trading activities from bookkeeping.

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 A. credit rationing. B. collusive behavior. C. strategic holding out. D. coercive bargaining.

A. credit rationing.

Off-balance sheet activities involving guarantees of securities and back-up credit lines A. increase the risk a bank faces. B. have no impact on the risk a bank faces. C. slightly reduce the risk a bank faces. D. greatly reduce the risk a bank faces.

A. increase the risk a bank faces.

The goals of bank asset management include A. purchasing securities with high returns and low risk. B. maximizing risk. C. lending at high interest rates regardless of risk. D. minimizing liquidity.

A. purchasing securities with high returns and low risk.

The amount of checkable deposits that banks are required by regulation to hold are the A. required reserves. B. excess reserves. C. vault cash. D. total reserves.

A. required reserves.

When banks calculate the losses the institution would incur if an unusual combination of bad events happened, the bank is using the ________ approach. A. stress-test B. value-at-risk C. trading-loss D. maximum value

A. stress-test

In the absence of regulation, banks would probably hold A. too little capital. B. too much capital, reducing the efficiency of the payments system. C. too much capital, reducing the profitability of banks. D. too much capital, making it more difficult to obtain loans.

A. too little capital.

Examples of off-balance-sheet activities include A. trading activities. B. extending loans to depositors. C. selling negotiable CDs. D. borrowing from other banks.

A. trading activities.

With a 10% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is A. $100. B. $90. C. $110. D. $10.

B. $90.

Which of the following statements are TRUE? A. A bank's assets are its sources of funds. B. A bank's balance sheet shows that total assets equal total liabilities plus equity capital. C. A bank's balance sheet indicates whether or not the bank is profitable. D. A bank's liabilities are its uses of funds.

B. A bank's balance sheet shows that total assets equal total liabilities plus equity capital.

A reason why rogue traders have bankrupt their banks is due to A. stringent supervision of trading activities by bank management. B. a failure to maintain proper internal controls. C. the separation of trading activities from the bookkeepers. D. accounting errors.

B. a failure to maintain proper internal controls.

Collateral requirements lessen the consequences of ________ because the collateral reduces the lender's losses in the case of a loan default and it reduces ________ because the borrower has more to lose from a default. A. moral hazard; adverse selection B. adverse selection; moral hazard C. adverse selection; diversification D. diversification; moral hazard

B. adverse selection; moral hazard

Duration analysis involves comparing the average duration of the bank's ________ to the average duration of its ________. A. securities portfolio; non-deposit liabilities B. assets; liabilities C. assets; deposit liabilities D. loan portfolio; deposit liabilities

B. assets; liabilities

Banks that actively manage liabilities will most likely meet a reserve shortfall by A. calling in loans. B. borrowing federal funds. C. seeking new deposits. D. selling municipal bonds.

B. borrowing federal funds.

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

B. checkable deposits

Which of the following are transaction deposits? A. savings accounts B. checkable deposits C. small-denomination time deposits D. certificates of deposit

B. checkable deposits

The difference of rate-sensitive liabilities and rate-sensitive assets is known as the A. duration. B. gap. C. rate-risk index. D. interest-sensitivity index.

B. gap.

Because of their ________ liquidity, ________ U.S. government securities are called secondary reserves. A. high; long-term B. high; short-term C. low; long-term D. low; short-term

B. high; short-term

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

B. interest-rate risk.

Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the A. lemon problem. B. moral hazard problem. C. adverse credit risk problem. D. adverse selection problem.

B. moral hazard problem.

Traders working for banks are subject to the A. exchange-risk problem. B. principal-agent problem. C. double-jeopardy problem. D. free-rider problem.

B. principal-agent problem.

Which of the following bank assets is the most liquid? A. state and local government securities B. reserves C. U.S. government securities D. consumer loans

B. reserves

When banks involved in trading activities attempt to outguess markets, they are A. forecasting. B. speculating. C. diversifying. D. engaging in riskless arbitrage.

B. speculating.

Banks develop statistical models to calculate their maximum loss over a given time period. This approach is known as the A. trading-loss approach. B. value-at-risk approach. C. stress-testing approach. D. doomsday approach.

B. value-at-risk approach.

Bank reserves include A. deposits at other banks and deposits at the Fed. B. vault cash and deposits at the Fed. C. vault cash and short-term Treasury securities. D. deposits at the Fed and short-term treasury securities.

B. vault cash and deposits at the Fed.

Asset transformation can be described as A. borrowing and lending for the long term. B. borrowing and lending only for the short term. C. borrowing short and lending long. D. borrowing long and lending short.

C. borrowing short and lending long.

Banks earn profits from off-balance sheet loan sales A. by foreclosing on delinquent accounts. B. by selling the loans at discounted prices. C. by selling existing loans for more than the original loan amount. D. by calling-in loans before the maturity date.

C. by selling existing loans for more than the original loan amount.

Conditions that likely contributed to a credit crunch during the global financial crisis include A. increases in reserve requirements. B. falling interest rates that raised interest rate risk, causing banks to choose to hold more capital. C. capital shortfalls caused in part by falling real estate prices. D. regulated hikes in bank capital requirements.

C. capital shortfalls caused in part by falling real estate prices.

Banks may borrow from or lend to another bank in the Federal Funds market. A loan of excess reserves from one bank to another bank is recorded as a(n) ________ for the borrowing bank and a(n) ________ for the lending bank. A. asset; asset B. asset; liability C. liability; asset D. liability; liability

C. liability; asset

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 A. managing credit risk. B. managing interest rate risk. C. liquidity management. D. liability management.

C. liquidity management.

Bank's make their profits primarily by issuing A. NOW accounts. B. equity. C. loans. D. negotiable CDs.

C. loans.

If a bank has ________ rate-sensitive assets than liabilities, a ________ in interest rates will reduce bank profits, while a ________ in interest rates will raise bank profits. A. more; rise; decline B. fewer; decline; decline C. more; decline; rise D. fewer; rise; rise

C. more; decline; rise

Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called A. return on assets. B. return on investment. C. return on equity. D. return on capital.

C. return on equity.

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

C. short-term; longer-term

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 A. reserves increase by $200,000. B. the liabilities of the bank decrease by $1 million. C. the assets at the bank increase by $1 million. D. liabilities increase by $200,000.

C. the assets at the bank increase by $1 million.

If a banker expects interest rates to fall in the future, her best strategy for the present is A. to sell long-term certificates of deposit. B. to increase the duration of the bank's liabilities. C. to increase the duration of the bank's assets. D. to buy short-term bonds.

C. to increase the duration of the bank's assets.

Which of the following statements is FALSE? A. A bank issues liabilities to acquire funds. B. A bank's assets are its uses of funds. C. The bank's assets provide the bank with income. D. Bank capital is recorded as an asset on the bank balance sheet.

D. Bank capital is recorded as an asset on the bank balance sheet.

All else the same, if a bank's liabilities are more sensitive to interest rate fluctuations than are its assets, then ________ in interest rates will ________ bank profits. A. a decline; not affect B. an increase; increase C. a decline; reduce D. an increase; reduce

D. an increase; reduce

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap times the change in the interest rate is called A. basic duration analysis. B. interest-exposure analysis. C. gap-exposure analysis. D. basic gap analysis.

D. basic gap analysis.

From the standpoint of ________, specialization in lending is surprising but makes perfect sense when one considers the ________ problem. A. moral hazard; diversification B. diversification; moral hazard C. adverse selection; diversification D. diversification; adverse selection

D. diversification; adverse selection

Modern liability management has resulted in A. reduced borrowing by banks in the overnight loan market. B. failure by banks to coordinate management of assets and liabilities. C. increase importance of deposits as a source of funds. D. increased sales of negotiable CDs to raise funds.

D. increased sales of negotiable CDs to raise funds.

A bank is insolvent when A. its assets exceed its liabilities. B. its capital exceeds its liabilities. C. its assets increase in value. D. its liabilities exceed its assets.

D. its liabilities exceed its assets.

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. A. securities; deposits B. loans; deposits C. assets; liabilities D. liabilities; assets

D. liabilities; assets

Unanticipated moral hazard contingencies can be reduced by A. specialization in lending. B. credit rationing. C. screening. D. long-term customer relationships.

D. long-term customer relationships.

If a bank has ________ rate-sensitive assets than liabilities, then ________ in interest rates will increase bank profits. A. fewer; a surge B. fewer; an increase C. more; a decline D. more; an increase

D. more; an increase

Banks acquire the funds that they use to purchase income-earning assets from such sources as A. cash items in the process of collection. B. deposits at other banks. C. reserves. D. savings accounts.

D. savings accounts.