Econ 330 Chapter 10-15
The Second Bank of the United States was denied a new charter by
President Andrew Jackson
What is the disadvantage of quantitative easing as an alternative to conventional monetary policy when short-term interest rates are at the zero lower-bound?
Quantitative easing may not actually have the effect of increasing economic activitivy
Why do equity holders care more about ROE than about ROA?
ROE measures how much equity holders are earning, while ROA measures how efficiently the bank is being run
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
Rank the following bank assets from most liquid (1) to least liquid (4)
Reserves 1 Securities 2 Commercial loans 3 Physical capital 4
If a bank depositor withdraws $1000 of currency from an account, what happens to reserves, checkable deposits, and the monetary base? Assume that the required reserve ratio on checkable deposits is 10% and banks do not hold any excess reserves
Reserves fall by $1000, checkable deposits fall by $10000, and the monetary base remains unchanged
Why is it important for the US government to have resolution authority?
Resolution authority allows the government to quickly takeover a failing firm
Following the global financial crisis in 2008, assets on the Federal Reserve's balance sheet increased dramatically, from approximately $800 billion at the end of 2007 to $3 trillion in 2011
Reverse repos serve as a temporary open market sale in which the Federal Reserve temporarily sells assets to reduce its balance sheet, thus decreasing the money supply and raising short-term interest rates
Which of the following repealed the prohibition on interstate banking?
Riegle-Neal Act
How could higher deposit insurance premiums for banks with riskier assets benefits the economy?
Risk-based premium would help mitigate the moral hazard problem; however, it is difficult to monitor the degree of risk in bank assets because often only the bank making the loans knows how risky they are.
Because of the abuses by state bank and the clear need for a central bank to help federal government raise funds during the War of 1812, Congress created the
Second Bank of the United States in 1816
Why has the trend in bank supervision moved away from a focus on capital requirements to a focus on risk management?
Since capital requirements do not effectively indicate whether banks are taking on too much risk, risk management allows supervisors to focus more on risk-taking procedures and thus may prevent insolvency in the future
Despite the important role that the Board of Governors has in setting monetary policy, seats to serve on the Board of Governors can sometimes be empty for several years. How could this happen?
Since members of the Board of Governors are appointed by the president and confirmed by the Senate, these seats may remain vacant due to the arduous and lengthy political approval process that candidates must endure
Which of the following entities in the Federal Reserve System controls the discount rate?
The Board of Governors
Which of the following entities in the Federal Reserve System sets reserve requirements?
The Board of Governors
Which is more independent, the Federal Reserve of the European Central Bank? Why?
The European Central Bank - Its charter cannot be changed the legislation, making it more independent than the Federal Reserve
In May 1991, the FDIC announced that it would sell the government's stake in the Continental Illinois, a bank that it had rescued in 1984. Why did the FDIC initially take control of Continental Illinois, rather than liquidate it?
The FDIC believed that Continental Illinois was too big to fail
"Discount loans are no longer needed because the presence of the FDIC eliminates the possibility of bank panics" Why is this statement false?
The Fed uses discounting to keep bank failures from spreading
The Fed is the most independent of all US government agencies. What is the main difference between it and other government agencies that explains the Fed's greater independence?
The Fed's source of revenue is free from the appropriations process
How does the Federal Reserve have a high degree of instrument independence?
The Federal Reserve can choose any method it wants in order to achieve a given set of policy objectives
What country is given credit for the birth of the Eurodollar barket
The Soviet Union
A bank finds that its ROE is too low because it has too much bank capital. Which of the following with not raise its ROE
The bank can sell part of its holdings of securities and hold more excess reserves
Which of the following does not explain the poor performance of thrift regulators in 1980s?
The determination of Congress to protect taxpayers from the unsound banking practices of managers at many of the nation's savings and loans
What would happen to the federal funds rate if it were initially at i^1/ff and households started transferring money from savings to checking, leading to an increase in the amount of checkable deposts
The federal funds rate would increase to i^2/ff
Why have banks been losing cost advantages in acquiring funds in recent years?
The increased cost of funds from higher interest rates and the abolishment of Regulation Q
What has been the likely effect of the Gramm-Leach-Bliley Act of financial consolidation?
The legislation further stimulated financial consolidation of the banking industry. Thus, more financial mergers are likely to occur, which will increase both the size and complexity of financial institutions in the future
Predict what will happen to the money supply if there is a sharp rise in the currency ratio
The money supply falls
If the economy starts to boom and loan demand picks up, what do you predict will happen to the money supply?
The money supply will increase
Which of the following is not a motivation for the original Glass-Steagall Act in 1933?
The need to further consolidate the banking industry and securities industry
Why has the development of overnight loan markets made it more likely that banks will hold fewer excess reserves?
The presence of overnight loan markets reduces the cost associated with deposit outflows
Which of the following is not part of the checks and balances of the Federal Reserve System?
The requirement that all depository institutions keep deposits at the Fed
What is the primary tool of Congress uses to exercise some control over the Fed?
The threat that Congress will acquire greater control over the Fed's finances and budget
What is the primary tool that congress uses to exercise some control over the Fed?
The threat that Congress will acquire greater control over the Fed's finances and budget
Why was the Federal Reserve System set up with twelve regional Federal Reserve banks rather than one central bank, as in other countries?
The writers of the Federal Reserve Act wanted to ensure the Fed's power was not centralized in a single location
The money multiplier declined significantly during the period 1930-1933 and also during the recent financial crisis of 2008-2010. Yet the M1 money supply decreased by 25% in the Depressing period by increased by more than 20% during the recent financial crisis. What explains the difference in outcomes?
There was a significant increase in the monetary base during the recent financial crisis.
The largest percentage of bank's holdings of securities consist of
Treasury and government agency securities
"The federal funds rate can sometimes be above the discount rate" Is this statement true, false, or uncertain?
True. Banks may prefer to pay a higher market rate than to borrow directly from the Fed and incur the perceived stigma
If inflation had not risen in the 1960s and 1970s, the banking industry might be healthier today. Is this statement true, false, or uncertain?
True. Higher inflation helped raise interest rates, which caused the disintermediation process to occur and helped create money market mutual funds
Why is there only one US bank among the ten largest banks in the world?
US banks are more heavily regulated than foreign banks, thus limiting the number of mergers in the United States. With fewer mergers and bank consolidation, US banks are less dominant in world markets
Should the Federal Reserve redraw its district boundaries, similar to how congressional districts are periodically realigned?
Uncertain. This would required Congress to rewrite the Federal Reserve Act, which could create opportunities for political interests to interfere with the monetary policy
Banks develop statistical models to calculate their maximum loss over a given time period. This approach is known as the
Value-at-risk approach
If you are a banker and expect interest rates to rise in the future, would you want to make short-term or long-term loans
You would want to make short-term loans so you can reinvest the funds at higher interest rates after their maturity
Foreign banks may engage in banking activities in US by opening all of the following except
a McFadden Corporation
A bank failure occurs whenever
a bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements
A bank failure is less likely to occur when
a bank has more bank capital
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 graph to the right shows a fall in the vertical section of the supply curve of reserves. The fall in the supply curve is caused by
a decreased in the discount rate
During the holiday season when the public's holdings of currency increase, what defensive open market operations typically occur
a defensive open market purchase
A reason why rogue traders have bankrupt their banks is due to
a failure to maintain proper internal controls
An instrument developed to help investors and institutions hedge interest-rate risk is
a financial derivative
The agreement to provide a standardized commodity to a buyer on a specific date at a specific future price is
a futures contract
The many regional Federal Reserve banks resulted from a compromise between parties favoring:
a private central bank and those favoring a government institution
Commercial banks that provide a full range of banking, securities, and insurance services, all within a single legal entity, are part of:
a universal banking system
As financial intermediaries, banks:
accept deposits and make loans
Although the National Bank Act of 1863 was designed to eliminate state-chartered banks by imposing a prohibitive tax on banknotes, these banks have been able to stay in business by
acquiring funds through deposits
Both ____ and ____ were financial innovations that occurred because of interest rate volatility
adjustable-rate mortgages; financial derivatives
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 are more likely to seek bank loans as compared to those borrowers with the safest investment projects, banks are said to face the problem of:
adverse selection
If borrowers with the most risky investment projects seek bank loans in higher proportion to those borrowers with the safest investment projects, bank 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
When bad drivers line up to purchase collision insurance, automobile insurers are subject to the
adverse selection problem
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
adverse selection; moral hazard
The chartering process is especially designed to deal with the _____ problem, and regular bank examinations help to reduce the ____ problem
adverse selection; moral hazard
Banks subject to reserve requirements set by the Federal Reserve System include
all banks whether or not they are members of the Federal Reserves System
The monetary base is affected by
all of the above are correct
Credit easing refers to
altering the composition of the Fed's balance sheet in order to improve the functioning of particular segments of the credit markets
Critics of nationwide banking fear
an elimination of community banks
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
All else that same, if a bank's liabilities are more sensitive to interest rate fluctuations than are its assets, then ____ in interest rates will ____ bank profits
an increase; reduce
Prior to 2008, bank managers looked on reserve requirements
as a tax on deposits
Moral hazard and adverse selection problem increased in the 1980's:
as part of the financial innovation in the 1970s and early 1980s that produced new financial instruments and markets, thereby widening the scope for risk taking
Loans that the Fed makes to bank appear on the balance sheet as part of its _____, and deposits made by banks appear on the Fed's balance sheet as part of its ____
assets; liabilities
A financial innovation the developed as result of banks avoidance of bank branching restrictions was ____
bank holding companies
Currency circulated by bank that could be redeemed for gold was called ____
banknotes
Measuring the sensitivity of bank profits to changes in interest rate by multiplying the gap times the change in interest rate is called
basic gap analysis
Measuring the sensitivity of bank profits to changes in interest rates by calculating the product of the gap and the change in the interest rate is called
basic gap analysis
Adjustable rate mortgages
benefit homeowners when interest rates are falling
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
Transformation of assets can be accomplished by
borrowing short and lending long
Regulations that reduced competition between banks included
branching restrictions
Because of an expected rise in interest rates in the future, a banker will likely
buy short-term rather than long-term bonds
Banks earn profits from off-balance sheet loan sales
by selling existing loan for more than the original loan amount
A bank with insufficient reserves can increase its reserves by
calling loans
The leverage ratio is the ratio of a bank's
capital divided by its total assets
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
Prior to 1980, the Fed set an interest rate ____, a maximum limit on the interest rate could be paid on time deposits
ceiling
An important function of the regional Federal Reserve Bank is
clearing checks
Assets of value promised to the lender as compensation if the borrower defaults are called:
collateral
During the boom years of the 1920s, bank failures were quite
common, averaging about 600 per year
Automated teller machines
cost less than human tellers, so banks may encourage their use by charging less for using ATMs
The Fed's lender-of-last-resort function
creates a moral hazard problem
The principal-agent problem that exists for bank trading activities can be reduced trhough
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
credit rationing
The monetary base consists of
currency in circulation and reserves
The monetary liabilities of Federal Reserve include
currency in circulation and reserves
If the First National Bank has a gap equal to negative $30 million, then a 5 percentage point increase in interest rates will cause profits to
decline by $1.5 million
One factor contributing to the decline in cost advantages that bank once had is the
decline in the importance of checkable deposits from over 60 percent of banks' liabilities to 2 percent today
In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ____ in the reserve requirement ____ the demand for reserves, lowering the federal funds interest rate, everything else held constant
decline; decreases
The volume of checkable deposits relative to total bank liabilities has:
declined over time
Mutual savings banks are owned by ____
depositors
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
A main provision of the Competitive Equality in Banking Act (CEBA) of 1987 included:
directing the Federal Home Loan Bank Board to continue to pursue regulatory forbearance
Regulations designed to provide information to the marketplace so that investors can make informed decisions are called
disclosure requirements
Bank loans from the Federal Reserve are called ____ and represent a ____ of funds
discount loans; source
The interest rate charged to bank that borrow funds from the Fed is known as the:
discount rate
The interest rate charged to banks that borrow funds from the Fed is known as the:
discount rate
The process in which people take their funds out of the banking system seeking higher yielding securities is called
disintermediation
From the standpoint of ____, specialization in lending is surprising but makes perfect sense when one considers the ____ problem
diversification; adverse selection
Eurodollars are
dollar-dominated deposits held in banks outside the US
The regulatory system that has evolved in the United States whereby banks are regulated at the state level, the national level, or both, is known as
dual banking system
The ability to use one common resource to provide different products and services is
economies of scope
The Glass-Steagall Act, which was repealed in 1999, prohibited commercial banks from
engaging in underwriting and dealing corporate securities
The Glass-Steagall Act, before its repeal in 1999, prohibited commercial bank from
engaging in underwriting and dealing of corporate securities
Crazy graph
equal to the distance between B and C
The federal funds interest rate is determined by the
equilibrium of supply and demand in the market for reserves
The amount of assets per dollar of equity capital is called the
equity multiplier
Since the passage of the International Banking Act of 1978, the competitive advantage enjoyed by foreign banks has been
eroded
Since the passage of the International Banking Act of 1978, the competitive advantage enjoyed by foreign banks has been:
eroded
The Depository Institutions Deregulation and Monetary Control Act of 1980:
established uniform reserves requirements for all banks
Total reserves are the sum of ____ and ____
excess reserves; required reserves
Banks that suffered significant losses in the 1980s made the mistake of
failing to diversify their loans portfolio
Today the United States has a dual banking system in which bank supervised by the ____ and by the ____ operate side by side
federal government; states
Unlike banks, ____ have been allowed to branch statewide since 1980
federally-chartered S&Ls
Although it has a population about half that of the US, Japan has
fewer than 100 commercial banks
Currency in circulation that cannot be redeemed for gold is called
fiat money
Financial instruments with returns tied to previously issued securities are called
financial derivatives
Financial instruments whose payoffs are linked to previously issued securities are called____
financial derivities
During the 1960s, 1970s, and early 980s, traditional bank profitability declined because of
financial innovation that increased competition from new financial institutions
Agreements to provide a standardized commodity to a buyer at a specific price on a specific date are:
futures contracts
The difference of rate-sensitive liabilities and rate-sensitive assets is known as the
gap
Two primary assets of the Federal Reserve System are:
government securities and loans to commercial banks
Two primary assets of the Federal Reserves System are:
government securities and loans to commercial banks
Because most open market operations are typically repurchase agreements, it is likely that the volume of defensive open market operations is ____ the volume of dynamic open market operations
greater than
Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the discount rate from 5% to 4%
has no effect on the federal funds rate
Everything else held constant, in the market for reserves, when the supply for federal funds intersects the reserve demand curve on the downward sloping section, decreasing the interest rate paid on excess reserves
has no effect on the federal funds rate
Since 1974, commercial banks importance as a source of funds for nonfinancial borrowers
has shrunk dramatically, from around 40 percent of total credit advanced to around 25 percent by 2011
Because of their ____ liquidity, ____ US government securities are called secondary reserves
high; short-term
One factor contributing to the rapid growth of the commercial paper market since 1970 is
improved information technology making it easier to screen credit risks
The most important source of the changes in supply conditions that stimulate financial innovation has been the
improvement in computer and telecommunications technology
Off-balance sheet activities involving guarantees os securities and back-up credit lines
increase the risk a bank faces
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
The Depository Institutions Deregulation and Monetary Control Act of 1980
increased deposit insurance from$40000 to $100000
Which of the following factors does not explain the rapid growth in international banking
increased regulation of the US banking industry
The Federal Deposit Insurance Corporation Improvement Act of 1991:
increased the FDIC's ability to borrow from the Treasury to deal with failed banks
Risk interest-rate risk
increased the demand for financial innovation
In the market for reserves, if the federal funds rate is betewen the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ____ the demand for reserves, _____ the federal funds rate, everything else held constant
increases; raising
In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves , an increase in the reserve requirement ____ the demand of reserves and causes the federal funds interest rate to ____ everything else held constant
increases; rise
Under the Gramm-Leach-Bliley Act states retain regulatory authority over ____
insurance activities
Disintermediation resulted from
interest rate ceilings combined with inflation-driven increases in interest rates
Firms that are designated as systemically important financial institutions (SIFIs) are subject to all of the following additional Federal Reserve regulations except
interest rate ceilings on time deposits
Uncertainty about future interest rate volatility and returns is known as:
interest risk-rate
Risk that is related to the uncertainty about future interest-rate movements is called:
interest-rate risk
Risk that is related to to the uncertainty about interest rate movements is valled
interest-rate risk
Uncertainty about interest-rate movements and returns is called
interest-rate risk
The theory of bureaucratic behavior when applied to the Fed helps to explain why the Fed
is so secretive about the conduct of future monetary policy
Why is paying interest on reserves an important tool for the Federal Reserve to manage crises?
it allows the Fed to increase its lending as much as it wants without reducing the federal funds rate
The ECSB is similar to the Federal Reserve system in that:
it is structured such that the central banks for each country have a similar role to that of the Federal Reserve banks
Critics of Fed independence argue that
it is undemocratic to have monetary policy controlled by an elite group responsible to no one
Critics of the Fed independence argue that
it is undemocratic to have monetary policy controlled by an elite group responsible to no one
When you deposit a $50 bill in the Security Pacific Nation Bank,
its assets increase by $50
While legislation enacted in 1998 granted the Bank of Japan new powers and greater autonomy, its critics contend that:
its independence is limited by the Ministry of Finance's veto power over part of the Bank's budget
A bank is insolvent
its liabilities exceed its assets
The theory of bureaucratic behavior suggests that the objective of a bureaucracy is to maximize:
its own welfare
so-called fallen angels differ from just bonds in that
junk bonds refer to newly issued bonds with low credit ratings, whereas fallen angels refer to previously issued bonds that have had their credit ratings fall below Baa
A bank that wants to monitor the check payment practices of its commercial borrowers, so that moral hazard can be prevented, will require borrowers to
keep compensating balances in a checking account at the bank
The large number of banks in the US is an indication of
lack of competition within the banking industry
The Depository Institutions Deregulation and Monetary Control Act of 1980:
led to the creation of NOW accounts nationwide
A bank with excess reserves can economize on these reserves by:
lending reserves in the federal funds market
In England, the Chancellor of the Exchequer (the equivalent of the US Secretary of Treasury) sets the goal of monetary policy, a target for inflation. Thus, when compared to the Fed, the Bank of England has:
less goal independence
One of the concerns of increased bank consolidation is the reduction in community banks which could result in
less lending to small businesses
Banks can 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
Bank capital is listed on the ____ side of the bank's balance sheet because it represents a ___ of funds
liability; source
Regulators attempt to reduce the riskiness of banks asset portfolios by
limiting the amount of loans in particular categories or toe individual borrowers
Bankers' concerns regarding the optimal mix of excess reserves, and secondary reserves, borrowing 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
Examples of off-balance-sheet activities include
loan sales
Banks generate profits by earning higher returns on their ____ than they pay in interest on ____
loans; deposits
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 ____ of $100
loses; loses
Everything else held constant, in the market for reserves, when the supply for federal funds intersects the reserve demand curve along the horizontal section of the demand curve, lowering the interest rate paid on excess reserves
lowers the federal funds rate
As a result of strict banking regulations, the US has:
many more smaller banks when compared to other industrialized countries
As a result of strict banking regulations, the United States has:
many more smaller banks when compared to other industrialized countries
With ____, firms value assets on their balance sheet at what they would sell for in the market
mark-to-market accounting
ATMs were developed because of breakthroughs in technology and as a
means of avoiding restrictive branching regulations
The inaccurate ratings provided by credit-rating agencies
meant that investors did not have the information they needed to make informed choices about their investments
With the creation of the Federal Deposit Insurance Corporation,
member banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors, while non-member commercial banks could chose to buy deposit insurance
The primary reason for the recent reduction in the number of banks is
mergers and acquisitions
Open market sales shrink the _____, thereby decreasing the _____
monetary base and reserves; money supply
In order to halt the decline in the number of savings and loans and mutual savings bank, the Garn-St. Germain Act of 1982 allowed:
money market deposit accounts (MMDAs)
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
In order to reduce the ____ problem in loan markets, banks often insist on collateral from potential borrowers
moral hazard
The European Central Bank (ECB) has complete control over monetary policy in eleven euro countries and has a charter that cannot be changed by legislation. In comparison to the Federal Reserve System, the ECB is
more independent
If a bank has ____ rate-sensitive assets than liabilities, then ____ in interest rates will increase bank profits
more; an increase
Which of the following is not an example of a backup line of credit?
mortgages
Which of the following would a bank not hold as insurance against the highest cost of deposit outflow-bank failure
mortgages
Thrift institutions include
mutual savings banks
The Federal Reserve Act of 1913 required that
national banks join the Federal Reserve System
The Federal Reserve Act required all ____ bank to become members of the Federal Reserve System, while ____ banks could choose to become members of the system
national; state
Graph question
negatively related; countries with low ratings have generally produced higher inflation
Large-denomination CDs are _____, so that like a bond, they have a _____ degree of liquidity and can be sold in secondary markets
negotiable; greater
An advantage to American banks from operating foreign branches is that Eurodollars deposits in offshore branches are
not subject to reserve requirements
An advantage to American banks operating foreign branches in that Eurodollar deposits in offshore branches are:
not subject to reserve requirements
zero lower bound problem
occurs because people can always earn more from holding bonds than holding cash
The Fed's most commonly used means of changing the money supply is
open market operations
Because ____ are less liquid for the depositor than ____, they earn higher interest rates
passbook saving; checkable deposits
Credit cards date back to
prior to the second World War
The McFadden Act of 1927
prohibited banks from branching across state lines
Banks hold excess and secondary reserves to
provide for deposit outflows
The Argentine banking crisis of 2001 resulted from banks in that nation being required to
purchase large amounts of government debt
When banks offer borrowers smaller loans than they have requested, banks are said to
ration credit
A $5 million deposit outflow from a bank has the immediate effect of
reducing deposits and reserves by $5 million
According to Edward Kane, because the banking industry is one of the most ____ industries in America, it is an industry in which ____ is especially likely to occur
regulated; loophole mining
The practice of keeping high-risk assets on a bank's books while removing low-risk assets with the same capital requirements is known as
regulatory arbitrage
Although neither ____ nor the ____ is officially set by the Federal Open Market Committee, decisions concerning these policy tools are effectively made by the committee
reserve requirements; discount rate
Provisions in loan contracts designed to mitigate the moral hazard problem are called
restrictive covenants
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 taxes per dollar of equity capital is a basic measure of bank profitability called
return on equity
An open market purchase would shift the supply curve to the ____ and cause the federal funds rate to ____
right, fall
In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ____ in the reserve requirement ____ the demand for reserves, raising the federal funds interest rate, everything else held constant
rises; increases
The Basel Accord, an international agreement, requires banks to hold capital based on
risk-weighted assets
Banks acquire the funds that they use to purchase income-earning assets from such sources as
savings accounts
Both ____ and ____ are Federal Reserve assets
securities; loans to financial institutions
____ is creating a marketable capital market instrument by bundling a portfolio of mortgage or auto loans
securitization
If, after a deposit outflow, a bank needs an additional $3 million to meet tis reserve requirements, the bank can
sell $3 million of securities
Examples of off-balance-sheet activities include
selling loan portfolios
All of the following are examples of off-balance sheet activities that generate fee income for banks except
selling negotiable CDs
One way for banks to reduce the principal-agent problems associated with trading activities is to
set limits on the total amount of a traders' transactions
Experts predict that future trends in the US banking industry will lead to:
several thousand banks
Eliminating the Fed's independence might lead to a more pronounced political business cycle because a politically exposed Fed would be more concerned with
short-run objectives and thus be more likely to engage in expansionary policies designed to lower unemployment and interest rates before an election
Secondary reserves include
short-term Treasury securities
In general, banks make profits by selling ______ liabilities and buying _____ assets
short-term; longer-term
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
shortening; lengthening
The share of checkable deposits in total bank liabilities has
shrunk over time
The money multiplier when people hold currency and when banks hold excess reserves is ____ the simple multiplier
smaller than
When investors are involved in trading activities in an attempt to outguess markets, investors are
speculating
If a foreign bank operates a subsidiary bank in the US, the subsidiary bank in the US, the subsidiary bank is
subject to the same regulations as a US owned bank
Bank holding companies that rival money center banks in size but are not located in money center cities are known as
superregional banks
In this type of arrangement, any balance above a certain amount in a corporation's checking account at the end of the business day are "removed" and invested in over night securities that pay the corporation interest. This innovation is referred to as a
sweep account
The business term for economies of scope is
synergies
Sweep accounts which were created to avoid reserve requirements became possible because of a change in
technology
In the ten year period 1981-1990, 1202 commercial banks were closed, with a peak of 206 failures in 1989. This rate of failures was approximately ___ times greater than that in the period from 1934 to 1980
ten
Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and nine million dollars in required reserves. Given this information, we can say First National Bank faces a required reserve ratio of ____ percent
ten
Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in required reserves. Given this information, we can say First National Bank faces a required reserve ratio of ____ percent
ten
The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is
that the FDIC guarantees al deposits when it uses the "purchase and assumption" method
Agreements such as _______ are attempts to standardize international banking regulations
the Basel Accord
Which of the following entities in the Federal Reserve System directs open market operations?
the FOMC
The new Consumer Financial Protection Bureau is an independent agency but is funded and housed within
the Federal Reserve
The legislation overturning the Glass-Steagall Act is
the Gramm-Leach-Bliley Act
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 Act of 1863
Federally chartered banks are supervised by
the Office of the Comptroller of the Currency
The legislation that overturned to prohibition on interstate banking is
the Riegle-Neal Act
Under the Gramm-Leach-Bliley Act the oversight of the securities activities of bank holding companies belong to
the SEC
The players in the money supply process include all of the following except:
the Treasury
When the $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 reserved instead, then, in the bank's final balance sheet
the assets at the bank increase by $1 million
A bank has required reserve ratio to 10%. If the bank has deposits of $100000 and is holding $12000 in reserves:
the bank is holding $2000 in excess reserves
The development of money market mutual funds contributed to the growth of ____ since the money market mutual funds need to hold liquid, high-quality, short-term assets
the commercial paper market
The most important developments that have reduced banks cost advantages in the past thirty years include
the competition from money market mutual funds
Probably the most significant factor explaining the drastic drop in the number of bank failures since the Great Depression has been
the creation of the FDIC
The most significant change in the economic environment that changed the demand for financial products in recent years has been
the dramatic increase in the volatility of interest rates
Reason for holding Eurodollars include
the fact that dollars are widely used to conduct international transactions
Another graph question
the federal funds rate would increase to i^2/ff The federal funds rate would stay at i^1/ff
Which of the following statements regarding Federal Reserve independence is incorrect?
the fourteen-year nonrenewable terms for governors effectively insulate the Board of Governors from political pressure
Prior to 1980, member banks left the Federal Reserve System due to
the high cost of required reserves
Prior to 2008, the bank's cost of holding reserves equaled
the interest earned on loans time the amount of reserves
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 $1000000
Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals times the change in the interest rate is called
the maturity bucket approach to gap analysis
The sum of the Fed's monetary liabilities and the US Treasury's monetary liabilities is called
the monetary base
The principal-agent problem that exists for bank trading activities can be reduced by:
the physical separation of trading activities from bookkeeping acitivities
A dilemma challenging the existing structure of the ECB has been brought on by:
the possibility to expanding the membership in the Eurosystem
The spectacular growth in international banking can be explained by
the rapid growth in international trade
In September 2008, the Reserve Primary Fund, a money market mutual fund, found itself in the situation know as "breaking the buck." This means that
they could no longer afford to redeem shares at the par value of $1
Because ____ are less liquid for the depositor than ____, they earn higher interest rates
time deposits; passbook savings
If a banker expects interest rates to fall in the future, her best strategy for the present is
to increase the duration of the bank's assets
The primary reason for the creation of the Federal Reserve System was
to reduce or eliminate future bank panics
The primary reason for the creation of the Federal Reserve System was:
to reduce or eliminate future bank panics
In the absence of regulation, banks would probably hold
too little capital
Bank capital is equal to ____ minus ____
total assets; total liabilities
The Volcker Rule addresses the off-balance-sheet problem involving
trading risks
Suppose that from a new checkable deposit, First National Bank holds eight million dollars on deposit with the Federal Reserve, one million dollars in required reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ____ million dollars in vault cash
two
In a _____ banking system, commercial banks provide a full range of banking, securities, and insurance services, all within a single legal entity
universal
Total reserves minus bank deposits with the Fed equals
valut cash
Excess reserves are equal to
vault cash plus deposits with Federal Reserve banks minus required reserves
In order to ensure that borrowers have an ability to repay residential mortgages, the new consumer protection legislation requires lenders to do all of the following except
verify that the borrower can read and understand a loan contract
The declining cost of computer technology has made _____ a reality
virtual banking
In may 1991, the FDIC announced that it would sell the government's final 26% stake in Continental Illinois, ending government ownership of the banks that it had rescued in 1984. The FDIC took control of the bank, rather than liquidate it, because it believed that Continental Illinois
was too big to fail
Prior to 1863, all commercial banks in the United States
were chartered by the banking commission of the state in which they operated
A major controversy involving the banking industry in its early years was
wether the federal government or the states should charter banks
Everything else held constant, in the market for reserves, increases in the discount rate affect the federal funds rate
when the funds rate equals the discount rate
Federal deposit insurance covers deposits up to $250000 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
"purchase and assumption" method
If a bank has $100000 of checkable deposits, a required reserve ratio of 20 percent, and its holds $40000 in reserves, then they maximum deposit outflow it can sustain without altering its balance sheet is
$25000
If the required reserve ratio on checkable deposits increased to 20%, how much multiple deposit creation will take place when reserves are increased by $100? Assume that bank do not hold any excess reserves and the public's holding of currency do not change
$500
If a bank has $200,000 of checkable deposits, a required reserve ratio of 20% percent, and it holds $80,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is
$50000
In the balance sheet above, the excess reserve ratio of ABC bank is ____ and its excess reserves are ____
0.011; $10
Under 100% reserve banking, the money multiplier will be
1
In recent years the interest paid on checkable and time deposits has accounted for around ____ of total banking operating expenses, while the costs involved in servicing accounts have been approximately ____ of operating expenses
25 percent; 50 percent
In the 1950s the interest rate on three-month Treasury bills fluctuated between 1 percent and 3.5 percent; in the 1980s it fluctuated between _____ percent and ____ percent
5; 15
There are ____ members of the Board of Governors of the Federal Reserve System
7
The M2 money multiplier increases in value when the:
A and B are correct
Which of the following statements are true?
A bank's balance sheet shows that total assets equal total liabilities plus equity captial
If the Treasury has just paid a large bill to defense contractors and as a result its deposits with the Fed fall, what defensive open market operations will the manager of the open market desk undertake?
A defensive open market sale
Why was the United States one of the last major industrialized countries to have a central bank?
Agricultural and other US interests were suspicious of centralized power and opposed the creation of a central bank
The European System of Central Banks uses similar monetary policy tools to that of the Federal Reserve. These tools involve
All of the above
Graph question
All of the above are correct
In what ways can the regional Federal Reserve Banks influence the conduct of monetary policy?
All of the above are correct
Open market operations as a monetary policy tool have the advantage that
All of the above are correct
The Board of Governors of the Federal Reserve System:
All of the above are correct
Why is being nosy a desirable trait for a banker?
All of the above are correct
Why is the New York Federal Reserve always a voting member on the FOMC?
All of the above are correct
"The independence of the Fed leaves it completely unaccountable for its actions." Why is this statement not true?
All the above are correct
How do sweep accounts and money market mutual funds allow bank to avoid reserve requirements?
Although they function as interest-earning deposits, these accounts are not legally deposits and so are not subject to reserve requirements
What is the major difference between banking systems in the United States and Japan
American banks are not allowed to hold substantial equity stakes in commercial firms, whereas Japanese banks can
____ of foreign bank operates in the US but cannot accept deposits from domestic residents
An agency office
Which of the following is likely a result of increased interest-rate volatitilty
An increase in demand for financial services and products
Which of the following statements is false?
Bank capital is recorded as an asset on the bank balance sheet
Which of the following is not a reason for the dramatic increase the number of bank holding companies?
Bank holding companies can monopolize the market for banking services in a given region
The modern commercial banking system began in America when the
Bank of North America was chartered in Philadelphia in 1782
Which of the following is not an income-producing asset on a bank's balance sheet?
Bank reserves
Why has noninterest income been growing as a source of bank operating income?
Banks can increase profits by engaging in noninterest income, or off-balance-sheet activities
Why is loophole mining so prevalent in the banking industry in the United States
Banks engage in loophole mining in order to avoid regulatory constraints that restrict their ability to earn profits
Why is there a higher percentage of bank with less than $25 million of assets among commercial banks than among savings and loans in mutual savings banks?
Because restrictions on branching are stricter for commercial banks that for savings and loans, smaller commercial banks have greater protection from competition and are more likely to survive than small savings and loans.
Why might a bank be willing to borrow funds from other banks at a higher rate rather than borrow from the Fed?
Borrowing from the Fed might invite greater supervisory scrutiny from the central bank
Why might the procyclical behavior of interest rates (rising during business cycle expansions and falling during recessions) lead to procyclical movements in the money supply?
Both A & C are correct
Why have banks been losing income advantages on their assets in recent years?
Both A and C are correct
At the height of the global financial crisis in October 2008, the US Treasury forced nine of the largest US banks to accept capital injections in exchange for nonvoting ownership stock, even though some of the banks did not need to capital and did not want to participate. What could be the rationale for doing this?
By forcing all banks to accept capital injections, it would help prevent bank runs on the weakest banks
____ may antagonize customers and thus can be a very costly way of acquiring funds to meet to unexpected deposit outflow
Calling in loans
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 in not an asset on a bank's balance sheet?
Checkable deposits
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
If a bank decides that it wants to hold $1 million of excess reserves, what effect will this have on checkable deposits in the banking system? Assume that the required reserve ratio on checkable deposits is 10% and the public's holdings of currency do nto change
Checkable deposits decline by $10 million
What happens to checkable deposits in the banking system when the Fed lends an additional $1 million to the First National Bank, assuming that the required reserve ratio on checkable deposits is 10%, banks do not hold any excess reserves, and the public's holding of currency do not change?
Checkable deposits rise by $10 million
Why were consumer protection provisions included the Dodd-Frank bill, a bill designed to strengthen the financial system?
Consumer protection will avert future financial problems in the housing market
What are the five areas included in the Dodd-Frank Act of 2010
Consumer protection, resolution authority, systemic risk regulation, Volcker rule, and derivatives
What is a primary characteristic of credit unions?
Credit Unions are organized around a group of individuals that belong to a common institution
____ are the only depository institutions that are tax-exempt
Credit unions
Unlike commercial banks, savings and loans, and mutual savings banks, credit unions did not have restrictions on locating branches in other states. Why, then, are credit unions typically smaller than the other depository institutions?
Credit unions are small because members usually share a common employer or have ties to a particular organization
If casualty insurance companies provided fire insurance without any restrictions, what kind of moral hazard problem might result?
Customers would take less preventive care in avoiding fire risk with this type of insurance
____ are intended to offset movements in other factors that affect reserves and the monetary base
Defensive open market operations
What does the cross-sectional evidence from banking crises in several countries indicate?
Deregulation and poor regulatory supervision raise moral hazard incentives
Which of the following is not an incentive created by regulatory agencies to encourage international banking?
Direct federal subsidies
When depositors withdraw funds from commercial banks to seek other more attractive assets, deposit losses in the banking system may restrict the amount of funds that banks can lend. Which of the following identifies this process?
Disintermediation
____ are intended to change the level of reserves and the monetary base
Dynamic open market operations
Deposits in European banks denominated in dollars for the purpose of international transactions are known as:
Eurodollars
State banks that are not members of the Federal Reserve System are most likely to be examined by
FDIC
"Because diversification is desirable strategy for avoiding risk, it never makes sense for a bank to specialize in making specific types of loans." Is this statement true of false? Explain your answer
False. A bank may have developed expertise in screening and monitoring a particular type of loan, thus improving its ability to handle problems of adverse selection and moral hazard
"Bank managers should always seek the highest return possible on their assets." Is this statement true, false, or uncertain?
False. A bank must also consider an asset's risk and liquidity when deciding which assets to hold
"The only way that the Fed can affect the level of borrowed reserves is by adjusting the discount rate." Is this statement true, false, or uncertain? Explain your answer
False. The Fed can also limit the amount of discount loans that an individual bank can have
"The commercial banking industry in Canada is less competitive than the commercial banking industry in the United States because in Canada only a few large banks dominate the industry, while the United States there are around 6500 commercial banks/" Is this statement true or False?
False. The reason for the large number of US banks is anticompetitive regulations such as branching restrictions
Which of the following is responsible for the supervision of savings and loan associations
Federal Home Loan Banking System
The FHLBS gives loans to S&Ls and thus performs a function similar to the ____ for commercial banks
Federal Reserve
The bank panic of 1907 led to the passage of the
Federal Reserve Act of 1913
The FSLIC and the Federal Home Loan Bank Board were abolished by the:
Financial Institutions Reform, Recovery, and Enforcement Act of 1989
____ is the process of researching and developing new instruments to address the needs of investors and institutions in a rapidly changing financial climate
Financial engineering
____ is the process of researching and developing profitable new products and services by financial institutions
Financial engineering
If a bank doubles the amount of its capital and ROA stays constant, what will happen to ROE?
Given the ROA, if bank capital doubles, the ROE will fall by half
The legislation that separated investment banking from commercial banking until its repeal in 1999 is known as the
Glass-Steagall Act
Which of the following repealed the Glass-Steagall Act?
Gramm-Leach-Bliley Act
How could the approval of international banking facilities (IBFs) by the Fed in 1981 have reduced employment in the banking industry in Europe?
IBFs encourage American and foreign banks to do more banking business in the United States, thus shifting employment from Europe to the United States
Which of the following statements about central bank structure and independency is true?
In recent years, there has been a remarkable trent toward increasing independence
Which of the following has not resulted from more acitvie liability management on the part of banks?
Increased bank holdings of cash items
Why did many economists criticize the FIRREA legislation?
It did little to deal with the underlying adverse selection and moral hazard problems created by deposit insurance
How does the emergence of interest-rate risk help explain financial innovation
It increases the demand for financial products and services that could reduce that risk
Which agency has regulatory responsibility when a bank operates in many different countries?
It is not always clear
US banks have most of their branches in
Latin America, the Far East, the Caribbean, and Canada
If Jane Brow closes her account at the First National Bank and uses the money instead to open a money market mutual fund account, what happens to M1? Why?
M1 does not change because the funds that go to the money market mutual fund are first deposited into the mutual fund's bank
Which of the following is a main responsibility of the bank manager?
Maintaining reserves at a level to minimize the cost to the bank of deposit outlfows
Which of the following are primary concerns of the bank manager?
Maintaining sufficient reserves to minimize the cost to the bank of deposit outlfows
Why might American businesses want to hold Eurodollars?
Many commerical transactions and internation contracts are denominated in dollars
Which of the following is a requirement of the Federal Deposit Insurance Corporation?
Member banks of the Federal Reserve System are required to purchase FDIC insurance for their depositors
In 1977, he pioneered the concept of selling new public issues of junk bonds for companies that had not yet achieved investment grade status
Michael Milken
Which of the following may not be used as a backup line of credit
Mortgages
The ____ established the Office of the Comptroller of Currency
National Bank Act of 1863
Which of the following are transaction deposits?
Negotiable order of withdraw accounts
The Federal Reserve Bank of ____ plays a special role in the Federal Reserve System because it houses the open market desk
New York
The president from which Federal Reserve Bank always has a vote in the Federal Open Market Committee?
New York
If the bank at which you keep your checking account is owned by foreigners, should you worry that your deposits are less safe that if the bank were owned by Americans?
No, because the foreign bank is subject to the same regulations as the American-owned bank
You often read in the newspaper that the Fed has just lowered the discount rate. Does this signal that the Fed is moving to a more expansionary monetary policy? Why or why not?
No. The Fed usually lowers the discount rate when market rates fall regardless of the direction of monetary policy
If the bank you own has no excess reserves and a sound customer comes in asking for a loan, should you automatically turn the consumer down, explaining that you don't have any excess reserves to lend? Why or why not? What options are available for you to provide the funds you customer needs?
No. There are several ways that reserves can be acquired. For example, the bank can borrow at the discount window or in the federal funds market, or it can acquire funds by issuing negotiable CDs
Why are repurchase agreements used to conduct most short-term monetary policy operations, rather than simply buying and selling securities outright?
Only A and B are correct
