M & B Banking and MGMT of FI chapter 10

1) 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 hazard C) moral suasion D) intentional fraud

A

1) Which of the following are primary concerns of the bank manager? A) Maintaining sufficient reserves to minimize the cost to the bank of deposit outflows B) Extending loans to borrowers who will pay low interest rates, but who are poor credit risks C) Acquiring funds at a relatively high cost, so that profitable lending opportunities can be realized D) Maintaining high levels of capital and thus maximizing the returns to the owners.

A

10) When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then A) the liabilities of the First National Bank decrease by $10. B) the reserves of the First National Bank increase by $10. C) the liabilities of Citibank decrease by $10. D) the assets of Citibank decrease by $10.

A

12) Property promised to the lender as compensation if the borrower defaults is called . A) collateral B) deductibles C) restrictive covenants D) contingencies

A

13) 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 bankʹs final balance sheet, A) the assets at the bank increase by $1 million. B) the liabilities of the bank decrease by $1 million. C) reserves increase by $200,000. D) liabilities increase by $200,000.

A

4) If a bank has $10 million of checkable deposits, a required reserve ratio of 10 percent, and it holds $2 million in reserves, then it will not have enough reserves to support a deposit outflow of A) $1.2 million. B) $1.1 million. C) $1 million. D) $900,000.

A

4) When a new depositor opens a checking account at the First National Bank, the bankʹs assets and its liabilities . A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

A

4) Which of the following are reported as liabilities on a bankʹs balance sheet? A) Discount loans B) Reserves C) U.S. Treasury securities D) Loans

A

5) If a bank has excess reserves greater than the amount of a deposit outflow, the outflow will result in equal reductions in A) deposits and reserves. B) deposits and loans. C) capital and reserves. D) capital and loans.

A

5) In one sense appears surprising since it means that the bank is not its portfolio of loans and thus is exposing itself to more risk. A) specialization in lending; diversifying B) specialization in lending; rationing C) credit rationing; diversifying D) screening; rationing

A

6) A $5 million deposit outflow from a bank has the immediate effect of A) reducing deposits and reserves by $5 million. B) reducing deposits and loans by $5 million. C) reducing deposits and securities by $5 million. D) reducing deposits and capital by $5 million.

A

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

A

8) To reduce moral hazard problems, banks include restrictive covenants in loan contracts. In order for these restrictive covenants to be effective, banks must also A) monitor and enforce them. B) be willing to rewrite the contract if the borrower cannot comply with the restrictions. C) trust the borrower to do the right thing. D) be prepared to extend the deadline when the borrower needs more time to comply.

A

8) Which of the following statements are true? A) Checkable deposits are payable on demand. B) Checkable deposits do not include NOW accounts. C) Checkable deposits are the primary source of bank funds. D) Demand deposits are checkable deposits that pay interest.

A

9) Long-term customer relationships the cost of information collection and make it easier to credit risks. A) reduce; screen B) increase; screen C) reduce; increase D) increase; increase

A

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

B

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

B

17) Credit risk management tools include A) deductibles. B) collateral. C) interest rate swaps. D) duration analysis.

B

4) 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. A) moral hazard B) adverse selection C) moral suasion D) adverse lending

B

6) When you deposit a $50 bill in the Security Pacific National Bank, A) its liabilities decrease by $50. B) its assets increase by $50. C) its reserves decrease by $50. D) its cash items in the process of collection increase by $50.

B

6) Which of the following statements is false? A) Checkable deposits are usually the lowest cost source of bank funds. B) Checkable deposits are the primary source of bank funds. C) Checkable deposits are payable on demand. D) Checkable deposits include NOW accounts.

B

7) Bankersʹ 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) liability management. B) liquidity management. C) managing interest rate risk. D) managing credit risk.

B

7) Provisions in loan contracts that prohibit borrowers from engaging in specified risky activities are called A) proscription bonds. B) restrictive covenants. C) due-on-sale clauses. D) liens.

B

9) A bank with insufficient reserves can increase its reserves by A) lending federal funds. B) calling in loans. C) buying short-term Treasury securities. D) buying municipal bonds.

B

1) 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) loans; deposits B) securities; deposits C) liabilities; assets D) assets; liabilities

C

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

C

10) Which of the following are transaction deposits? A) Savings accounts B) Small-denomination time deposits C) Negotiable order of withdraw accounts D) Certificates of deposit

C

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

C

27) Secondary reserves include A) deposits at Federal Reserve Banks. B) deposits at other large banks. C) short-term Treasury securities. D) state and local government securities.

C

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

C

28) The amount of assets per dollar of equity capital is called the A) asset ratio. B) equity ratio. C) equity multiplier. D) asset multiplier.

C

31) Bankʹs make their profits primarily by issuing . A) equity B) negotiable CDs C) loans D) NOW accounts

C

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

C

32) The most important category of assets on a bankʹs balance sheet is A) discount loans. B) securities. C) loans. D) cash items in the process of collection.

C

34) If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to A) buy back bank stock. B) pay higher dividends. C) shrink the size of the bank. D) sell securities the bank owns and put the funds into the reserve account.

C

10) Of the following, which would be the first 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

D

14) Because are less liquid for the depositor than , they earn higher interest rates. A) passbook savings; time deposits B) money market deposit accounts; time deposits C) money market deposit accounts; passbook savings D) time deposits; passbook savings

D

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

D

16) When banks offer borrowers smaller loans than they have requested, banks are said to A) shave credit. B) rediscount the loan. C) raze credit. D) ration credit.

D

19) Which of the following would a bank not hold as insurance against the highest cost of deposit outflow-bank failure? A) Excess reserves B) Secondary reserves C) Bank capital D) Mortgages

D

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

D

23) Which of the following are not reported as assets on a bankʹs balance sheet? A) Cash items in the process of collection B) Deposits with other banks C) U.S. Treasury securities D) Checkable deposits

D

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

D

33) Which of the following would not be a way to increase the return on equity? A) Buy back bank stock B) Pay higher dividends C) Acquire new funds by selling negotiable CDs and increase assets with them D) Sell more bank stock

D

14) Which of the following statements most accurately describes the task of bank asset management? A) Banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity. B) Banks seek to have the highest liquidity possible subject to earning a positive rate of return on their operations. C) Banks seek to prevent bank failure at all cost; since a failed bank earns no profit, liquidity needs supersede the desire for profits. D) Banks seek to acquire funds in the least costly way.

A

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

A

18) Bank capital is equal to minus . A) total assets; total liabilities B) total liabilities; total assets C) total assets; total reserves D) total liabilities; total borrowings

A

20) Which of the following has not resulted from more active liability management on the part of banks? A) Increased bank holdings of cash items B) Aggressive targeting of goals for asset growth by banks C) Increased use of negotiable CDs to raise funds D) An increased proportion of bank assets held in loans

A

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

A

23) A bank failure occurs whenever A) a bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements. B) a bank suffers a large deposit outflow. C) a bank has to call in a large volume of loans. D) a bank is not allowed to borrow from the Fed.

A

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

A

25) The largest percentage of banksʹ holdings of securities consist of A) Treasury and government agency securities. B) tax-exempt municipal securities. C) state and local government securities. D) corporate securities.

A

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

A

29) Secondary reserves are so called because A) they can be converted into cash with low transactions costs. B) they are not easily converted into cash, and are, therefore, of secondary importance to banking firms. C) 50% of these assets count toward meeting required reserves. D) they rank second to bank vault cash in importance of bank holdings.

A

3) 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 A) $50,000. B) $40,000. C) $30,000. D) $25,000.

A

30) 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. A) reduces; reduces B) increases; increases C) reduces; increases D) increases; reduces

A

30) Banksʹ asset portfolios include state and local government securities because A) their interest payments are tax deductible for federal income taxes. B) banks consider them helpful in attracting accounts of Federal employees. C) the Federal Reserve requires member banks to buy securities from state and local governments located within their respective Federal Reserve districts. D) there is no default-risk with state and local government securities.

A

32) Conditions that likely contributed to a credit crunch in 2008 include: A) capital shortfalls caused in part by falling real estate prices. B) regulated hikes in bank capital requirements. C) falling interest rates that raised interest rate risk, causing banks to choose to hold more capital. D) increases in reserve requirements.

A

33) Which of the following are bank assets? A) the building owned by the bank B) a discount loan C) a negotiable CD D) a customerʹs checking account

A

12) 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 bankʹs final balance sheet, A) the assets at the bank increase by $800,000. B) the liabilities of the bank increase by $1,000,000. C) the liabilities of the bank increase by $800,000. D) reserves increase by $160,000.

B

13) Banks hold excess and secondary reserves to A) reduce the interest-rate risk problem. B) provide for deposit outflows. C) satisfy margin requirements. D) achieve higher earnings than they can with loans.

B

14) Of the following methods that banks might use to reduce moral hazard problems, the one not legally permitted in the United States is the A) requirement that firms keep compensating balances at the banks from which they obtain their loans. B) requirement that firms place on their board of directors an officer from the bank. C) inclusion of restrictive covenants in loan contracts. D) requirement that individuals provide detailed credit histories to bank loan officers.

B

15) 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) savings accounts. C) reserves. D) deposits at other banks.

B

16) Bank loans from the Federal Reserve are called and represent a of funds. A) discount loans; use B) discount loans; source C) fed funds; use D) fed funds; source

B

17) A bank will want to hold more excess reserves (everything else equal) when A) it expects to have deposit inflows in the near future. B) brokerage commissions on selling bonds increase. C) the cost of selling loans falls. D) the discount rate decreases.

B

19) Bank capital is listed on the side of the bankʹs balance sheet because it represents a of funds. A) liability; use B) liability; source C) asset; use D) asset; source

B

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

B

2) If a bank has $100,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A) $30,000. B) $25,000. C) $20,000. D) $10,000.

B

2) If borrowers with the most risky investment projects seek bank loans in higher proportion to those borrowers with the safest investment projects, banks are said to face the problem of A) adverse credit risk. B) adverse selection. C) moral hazard. D) lemon lenders.

B

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

B

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

B

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

B

22) Which of the following are reported as assets on a bankʹs balance sheet? A) Borrowings B) Reserves C) Savings deposits D) Bank capital

B

24) Through correspondent banking, large banks provide services to small banks, including A) loan guarantees. B) foreign exchange transactions. C) issuing stock. D) debt reduction.

B

26) Which of the following bank assets is the most liquid? A) Consumer loans B) Reserves C) Cash items in process of collection D) U.S. government securities

B

29) For a given return on assets, the lower is bank capital, A) the lower is the return for the owners of the bank. B) the higher is the return for the owners of the bank. C) the lower is the credit risk for the owners of the bank. D) the lower the possibility of bank failure.

B

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

B

3) Which of the following are reported as liabilities on a bankʹs balance sheet? A) Reserves B) Checkable deposits C) Loans D) Deposits with other banks

B

11) A bankʹs 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 A) an adjustable gap loan. B) an adjustable portfolio loan. C) loan commitment. D) pre-credit loan line.

C

11) In general, banks would prefer to acquire funds quickly by rather than . A) reducing loans; selling securities B) reducing loans; borrowing from the Fed C) borrowing from the Fed; reducing loans D) ʺcalling inʺ loans; selling securities

C

11) When you deposit $50 in your account at First National Bank and a $100 check you have written on this account is cashed at Chemical Bank, then A) the assets of First National rise by $50. B) the assets of Chemical Bank rise by $50. C) the reserves at First National fall by $50. D) the liabilities at Chemical Bank rise by $50.

C

11) Which of the following is not a nontransaction deposit? A) Savings accounts B) Small-denomination time deposits C) Negotiable order of withdrawal accounts D) Certificate of deposit

C

12) Large-denomination CDs are , so that like a bond they can be resold in a market before they mature. A) nonnegotiable; secondary B) nonnegotiable; primary C) negotiable; secondary D) negotiable; primary

C

12) may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow. A) Selling securities B) Selling loans C) Calling in loans D) Selling negotiable CDs

C

13) 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 A) place a bank officer on their board of directors. B) place a corporate officer on the bankʹs board of directors. C) keep compensating balances in a checking account at the bank. D) purchase the bankʹs CDs.

C

13) Because are less liquid for the depositor than , they earn higher interest rates. A) money market deposit accounts; time deposits B) checkable deposits; passbook savings C) passbook savings; checkable deposits D) passbook savings; time deposits

C

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

C

16) Banks that suffered significant losses in the 1980s made the mistake of A) holding too many liquid assets. B) minimizing default risk. C) failing to diversify their loan portfolio. D) holding only safe securities.

C

17) Which of the following is not a source of borrowings for a bank? A) Federal funds B) Eurodollars C) Transaction deposits D) Discount loans

C

18) As the costs associated with deposit outflows , the banks willingness to hold excess reserves will . A) decrease; increase B) increase; decrease C) increase; increase D) decrease; not be affected

C

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

C

25) Holding large amounts of bank capital helps prevent bank failures because A) it means that the bank has a higher income. B) it makes loans easier to sell. C) it can be used to absorb the losses resulting from bad loans. D) it makes it easier to call in loans.

C

5) The share of checkable deposits in total bank liabilities has A) expanded moderately over time. B) expanded dramatically over time. C) shrunk over time. D) remained virtually unchanged since 1960.

C

7) In recent years the interest paid on checkable and time deposits has accounted for around _____________ of total bank operating expenses, while the costs involved in servicing accounts have been approximately ______________ of operating expenses. A) 45 percent; 55 percent B) 55 percent; 4 percent C) 25 percent; 50 percent D) 50 percent; 30 percent

C

7) When you deposit $50 in currency at Old National Bank, A) its assets increase by less than $50 because of reserve requirements. B) its reserves increase by less than $50 because of reserve requirements. C) its liabilities increase by $50. D) its liabilities decrease by $50.

C

8) If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can A) reduce deposits by $3 million. B) increase loans by $3 million. C) sell $3 million of securities. D) repay its discount loans from the Fed.

C

9) When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then A) the liabilities of the First National Bank increase by $10. B) the reserves of the First National Bank increase by $ 10. C) the liabilities of Citibank increase by $10. D) the assets of Citibank fall by $10.

C

5) When Jane Brown writes a $100 check to her nephew (who lives in another state), Ms. Brownʹs bank assets of $100 and liabilities of $100. A) gains; gains B) gains; loses C) loses; gains D) loses; loses

D

6) 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

9) Because checking accounts are _____________ liquid for the depositor than passbook savings, they earn _______________ interest rates. A) less; higher B) less; lower C) more; higher D) more; lower

D