Money and Banking

reducing deposits and reserves by $5 million

A $5 million deposit outflow from a bank has the immediate effect of

a bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements

A bank failure occurs whenever

its liabilities exceed its assets.

A bank is insolvent when

brokerage commissions on selling bonds increase

A bank will want to hold more excess reserves ( everything else equal) when

calling in loans

A bank with insufficient reserves can increase its reserves by

borrowing short and lending long

Asset transformation can be described as

total assets; total liabilities

Bank capital is equal to ________ minus ________

liability; source

Bank capital is listed on the ________ side of the bank's balance sheet because it represents a ________ of funds

discount loans; source

Bank loans from the Federal Reserve are called ________ and represent a ________ of funds

vault cash and deposits at the Fed

Bank reserves include

liquidity management

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

savings accounts

Banks acquire the funds that they use to purchase income-earning assets from such sources as

liabilities; 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

provide for deposit outflows

Banks hold excess and secondary reserves to

borrowing federal funds

Banks that actively manage liabilities will most likely meet a reserve shortfall by

failing to diversity their loan portfolio

Banks that suffered significant losses in the 1980s made the mistake of

their interest payments are tax deductible for federal income taxes

Banksʹ asset portfolios include state and local government securities because

loans

Bankʹs make their profits primarily by issuing ________.

passbook savings; checkable deposits

Because ________ are less liquid for the depositor than ________, they earn higher interest rates

time deposits; passbook savings

Because ________ are less liquid for the depositor than ________, they earn higher interest rates.

more; lower

Because checking accounts are ________ liquid for the depositor than passbook savings, they earn ________ interest rates

high; short-term

Because of their ________ liquidity, ________ U.S. government securities are called secondary reserves.

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

Holding all else constant, when a bank receives the funds for a deposited check

it can be used to absorb the losses resulting from bad loans.

Holding large amounts of bank capital helps prevent bank failures because

$1.2 million

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

$25,000

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

$50,000

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

deposits and reserves

If a bank has excess reserves greater than the amount of a deposit outflow, the outflow will result in equal reductions in

sell $3 million of securities

If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can

short-term; longer-term

In general, banks make profits by selling ________ liabilities and buying ________ assets. A) long-term; shorter-term

borrowing from the Fed; reducing loans

In general, banks would prefer to acquire funds quickly by ________ rather than________________

25 percent; 50 percent

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

negotiable; secondary

Large-denomination CDs are ________, so that like a bond they can be resold in a ________ market before they mature

increased sales of certificates of deposits to raise funds

Modern liability management has resulted in

return on assets

Net profit after taxes per dollar of assets is a basic measure of bank profitability called

return on equity

Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called

Borrow from the Fed

Of the following , which would be the first choice for a bank facing a reserve deficiency

they can be converted into cash with low transactions cost

Secondary reserves are so called because

short-term Treasury securities

Secondary reserves include

equity multipler

The amount of assets per dollar of equity capital is called the

required reserves

The fraction of checkable deposits that banks are required by regulation to hold are

purchasing securities with high returns and low risk

The goal of bank asset management include

Treasury and government agency securities

The largest percentage of bank's holdings of securities consist of

loans

The most important category of assets on a bankʹs balance sheet is

shrunk over time

The share of checkable deposits in total bank liabilities has

foreign exchange transaction

Through correspondent banking, large banks provide services to small banks, including

the liabilities of the bank increase by $1,000,000

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,

the assets at the bank increase by $1 million

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 shee

loses; loses

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

the liabilities of Citibank increase by $10

When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then

the liabilities of the First National Bank decrease by $10

When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then

increase;increase

When a new depositor opens a checking account at the First National Bank, the bankʹs assets ________ and its liabilities _______

its liabilities increase by $50

When you deposit $50 in currency at Old National Bank

the reserves at First National fall by $50

When you deposit $50 in your account at First National Bank and a $100 check you have written

its assets increase by $50

When you deposit a $50 bill in the Security Pacific National Bank

the building owned by the bank

Which of the following are bank asset

Checkable deposits

Which of the following are not reported as assets on a bankʹs balance sheet

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

Which of the following are primary concerns of the bank manager?

Reserves

Which of the following are reported as assets on a bankʹs balance sheet

Checkable deposits

Which of the following are reported as liabilities on a bankʹs balance sheet

Discount loans

Which of the following are reported as liabilities on a bankʹs balance sheet

Negotiable order of withdraw accounts

Which of the following are transaction deposits

Reserves

Which of the following bank assets is the most liquid

Increased bank holdings of cash items

Which of the following has not resulted from more active liability management on the part of banks

Negotiable order of withdrawal accounts

Which of the following is not a nontransaction deposit

Transaction deposits

Which of the following is not a source of borrowings for a bank

A bankʹs balance sheet shows that total assets equal total liabilities plus equity capital

Which of the following statements are true

Checkable deposits are payable on demand

Which of the following statements are true

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

Which of the following statements is false

Checkable deposits are the primary source of bank funds

Which of the following statements is false

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

Which of the following statements most accurately describes the task of bank asset management

Mortgages

Which of the following would a bank not hold as insurance against the highest cost of deposit outflow-bank failure

$90

With a 10% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is

Calling in loans

____________ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow