Money and Banking Exam 2 Study Guide Ch. 10

Why is being nosy a desirable trait of a banker

- A banker determines credit risk by learning as much as possible about potential borrowers - A banker has to screen out good credit risk from bad credit risk - To reduce moral hazard, a banker must continually monitor borrowers to ensure that they are complying with restrictive loan covenants

True statement regarding bank's balance sheet

A bank's balance sheet shows that total assets equal total liabilities plus equity capital. Also, A bank's assets are its uses of funds A bank's liabilities are its sources of funds

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

Borrow from other banks Most costly, Call in loans

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

Calling in loans

Which of the following are reported as liabilities on a bank's balance sheet?

Checkable deposits

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.

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.

How to find equity multiplier

ROE/ROA =EM

In general, banks make profits by selling _____ liabilities and buying _____ assets

Short-term, longer-term

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

The liabilities of Citibank increase by $10 Also, The assets of First National Bank increase by $10

Asset transformation can be described as

borrowing short and lending long

A bank with insufficient reserves can increase its reserves by

calling in loans

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. Also, bank assets decrease by the amount of the check bank liabilities increase by the amount of the check

As the costs associated with deposit outflows _____, the banks willingness to hold excess reserves will ______

increase, increase

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

reducing deposits and reserves by $5 million

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

sell $3 million of securities

Bank capital is equal to ____ minus _____

total assets - total liabilities