CH. 9 Econ 303

If a bank has $10 mil of checkable deposits, required reserve ratio of 10%and holds $2 mil in reserves, then it will not have enough reserves to support a deposit outflow of

$1.2 mil

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

$90.

In recent yrs interest paid on checkable and nontransaction deposits has accounted for ___of total bank operating expenses, while the costs involved in servicing accounts have been approxy ____ of operating exp

25 %; 50%

If a bank has $100,000 of checkable deposits, a required reserve ratio of 20 %, andholds $40,000 in reserves, the maximum deposit outflow it can sustain without altering its balance sheet

25K

If a bank has $200,000 of checkable deposits, a required reserve ratio of 20%, and holds $80,000 in reserves, the maximum deposit outflow it can sustain without altering BS

50K

Which of the following statements is FALSE?

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

Which of the following stMTts most accurately describes the task of bank asset mgmgnt

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

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

Call in loans.

_____ may antagonize customers and can be very costly way of acquiring funds to meet an unexpected deposit outflow.

Calling in loans

Which of the following is FALSE?

Checkable deposits are primary source of bank funds.

Which of the following stmts TRUE?

Checkable deposits payable on demand.

When new depositor opens a checking acct at First National Bank, bank's assets ____ and liab___.

INC,INC

Which of the following would NOT be a way to increase return on equity?

Sell more bank stock.

The largest percentage of banks' holdings of securities consist of

Treasury and gov agency securities

Banks face the problem of ___ in loan markets because bad credit risks are the ones most likely to seek bank loans.

adverse selection

In order to reduce ____ problem in loan markets, bankers collect info from prospective borrowers to screen out bad credit risks from good ones.

adverse selection

If borrowers with most risky investment projects seek bank loans in higher proportion to borrowers with safest investment projects,

adverse selection.

Collateral requirements lessen consequences of ___ bcthe 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

A deposit outflow results in equal reductions in

assets and liabilities.

When $1 mil is deposited atbank,required reserve ratio is 20%, bank chooses not to make any loans but to hold excess reserves instead, then,

assets at bank increase by $1 mil.

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

assets increase by $50.

A bank failure occurs whenever

bank cant satisfy obligations to pay depositors and other creditors.

Which of the following statements are TRUE?

bank's balance sheet shows that total assets =total liabilities plus equity capital.

Secondary reserves are so called because

be converted into cash with low transactions costs

If a bank needs to acquire funds quickly to meet an unexpected deposit outflow,

borrow from another bank in the fed funds mKt.

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

borrowing federal funds.

In general, banks would prefer to acquire funds quickly by ___ rather than __.

borrowing from the Fed; reducing loans

Asset transformation can be described

borrowing short and lending long

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

brokerage commissions on selling bonds increase.

Which of the following are bank assets?

building owned by bank

A bank with insufficient reserves can increase its reserves by

calling in loans.

Holding large amounts of bank capital helps prevent bank failures

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

Bank ___ is/are listed on liab side of bank's BS

capital

Conditions that likely contributed to a credit crunch during global financial crisis

capital shortfalls caused in part by falling real estate prices.

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

cash items in process of collection fall by amt of check.

Which of the following are NOT reported as assets on a bank's BS?

checkable deposits

Which of the following are transaction deposits?

checkable deposits

All of the following are nontransaction deposits EXCEPT

checkable deposits.

Which of the following are reported as liab BS

checkable deposits//discount loans

Property promised to lender as compensation if borrower defaults

collateral.

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.

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

deposits and reserves.

Bank loans from Fed Reserve are ________ and represent________ of funds.

discount loans; source

From the standpoint of ___, specialization in lending is surprising but makes perfect sense when one considers ___ prob

diversification; adverse selection

The amount of assets per dollar of equity capital

equity multiplier.

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

failing to diversify their loan portfolio.

Through correspondent banking, large banks provide services to small banks

foreign exchange transactions.

Banks' asset portfolios include state/local gov securities

help to attract business from these govt entities.

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

high; short-term

For a given return on assets, the lower is bank capital

higher is return for the owners of bank.

As the costs associated with deposit outflows ___, t banks willingness to hold excess reserves will __

inc,inc

Which of the following has NOT resulted from more active liability mgmt on part of banks?

increased bank holdings of cash items

Modern liability mgmt has

increased sales of negotiable CDs to raise funds.

A bank that wants to monitor check payment practices of its commercial borrowers, so moral hazard can be reduced, require

keep compensating balances in checking acct at bank.

A bank is insolvent when

liab exceed assets.

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

liab of Citibank increase by $10.//liab of First National Bank decrease by $10.

Banks may borrow from or lend to another bank in Fed Funds mkt. A loan of excess reserves from one bank to another bank is recorded as a(n) ___ forborrowing bank and a(n) ____ for lending bank.

liab; asset

Banks earn profits by selling ____ with attractive combinations of liquidity, risk, and return, and usingproceeds to buy ________ with a diff characteristics.

liab; assets

When you deposit $50 in currency at Old National Bank

liabilities increase by $50.

When $1 mil is deposited at bank, required reserve ratio is 20% and bank chooses not to hold any excess reserves but makes loans instead,

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

Bankers' concerns regarding optimal mix of excess reserves, secondary reserves, borrowings from Fed, and borrowings from other banks to deal with deposit outflows

liquidity mgmt

A bank's commitment to provid firm with loans up to pre-specified limit at an interest rate that is tied to a market interest rate

loan commitment.

Bank's make profits primarily by issuing

loans.

The most important category of assets on a bank's BS

loans.

Unanticipated moral hazard contingencies can be reduced by

long-term customer relationships.

When Jane Brown writes$100 check tonephew and he cashes the check, Ms. Brown's bank ___ assets of $100 and ____ liab of $100.

loses; loses

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

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

To reduce moral hazard problems, banks include restrictive covenants in loan contracts. In order for these restrictive covenants to be effective, banks must

monitor and enforce them.

Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face

moral hazard prob.

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

more; lower

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

mortgages

Large-denomination CDs are ___, they can be resold in a ____ mkt before they mature.

negotiable; secondary

Banks hold excess and secondary reserves to

provide for unexpected deposit outflows.

The goals of bank asset management

purchasing securities with high returns and low risk.

When banks offer borrowers smaller loans than they have requested,

ration credit.

Long-term customer relationships __cost of info collection and make it easier to __ credit risks.

reduce; screen

Bank capital has both benefits and costs for bank owners. Higher bank capital ___ likelihood of bankruptcy, but higher bank capital _ the return on equity for a given return on assets.

reduces; reduces

A $5 mil deposit outflow from bank has immediate effect of

reducing deposits and reserves by $5 mil

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

required reserves.

Banks hold capital because

required to by regulatory authorities.

Of the following methods that banks might use to reduce moral hazard prob the one not legally permitted in the United States

requirement that firms place on their board of directors an officer from bank.

A $100 deposit into my checking account at My Bank increases my checkable deposits by $100, and bank's ________ by $100.

reserves

Which of the following are reported as assetS on banks BS

reserves

Which of the following bank assets is most liquid?

reserves

When you deposit $50 in your acct at First National Bank and $100 check you have written on this acct is cashed at Chemical Bank,

reserves at First National fall by $50.

Provisions in loan contracts that prohibit borrowers from engaging in specified risky activities

restrictive covenants.

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

return on assets.

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

return on equity

Because ___ are less liquid for depositor than ________, they earn higher IR%

savings accounts; checkable deposit//time deposits; savings accounts

Banks acquire funds they use to purch income-earning assets from sources

savings accts.

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

sell $3 mil of securities.

Secondary reserves include

short-term U.S. government securities.

In general, banks make profits by selling ___ liab and buying ____ assets.

short-term; longer-term

If a bank needs to raise amt of capital relative to assets, a bank manager might

shrink the size of the bank.

The share of checkable deposits in total bank liab.

shrunk over time.

In one sense ________ appears surprising since it means that the bank is not ________ its portfolio of loans and exposing itself to more ri

specialization in lending; diversifying

In the absence of regulation, banks would probably hold

too little capital.

Bank capital is equal to ____ minus ___

total assets; total liab

Which of the following is NOT a source of borrowings?

transaction deposits

Bank reserves include

vault cash and deposits at the Fed.