Chapter 17

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

A

2) Which of the following statements is true? A) A bank's assets are its uses of funds. B) A bank's assets are its sources of funds. C) A bank's liabilities are its uses of funds. D) Only B and C of the above are true.

A

24) Secondary reserves ________. A) can be converted into cash with low transaction costs B) are not easily converted into cash and are, therefore, of secondary importance to banks C) count toward meeting required reserves, but only at a rate of $0.50 per dollar of secondary reserves D) of none of the above.

A

29) A bank's largest source of funds is its A) nontransaction deposits. B) checking deposits. C) borrowing from the Fed. D) federal funds.

A

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

A

36) When a $10 check written on the First National Bank is deposited in an account at the Second National Bank, 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 the Second National Bank decrease by $10. D) the assets of Second National Bank decrease by $10.

A

38) Holding all else constant, when a bank receives the funds for a deposited check, A) cash items in 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) all of the above occur.

A

47) If a bank has $200,000 of deposits, a required reserve ratio of 20 percent, and $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

48) If a bank has $10 million of deposits, a required reserve ratio of 10 percent, and $2 million in reserves, then it does not have enough reserves to support a deposit outflow of A) $1.2 million. B) $1.1 million. C) $1 million. D) either A or B of the above.

A

51) Which of the following do banks hold as insurance against the high cost of deposit outflows? A) Excess reserves B) Secondary reserves C) Bank equity capital D) All of the above E) Only A and B of the above

A

52) Which is the least costly way for a bank to handle deposit outflows? A) Hold excess reserves. B) Borrow from other banks. C) Sell securities. D) Call in loans.

A

6) Which of the following are reported as liabilities on a bank's balance sheet? A) Discount loans B) Cash items in the process of collection C) State government securities D) All of the above E) Only B and C of the above

A

60) The largest source of bank income is A) interest on loans. B) interest on securities. C) service charges on deposit accounts. D) noninterest income.

A

63) On a bank's income statement, the amount available to keep as retained earnings or pay to the stockholders in dividends is the bank's A) net income. B) net operating income. C) net extraordinary items. D) net interest margin.

A

65) 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 after taxes.

A

71) Examples of off-balance-sheet activities include A) loan sales. B) extending loans to depositors. C) borrowing from other banks. D) all of the above.

A

74) A bank A) obtains funds by borrowing and by issuing liabilities. B) makes profits by charging an interest rate on their asset holdings of securities and loans that is lower than the interest and other expenses on their liabilities. C) does both A and B of the above. D) does neither A nor B of the above.

A

77) Bank capital A) is raised by selling new equity. B) is a cushion against a drop in the value of its assets. C) comes from retained earnings. D) is all of the above.

A

78) Before the 1960s, A) over half of the sources of bank funds were obtained through checkable deposits that by law could not pay any interest. B) banks mostly borrowed from other banks to meet their reserve needs. C) both A and B occurred. D) neither A nor B occurred.

A

10) The value-at-risk method for estimating a bank's risk exposure measures the losses a bank could incur under a worst-case scenario.

Answer: FALSE

12) Since a bank's assets exceed its equity capital, the return on assets always exceeds the return on equity.

Answer: FALSE

2) Deposits that banks keep in accounts at the Federal Reserve less vault cash is called reserves.

Answer: FALSE

7) Given a bank's return on assets, the higher the bank capital, the higher the return for the owners of the bank.

Answer: FALSE

8) Loan loss reserves are an asset on a bank's balance sheet.

Answer: FALSE

5) Required reserves are insurance against the costs associated with deposit outflows. The higher the costs associated with deposit outflows, the more required reserves banks will want to hold.

Answer: FALSE (the more excess reserves)

1) Since their introduction in 1961, negotiable CDs have become an important source of bank funds.

Answer: TRUE

11) The share of bank operating income earned from off-balance-sheet activities has increased over the past two decades.

Answer: TRUE

13) A loan commitment is an agreement to provide a loan up to a certain dollar amount if a customer requests the loan during a specific time period.

Answer: TRUE

14) Nontransaction deposits are the primary source of bank funds.

Answer: TRUE

15) Owners cannot write checks on nontransaction deposits, but the interest rate paid on these deposits are usually higher than those on checkable deposits.

Answer: TRUE

3) When a bank receives additional deposits, it gains an equal amount of reserves; when it loses deposits, it loses an equal amount of reserves.

Answer: TRUE

4) To keep enough cash on hand to meet depositors' demand for withdrawals, banks must engage in liquidity management.

Answer: TRUE

6) A bank maintains bank capital to lessen the chance that it will become insolvent.

Answer: TRUE

9) Off-balance-sheet activities consist of trading financial instruments and generating income from fees and loan sales, all of which affect bank profits but are not visible on bank balance sheets.

Answer: TRUE

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) Which of the following would substitute for discount loans? A) Loans to businesses B) Repurchase agreements C) Investing in Eurodollars D) Loans to bank holding companies E) Reverse repurchase agreements

B

18) Which of the following are reported as assets on a bank's balance sheet? A) Discount loans from the Fed B) Loans C) Borrowings D) Only A and B of the above

B

20) Which of the following are reported as assets on a bank's balance sheet? A) Borrowings B) Reserves C) Savings deposits D) Bank capital E) Only A and B of the above

B

22) Which of the following are not reported as assets on a bank's balance sheet? A) Cash items in the process of collection B) Borrowings C) U.S. Treasury securities D) Reserves

B

26) Which of the following bank assets are the least liquid? A) Reserves B) Mortgage loans C) Cash items in process of collection D) Deposits with other banks

B

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

B

31) 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

33) When you deposit $50 in the First National Bank, A) its liabilities decrease by $50. B) its assets increase by $50. C) its reserves decrease by $50. D) only B and C of the above occur.

B

42) Bankers' concern 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) none of the above.

B

44) 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 instead makes loans, then in the bank's 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

46) If a bank has $100,000 of deposits, a required reserve ratio of 20 percent, and $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

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

B

67) For a given return on assets, the lower the bank capital is, A) the lower the return for the owners of the bank will be. B) the higher the return for the owners of the bank will be. C) the lower the credit risk for the owners of the bank will be. D) both A and C of the above will happen.

B

69) An argument that supports a regulated minimum capital requirement is that banks that hold too little capital A) are unprofitable. B) impose costs on other banks because they are more likely to fail. C) have an unfair competitive advantage over savings and loans. D) includes all of the above.

B

76) Discount loans are also known as ________. A) interest-free loans B) advances C) credits D) market loans

B

9) 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

1) Which of the following statements is true? A) A bank's assets are its sources of funds. B) A bank's liabilities are its uses of funds. C) A bank's balance sheet shows that total assets equal total liabilities plus equity capital. D) All of the above are true.

C

12) Which of the following is checkable deposits? A) Savings accounts B) Small-denomination time deposits C) Money market deposit accounts D) Certificates of deposit

C

14) Which of the following are checkable deposits? A) Savings accounts B) Small-denomination time deposits C) Negotiable order of withdrawal accounts D) Certificates of deposit

C

15) 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

23) 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

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

C

30) 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

35) When you deposit $50 in currency at the 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) only A and B of the above occur.

C

43) 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 instead makes loans, then in the bank's final balance sheet, A) the assets at the bank increase by $200,000. B) the liabilities of the bank increase by $200,000. C) reserves increase by $200,000. D) all of the above occur.

C

50) In general, banks would prefer to meet deposit outflows by ________ rather than ________. A) selling loans; selling securities B) selling loans; borrowing from the Fed C) borrowing from the Fed; selling loans D) "calling in" loans; selling securities

C

53) The ________ the costs associated with deposit outflows are, the ________ excess reserves banks will want to hold. A) lower; more B) higher; less C) higher; more D) none of the above, since deposit outflows cannot be anticipated

C

56) Banks fail when the value of bank ________ falls below the value of ________, causing the bank to become insolvent. A) reserves; required reserves B) loans; secondary reserves C) assets; liabilities D) income; expenses

C

58) Bank failure is less likely to occur when a bank A) holds less in U.S. government securities. B) suffers large deposit outflows. C) holds more excess reserves. D) has less bank capital.

C

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

C

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

C

68) 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, increasing the return on equity. D) none of the above.

C

7) 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

75) ________ were once the most common type of nontransaction deposit. A) Checking accounts B) Time deposits C) Savings accounts D) none of the above

C

81) In 2009 provisions for loan losses reached a new peak of ________ of total operating expenses. A) 60% B) 50% C) 33% D) 13%

C

10) 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

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

D

28) Loans A) are the largest category of bank assets. B) provide most of the bank's revenues. C) earn the highest return of all bank assets. D) do all of the above. E) are only A and B of the above.

D

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

D

32) When you deposit $50 in the First National Bank, A) its liabilities decrease by $50. B) its assets increase by $50. C) its reserves increase by $50. D) only B and C of the above occur.

D

40) A bank manager has which of the following concerns? A) To acquire funds at low cost B) To minimize risk by diversifying asset holdings C) To have enough ready cash to meet deposit outflows D) All of the above

D

41) Which of the following are primary concerns of a bank manager? A) Maintaining sufficient reserves to minimize the cost to the bank of deposit outflows B) Extending loans to borrowers who will pay high interest rates, but who are also good credit risks C) Acquiring funds at a relatively low cost, so that profitable lending opportunities can be realized D) All of the above

D

45) If a bank has $1 million of deposits, a required reserve ratio of 20 percent, and $300,000 in reserves, it need not rearrange its balance sheet if there is a deposit outflow of A) $50,000. B) $75,000. C) $150,000. D) either A or B of the above.

D

49) Banks can protect themselves from the disruption caused by deposit outflows by A) holding excess reserves. B) selling securities. C) "calling in" loans. D) doing all of the above. E) doing only A and B of the above.

D

57) A bank fails when the value of its ________ falls below the value of ________, causing the bank to become insolvent. A) reserves; required reserves B) loans; secondary reserves C) securities; deposit liabilities D) assets; liabilities

D

59) A bank failure is more likely to occur when A) a bank holds less in U.S. government securities. B) a bank suffers large deposit outflows. C) a bank holds less equity capital. D) all of the above occur. E) only A and B of the above occur.

D

61) The largest operating expense for a bank is A) salaries and employee benefits. B) interest paid on discount loans. C) interest paid on federal funds borrowed from other banks. D) interest paid on deposits.

D

62) On a bank's income statement, the provision for loan losses is an ________ item and represents the amount of ________ in the bank's loan loss reserves. A) income; decrease B) income; increase C) expense; decrease D) expense; increase

D

70) Examples of off-balance-sheet activities include A) loan sales. B) foreign exchange market transactions. C) trading in financial futures. D) all of the above. E) only A and B of the above.

D

72) The danger of banks engaging in activities such as trading in financial futures and interest-rate swaps is that these activities allow banks to A) increase profits. B) decrease risks. C) avoid bank regulations. D) engage in speculation.

D

79) With large banks beginning to explore ways in which the liabilities on their balance sheets could provide them with reserves and liquidity, this led to A) the expansion of overnight loan markets. B) the development of negotiable CDs. C) the ability of money center banks to acquire funds quickly. D) all of the above occurring.

D

8) Checkable deposits and money market deposit accounts are A) payable on demand. B) liabilities of the banks. C) assets of the banks. D) only A and B of the above. E) only A and C of the above

D

80) In the late 1960s, A) money market banks no longer needed to depend on checkable deposits as the primary source of bank funds. B) banks aggressively set target goals for their asset growth. C) the new management of liabilities created more flexibility. D) all of the above.

D

13) Which of the following are not checkable deposits? A) Savings accounts B) Small-denomination time deposits C) Negotiable order of withdrawal accounts D) All of the above E) Only A and B of the above

E

19) Which of the following are reported as assets on a bank's balance sheet? A) Cash items in the process of collection B) Deposits with other banks C) Checkable deposits D) Bank capital E) Only A and B of the above

E

37) When a $10 check written on the First National Bank is deposited in an account at the Second National Bank, then A) the liabilities of the First National Bank decrease by $10. B) the liabilities of the Second National Bank increase by $10. C) the reserves of the First National Bank increase by $10. D) all of the above occur. E) only A and B of the above occur.

E

39) Holding all else constant, when a bank receives the funds for a deposited check, A) cash items in process of collection fall by the amount of the check. B) bank assets remain unchanged. C) bank liabilities decrease by the amount of the check. D) all of the above occur. E) only A and B of the above occur.

E

4) A bank's balance sheet A) shows that total assets equal total liabilities plus equity capital. B) lists sources and uses of bank funds. C) indicates whether or not the bank is profitable. D) does all of the above. E) does only A and B of the above.

E

54) A bank can reduce its total amount of loans outstanding by A) "calling in" loans; that is, by not renewing some loans when they come due. B) selling loans to other banks. C) selling loans to the Federal Reserve. D) doing all of the above. E) doing only A and B of the above.

E

55) Which of the following statements is an accurate description of modern liability management? A) Greater flexibility in liability management has allowed banks to increase the proportion of their assets held in loans. B) New financial instruments enable banks to acquire funds quickly. C) The introduction of negotiable CDs have significantly reduced the percentage of funds that banks borrow from one another to finance loans. D) All of the above have occurred since 1960. E) Only A and B of the above have occurred since 1960.

E

73) When a bank sells all or part of the cash stream from a specific loan, A) it removes the loan from its balance sheet. B) it usually does so at a loss. C) it usually does so at a profit. D) both A and B of the above occur. E) both A and C of the above occur.

E