ECON 2035 CH. 10
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
$1.2 million
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
$25,000
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
$50,000
With a 10% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is
$90
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
25 percent; 50 percent
Which of the following statements are true?
A bank's balance sheet shows that total assets equal total liabilities plus equity capital
Which of the following statements is false?
Bank capital is recorded as an asset on the bank balance sheet
Which of the following statements most accurately describes the task of bank asset management?
Banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity
Of the following, which would be the first choice for a bank facing a reserve deficiency?
Borrow from other banks
Which of the following are not reported as assets on a bank's balance sheet?
Checkable deposits
Which of the following are reported as liabilities on a bank's balance sheet?
Checkable deposits
Which of the following statements are true?
Checkable deposits are payable on demand
Which of the following statements is false?
Checkable deposits are the primary source of bank funds
Which of the following are reported as liabilities on a bank's balance sheet?
Discount Loans
Which of the following has not resulted from more active liability management on the part of banks?
Increased bank holdings of cash items
When Jane Brown writes a $100 check to her nephew (who lives in another state), Ms. Brown's bank _____ assets of $100 and _____ liabilities of $100.
Loses; loses
Which of the following are primary concerns of the bank manager?
Maintaining sufficient reserves to minimize the cost to the bank of deposit outflows
Which of the following would a bank not hold as insurance against the highest cost of deposit outflow-bank failure?
Mortgages
Which of the following are transaction deposits?
Negotiable order of withdraw accounts
Which of the following is not a nontransaction deposit?
Negotiable order of withdrawal accounts
Which of the following are reported as assets on a bank's balance sheet?
Reserves
Which of the following is not a source of borrowings for a bank?
Transaction deposits
A bank failure occurs whenever
a bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements
Banks face the problem of _____ in loan markets because bad credit risks are the ones most likely to seek bank loans
adverse selection
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 to problem of
adverse selection
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
adverse selection
If a bank's liabilities are more sensitive to interest rate movements than are its assets, then
an increase in interest rates will reduce bank profits
All else the same, if a bank's liabilities are more sensitive to interest rate fluctuations than are its assets, then _____ in interest rates will _____ bank profits
an increase; reduce
Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap times the change in the interest rate is called
basic gap analysis
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 as
borrowing short and lending-long
A bank will want to hold more excess reserves (everything else equal) when
brokerage commissions on selling bonds increase
A bank with insufficient reserves can increase its reserves by
calling in loans
_____ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow.
calling in loans
Conditions that likely contributed to a credit crunch in 2008 include:
capital shortfalls caused in part by falling real estate prices
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
Credit risk management tools include
collateral
Property promised to the lender as compensation if the borrower defaults is called _____
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 the First National Bank has a gap equal to a negative $30 million, then a 5 percentage point increase in interest rates will cause profits to
decline by 1.5 million
If a bank has excess reserves greater than the amount of a deposit outflow, the outflow will result in equal reductions in
deposits and reserves
Bank loans from the Federal Reserve are called _____ and represent a _____ of funds.
discount loans; source
From the standpoint of _____, specialization in lending is surprising but makes perfect sense when one considers the _____ problem
diversification; adverse selection
The amount of assets per dollar of equity capital is called the
equity multiplier
Banks that suffered significant losses in the 1980s made the mistake of
failing to diversify their loan portfolio
Through correspondent banking, large banks provide services to small banks, including
foreign exchange transactions
The difference of rate-sensitive liabilities and rate-sensitive assets is known as the
gap
Because of their _____ liquidity, _____ U.S. government securities are called secondary reserves
high; short-term
As the costs associated with deposit outflows _____, the banks willingness to hold excess reserves will _____
increase; increase
When a new depositor opens a checking account at the First National Bank, the bank's assets _____ and its liabilities _____.
increase; increase
Modern liability management resulted in
increased sales of certificates of deposits to raise funds
Risk that is related to the uncertainty about interest rate movements is called
interest-rate risk
Holding large amounts of bank capital helps prevent bank failures because
it can be used to absorb the losses resulting from bad loans
When you deposit a $50 bill in the Security Pacific National Bank,
its assets increase by $50
A bank is insolvent when
its liabilities exceed its assets
When you deposit $50 in currency at Old National Bank,
its liabilities increase by $50
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
keep compensating balances in a checking account at the bank
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
liabilities; assets
Bankers' 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
liability management
Bank capital is listed on the _____ side of the bank's balance sheet because it represents a _____ of funds
liability; source
A bank's 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
loan commitment
Bank's make their profits primarily by issuing
loans
The most important category of assets on a bank's balance sheet is
loans
Unanticipated moral hazard contingencies can be reduced by
long-term customer relationships
To reduce moral hazard problems, banks include restrictive covenants in loan contracts. In order for these restrictive covenants to be effective, banks must also
monitor and enforce them
Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the
moral hazard problem
If a bank has _____ rate-sensitive assets than liabilities, then _____ in interest rates will increase bank profits
more; an increase
If a bank has _____ rate-sensitive assets than liabilities, a _____ in interest rates will reduce bank profits, while _____ in interest rates will raise
more; decline; rise
Because checking accounts are _____ liquid for the depositor than passbook savings, they earn _____ interest rates.
more; lower
Large denomination CDs are _____, so that like a bond they can be resold in a _____ market before they mature
negotiable, secondary
Because _____ are less liquid for the depositor than _____, they earn higher interest rates
passbook savings; checkable deposits
Banks hold excess and secondary reserves to
provide for deposit outflows
The goals of bank asset management include
purchasing securities with high returns and low risk
When banks offer borrowers smaller loans than they have requested, banks are said to
ration credit
Long-term customer relationships _____ the cost of information collection and make it easier to _____ credit risks
reduce; screen
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.
reduces; reduces
A $5 million deposit outflow from a bank has the immediate effect of
reducing deposits and reserves by $5 million
The fraction of checkable deposits that banks are required by regulation to hold are
required reserves
Of the following methods that banks might use to reduce moral hazard problems, the one not legally permitted in the United States is the
requirement that firms place on their board of directors an officer from the bank
Which of the following bank assets is the most liquid
reserves
Provisions in loan contracts that prohibit borrowers from engaging in specified risky activities are called
restrictive covenants
Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called
return on equity
Banks acquire the funds that they use to purchase income-earning assets from such sources as
savings accounts
If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can
sell $3 million of securities
Which of the following would not be a way to increase return on equity?
sell more bank stock
Secondary reserves include
short-term treasury securities
In general, banks make profits by selling _____ liabilities and buying _____ assets
short-term; longer-term
If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to
shrink the size of the bank
The share of checkable deposits in total bank liabilities has
shrunk over time
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
specialization in lending; diversifying
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 bank's final balance sheet
the assets at the bank increase by $1 million
Which of the following are banks assets?
the building owned by the bank
For a given return on assets, the lower is bank capital,
the higher is the return for the owners of the bank
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
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 $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 bank's final balance sheet
the liabilities of the bank increase by $1,000,000
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
the reserves at First National Bank fall by $50
Banks' asset portfolios include state and local government securities because
their interest payments are tax deductible for federal income taxes
Secondary reserves are so called because
they can be converted into cash with low transaction costs
Because _____ are less liquid for the depositor than _____, they earn higher interest rates
time deposits; passbook savings
In the absence of regulation, banks would probably hold
too little capital
Bank capital is equal to _____ minus _____
total assets; total liabilities
The largest percentage of banks' holdings of securities consist of
treasury and government agency securities
Bank reserves include
vault cash and deposits at the fed
