ECON 343 - Assignment 10

5) With a 10% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is A) $90. B) $110. C) $100. D) $10.

A) $90.

30) Collateral requirements lessen the consequences of ________ because the collateral reduces the lenderʹs losses in the case of a loan default and it reduces ________ because the borrower has more to lose from a default. A) adverse selection; moral hazard B) adverse selection; diversification C) moral hazard; adverse selection D) diversification; moral hazard

A) adverse selection; moral hazard

21) Banks that actively manage liabilities will most likely meet a reserve shortfall by A) borrowing federal funds. B) seeking new deposits. C) selling municipal bonds. D) calling in loans.

A) borrowing federal funds.

16) In general, banks would prefer to acquire funds quickly by ________ rather than ________. A) borrowing from the Fed; reducing loans B) ʺcalling inʺ loans; selling securities C) reducing loans; borrowing from the Fed D) reducing loans; selling securities

A) borrowing from the Fed; reducing loans

46) Because of an expected rise in interest rates in the future, a banker will likely A) buy short-term rather than long-term bonds. B) make either short or long-term loans; expectations of future interest rates are irrelevant. C) make long-term rather than short-term loans. D) buy long-term rather than short-term bonds.

A) buy short-term rather than long-term bonds.

9) Which of the following are reported as liabilities on a bankʹs balance sheet? A) checkable deposits B) deposits with other banks C) consumer loans D) reserves

A) checkable deposits

36) 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 A) credit rationing. B) coercive bargaining. C) collusive behavior. D) strategic holding out.

A) credit rationing.

12) Because of their ________ liquidity, ________ U.S. government securities are called secondary reserves. A) high; short-term B) low; short-term C) high; long-term D) low; long-term

A) high; short-term

49) Off-balance sheet activities involving guarantees of securities and back-up credit lines A) increase the risk a bank faces. B) have no impact on the risk a bank faces. C) greatly reduce the risk a bank faces. D) slightly reduce the risk a bank faces.

A) increase the risk a bank faces.

17) 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 A) liquidity management. B) managing interest rate risk. C) managing credit risk. D) liability management.

A) liquidity management.

26) Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the A) moral hazard problem. B) adverse credit risk problem. C) adverse selection problem. D) lemon problem.

A) moral hazard problem.

33) If a bank has ________ rate-sensitive assets than liabilities, then ________ in interest rates will increase bank profits. A) more; an increase B) fewer; a surge C) fewer; an increase D) more; a decline

A) more; an increase

14) The amount of checkable deposits that banks are required by regulation to hold are the A) required reserves. B) total reserves. C) excess reserves. D) vault cash.

A) required reserves.

7) In general, banks make profits by selling ________ liabilities and buying ________ assets. A) short-term; longer-term B) illiquid; liquid C) risky; risk-free D) long-term; shorter-term

A) short-term; longer-term

47) When banks calculate the losses the institution would incur if an unusual combination of bad events happened, the bank is using the ________ approach. A) stress-test B) value-at-risk C) maximum value D) trading-loss

A) stress-test

45) Banks develop statistical models to calculate their maximum loss over a given time period. This approach is known as the A) value-at-risk approach. B) doomsday approach. C) trading-loss approach. D) stress-testing approach.

A) value-at-risk approach.

1) Which of the following statements are TRUE? A) A bankʹs liabilities are its uses of funds. B) A bankʹs balance sheet shows that total assets equal total liabilities plus equity capital. C) A bankʹs assets are its sources of funds. D) A bankʹs balance sheet indicates whether or not the bank is profitable.

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

2) Which of the following statements is FALSE? A) The bankʹs assets provide the bank with income. B) Bank capital is recorded as an asset on the bank balance sheet. C) A bankʹs assets are its uses of funds. D) A bank issues liabilities to acquire funds.

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

44) Of the following, which would be the last choice for a bank facing a reserve deficiency? A) Borrow from the Fed. B) Call in loans. C) Borrow from other banks. D) Sell securities.

B) Call in loans.

50) A reason why rogue traders have bankrupt their banks is due to A) the separation of trading activities from the bookkeepers. B) a failure to maintain proper internal controls. C) stringent supervision of trading activities by bank management. D) accounting errors.

B) a failure to maintain proper internal controls.

27) Banks face the problem of ________ in loan markets because bad credit risks are the ones most likely to seek bank loans. A) moral suasion B) adverse selection C) intentional fraud D) moral hazard

B) adverse selection

35) Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap times the change in the interest rate is called A) basic duration analysis. B) basic gap analysis. C) gap-exposure analysis. D) interest-exposure analysis.

B) basic gap analysis.

41) Banks earn profits from off-balance sheet loan sales A) by foreclosing on delinquent accounts. B) by selling existing loans for more than the original loan amount. C) by selling the loans at discounted prices. D) by calling-in loans before the maturity date.

B) by selling existing loans for more than the original loan amount.

24) Conditions that likely contributed to a credit crunch during the global financial crisis include A) falling interest rates that raised interest rate risk, causing banks to choose to hold more capital. B) capital shortfalls caused in part by falling real estate prices. C) regulated hikes in bank capital requirements. D) increases in reserve requirements.

B) capital shortfalls caused in part by falling real estate prices.

42) The principal-agent problem that exists for bank trading activities can be reduced through A) elimination of regulation of banking. B) creation of internal controls that separate trading activities from bookkeeping. C) creation of internal controls that combine trading activities with bookkeeping. D) elimination of internal controls.

B) creation of internal controls that separate trading activities from bookkeeping.

32) The difference of rate-sensitive liabilities and rate-sensitive assets is known as the A) duration. B) gap. C) rate-risk index. D) interest-sensitivity index.

B) gap.

31) Risk that is related to the uncertainty about interest rate movements is called A) security risk. B) interest-rate risk. C) default risk. D) the problem of moral hazard.

B) interest-rate risk.

3) 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) assets; liabilities B) liabilities; assets C) securities; deposits D) loans; deposits

B) liabilities; assets

43) Traders working for banks are subject to the A) exchange-risk problem. B) principal-agent problem. C) double-jeopardy problem. D) free-rider problem.

B) principal-agent problem.

19) Banks acquire the funds that they use to purchase income-earning assets from such sources as A) reserves. B) savings accounts. C) deposits at other banks. D) cash items in the process of collection.

B) savings accounts.

40) When banks involved in trading activities attempt to outguess markets, they are A) engaging in riskless arbitrage. B) speculating. C) forecasting. D) diversifying.

B) speculating.

38) If a banker expects interest rates to fall in the future, her best strategy for the present is A) to sell long-term certificates of deposit. B) to increase the duration of the bankʹs assets. C) to increase the duration of the bankʹs liabilities. D) to buy short-term bonds.

B) to increase the duration of the bankʹs assets.

39) Examples of off-balance-sheet activities include A) selling negotiable CDs. B) trading activities. C) borrowing from other banks. D) extending loans to depositors.

B) trading activities.

15) Bank reserves include A) deposits at the Fed and short-term treasury securities. B) vault cash and deposits at the Fed. C) deposits at other banks and deposits at the Fed. D) vault cash and short-term Treasury securities.

B) vault cash and deposits at the Fed.

48) All else the same, if a bankʹs liabilities are more sensitive to interest rate fluctuations than are its assets, then ________ in interest rates will ________ bank profits. A) an increase; increase B) a decline; reduce C) an increase; reduce D) a decline; not affect

C) an increase; reduce

28) From the standpoint of ________, specialization in lending is surprising but makes perfect sense when one considers the ________ problem. A) moral hazard; diversification B) adverse selection; diversification C) diversification; adverse selection D) diversification; moral hazard

C) diversification; adverse selection

20) Modern liability management has resulted in A) increase importance of deposits as a source of funds. B) failure by banks to coordinate management of assets and liabilities. C) increased sales of negotiable CDs to raise funds. D) reduced borrowing by banks in the overnight loan market.

C) increased sales of negotiable CDs to raise funds.

11) Bankʹs make their profits primarily by issuing A) negotiable CDs. B) equity. C) loans. D) NOW accounts.

C) loans.

34) If a bank has ________ rate-sensitive assets than liabilities, a ________ in interest rates will reduce bank profits, while a ________ in interest rates will raise bank profits. A) fewer; decline; decline B) more; rise; decline C) more; decline; rise D) fewer; rise; rise

C) more; decline; rise

18) The goals of bank asset management include A) lending at high interest rates regardless of risk. B) maximizing risk. C) purchasing securities with high returns and low risk. D) minimizing liquidity.

C) purchasing securities with high returns and low risk.

4) 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 sheet A) the liabilities of the bank decrease by $1 million. B) reserves increase by $200,000. C) the assets at the bank increase by $1 million. D) liabilities increase by $200,000.

C) the assets at the bank increase by $1 million.

23) In the absence of regulation, banks would probably hold A) too much capital, making it more difficult to obtain loans. B) too much capital, reducing the profitability of banks. C) too little capital. D) too much capital, reducing the efficiency of the payments system.

C) too little capital.

37) Duration analysis involves comparing the average duration of the bankʹs ________ to the average duration of its ________. A) assets; deposit liabilities B) securities portfolio; non-deposit liabilities C) loan portfolio; deposit liabilities D) assets; liabilities

D) assets; liabilities

6) Asset transformation can be described as A) borrowing and lending for the long term. B) borrowing long and lending short. C) borrowing and lending only for the short term. D) borrowing short and lending long.

D) borrowing short and lending long.

13) Which of the following are transaction deposits? A) certificates of deposit B) savings accounts C) small-denomination time deposits D) checkable deposits

D) checkable deposits

25) A bank is insolvent when A) its assets increase in value. B) its capital exceeds its liabilities. C) its assets exceed its liabilities. D) its liabilities exceed its assets.

D) its liabilities exceed its assets.

8) Banks may borrow from or lend to another bank in the Federal Funds market. A loan of excess reserves from one bank to another bank is recorded as a(n) ________ for the borrowing bank and a(n) ________ for the lending bank. A) asset; asset B) liability; liability C) asset; liability D) liability; asset

D) liability; asset

29) Unanticipated moral hazard contingencies can be reduced by A) screening. B) specialization in lending. C) credit rationing. D) long-term customer relationships.

D) long-term customer relationships.

10) Which of the following bank assets is the most liquid? A) state and local government securities B) consumer loans C) U.S. government securities D) reserves

D) reserves

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

D) return on equity.